Lessons from a VoIP Entrepreneur

April 24, 2008
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This needs a lot more work, but since time is short, I may never get around to it, so here I provide the less than fully formed version.

Om Malik today posted about the woes of a silicon valley VoIP startup that launched with much fanfare last year. In this post, Om says:

the company focused on developing strange concept promotions for a device whose value proposition in a nut shell is: cheap calls. Cheap calling is a tough, low margin and volume business

I stand by everything I said about that company’s business plan as far back as 2004. Specifically:

  1. “The product solves a problem (call costs) that is going away (costs are going to zero without them)”
    This was not obvious back in 2004, when a lot of people were still paying 10 cents per minute for domestic calls, and “discount” rates were still around 5 cents per minute, but we certainly see it coming true today. What’s more important than call costs going to “zero”, is that the costs for long-distance calls stops being a pressing issue for people – it stops being on their radar. I think we can safely argue that this point has already arrived – especially for domestic calls which is the key selling proposition of the product. We can even argue that it’s no longer a high priority issue even for landline calls between many popular regions (there are exceptions, like India, where cost is still a major issue).
  2. “People won’t open their wallet for a large upfront purchase, as shown by Tivo etc. and especially not for “phone stuff” which is perceived as “should be cheap”
    First, very few consumer products cost over $400, and certainly nothing in the telephone aisle costs that much; it’s rare to find phone products costing more than $100. One can buy an entire multi-handset cordless phone setup for under $50 these days. A home phone is not an iPod and $39, to say nothing of $399, is considered “expensive” in the phone aisle.

These are fundamental problems and dropping the price to $250 is not going to change anything in any meaningful way.

Sitting on the outside, with nothing at stake, it’s easy to criticize other peoples’ business and marketing plans. We constantly hear how we need to move beyond the “cheap” message for VoIP. However, the problem is that the “save money” message is the only thing that consistently drives customers to action. We could argue that it’s a self-inflicted wound, and is driven by the fact that “cheap” is the only selling proposition companies push, so therefore it’s the only message customers seek. There is truth to that, but I now believe there’s more to it than that.

I’ve been at this for more than four years now and have gathered a lot of real world experience and informing data, including lots and lots of marketing A/B testing, feedback from real customers, plus actual behavior data (what people actually do is not the same as what they say they do). And all this points to an interesting conundrum for VoIP. It’s a catch-22 problem very similar to that of TiVo. TiVo has the problem that people don’t know their TV is broken until they have TiVo. They have to buy the product to figure out that they want to buy the product.

We find a similar thing with VoIP. Customers adopt the product on the premise of saving money, but they often fall in love with it due to something else and “saving money” becomes merely icing on the cake. The problem is, they only figured this out AFTER they already bought the product – catch 22.

This is the major marketing challenge for VoIP. You can’t blame companies for selling on the “cheap” message. The reality is, nothing else drives customers to their product as effectively, so what are they supposed to do? Again, much like TiVo, these other value propositions are too complicated, making them too expensive. You’ve got all kinds of different VoIP models out there, but nobody has cracked this conundrum… yet. When they do, it will change everything.

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2 Responses to Lessons from a VoIP Entrepreneur

  1. tom
    April 25, 2008 at 5:37 pm

    my argument that the value(or cheap) model is mandatory for consumer(not neccasarilly bussiness) VOIP products is that i have yet to find a VOIP enabled home phone that begins to approach the call clarity and reliablity of POTS lines. i am not saying that makes it unacceptable; but i do say that becasue of this a very significant discount over POTS is neccassry no matter how many extra features are included.

  2. MrBlog
    April 26, 2008 at 5:40 pm

    Tom, that’s an interesting perspective. Perhaps we in the VoIP industry are missing this “elephant in the room”. I know a lot of people that have fallen in love with a given VoIP product look the other way too frequently in terms of problems; see this post for a few examples: http://mrblog.org/2007/11/12/voip-tail-wags-dog/

    On the other hand, I’ve seen people be overly criticl of VoIP, tending to blame any and all problems on VoIP. We did tests that showed that people were overly-sensitive about quality and reliability when they were told they were using VoIP, when they were in fact using POTS. Likewise, when they were using VoIP, but told they were using POTS, they were less likely to be critical of call quality. There was a marked placebo effect.

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