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450 Bones To Call Me A Customer

August 27, 2004

In the wake of Vonage’s huge $105M VC round, several bloggers, including Om Malik and VC Bill Burnham, are noodling over a guestimate that Vonage is paying $450 per customer acquisition. At $25 per month, Vonage doesn’t get to break-even for 3 years. So why would anyone invest over $100M on that arithmetic?
Burnham says that the cash being spent on customer acquisition is a way to “get big fast.” Om’s take is that Vonage is in a bad situation because incumbents, like AT&T, are moving quickly. ”I think Vonage is hoping to grow really fast, go public, and perhaps cash out before people start asking those pesky questions about profits.”
We think Vonage and its investors must believe that acquisition costs will fall significantly. Vonage has more than 200,000 customers. All of these people accepted the risks that 1) Vonage may not have good quality of service 2) A competitor would not leapfrog Vonage with lower rate and/or better service 3) Vonage would stay in business. These risks are compounded by the fact that most Vonage subscribers must forfeit their current phone number, and then deal with giving friends and family their new number.
Once Vonage surpasses perhaps a million subscribers, and if it can continue to succeed on value for quality of service, there will be a critical mass of references. Existing Vonage subscribers will constitute a free new-customer acquisition force, causing the price to tumble from $450. An additional factor is that Vonage has largely been marketing VoIP by its lonesome. Now that AT&T is selling VoIP, more prospects will be making an AT&T or Vonage decision.
Read – Talk About Burn Rate [VoIP Watch]
Read – Vonage Pays Homage To Online Trading [Burnham’s Beat]
Read – Old Dog, Older Tricks [Om Malik on Broadband]

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