Vonage acquisition costs

September 26, 2006
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I’m often asked “why does it cost so much for Vonage to acquire a customer?”

The simple answer is that the demand is just not there. At the end of the day, they are selling something people don’t really want or need very badly. Us VoIP geeks assumed “if we build it, they will come.” Reality check time.

Pip Coburn, in his new book The Change Function talks about something he calls the perceived pain of adoption. In the past, we more or less called the same thing “switching cost” but the idea is that the purchaser weighs how much pain will be involved in adopting the new thing and if the benefit outweighs that pain, they buy, otherwise they don’t.

At this point, for a lot of people the perceived pain of adoption of switching to a Vonage-like service outweighs the benefit (what Pip Coburn calls the “crisis”). This perceived pain includes:

  • Signing up for the new service, and establishing (yet another) billing relationship
  • Switching phone numbers, or transferring their current number to the new service
  • Potential quality problems – Will it work? Will my friends know I’m not using a real phone? Will I miss calls?
  • Can I figure out the hardware? Will I be able to set it up?

If they are a little bit educated in the VoIP space, they may also ask:

  • What’s the deal with 911? Are my kids safe?
  • What if it doesn’t work and I have to go crawling back to my telephone company? Will I be able to get my number back?
  • Will my Tivo, home alarm system, and satellite receiver work?
  • How does the transition work? I’ll need to run two services at once, right?
  • I’ll need to factor in the cost of a multi-handset phone

So that’s a lot of perceived pain. The crisis I’m solving is what? These Vonage-like services don’t stress features, so the “crisis” is about how much I’m spending. So if I can save $5 per month, is all that pain worth it? Probably not. So Vonage has to spend a lot of money to talk people into believing they have a crisis – in other words, they have to sell people something they don’t really want all that badly, and that’s expensive.

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