Vonage Marketing Doesn’t Scale

TheStreet.com basically destroys Vonage in this article. One wonders if all the negative press around the company makes it a good buy. I have had many people in the industry tell me the value of this company’s stock should be zero. But with the absolute best-known brand in VoIP in the world (perhaps after Skype) I have trouble betting against them.

So many people claim that customer acquisition cost is the problem with the Vonage business model.

My argument? Hypothetically speaking — If TMC spends five million dollars marketing at ITEXPO we may get 10,000 attendees. If we spend 10 million on marketing for that same show we may get 12,000 attendees. In other words that extra marketing money is much less effective.

Marketing effectiveness does not always correlate one to one with spending. Marketing ROI doesn’t always scale well.

In all the analysis I have seen about The high cost of Vonage customer acquisition, I have never seen this logic applied. Vonage may be able to be profitable and grow with a $50 million annual spend. Currently they spend many times more each year. If shareholders press them enough to be profitable they could reduce their marketing spend and the company could indeed do well.

Still, I haven’t seen anyone else discuss this point of view which means either I am totally disconnected with reality or have insights that others haven’t figured out yet. Hopefully it’s the latter.

  • sandman
    June 19, 2006 at 2:20 pm

    Rich,
    Are you a shareholder?
    You still seem befuddled that the stock is in the toilet. And you are under the illusion that they will be able to fix what is wrong and restore themselves to profitability. Oops, make that “become profitable” as they have yet to see their first nickel.
    The Vonage IPO is not, and never should have been mistaken with, the bellwether for the VoIP Industry, which is still thriving. They have a myriad of problems, including a scary business model.
    The investors wanted out, planned their exit with a greedy price target, and are getting hammered on the street, most of all because the public remembers the last round of fresh IPOs with pretty logos and advertising but poor business cases and deep-in-the-red financials.
    Their stock will continue to sink until a competitor (a LEC, I suspect) decides that the cost-per-sub acquisition price is sufficiently low enough, and then all this Vonage business will be behind us.
    I, for one, will be sad to see them go, if only for my hatred of the LECs, but that is a discussion for another time. But I am not sad to see a poorly performing company fail to line the pockets of a handful of echelon members at the expense of the unsavvy trading public. I am glad to see that their Googleesque viral marketing attempt at pawning shares to the masses (via their customer base) fell flat, however.

  • Rich Tehrani
    June 20, 2006 at 8:43 am

    These are great comments but I am not a shareholder. Wouldn’t you say that their viral marketing campaign was a success as it allowed the shares to be sold at a higher price? Sure it was a PR nightmare but in return they recived a higher valuation when they went public.

  • KPM
    June 20, 2006 at 8:25 pm

    Wall Street money managers have been smart about this. Anyone viewing Vonage as a leader in VoIP subscribers, therefore must be a good investment is looking at the company and the market the wrong way.
    Vonage needs to be viewed in the context of communications and entertainment providers. They have no advantage besides price and some user interface features. They certaintly advocated for VoIP and were an early supplier to techie types, but ultimately there are no new services, no quality control, and no way to make a profit. Vonage is a single play in a triple play world. Why would anyone invest in this company on this side of 2000 is beyond me.

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