Vonage loses a third of its customers every year

Any business that loses a third of its customers a year has to be in trouble. Vonage's Q4 numbers yesterday showed some of the results of its more disciplined approach to costs, especially customer acquisition costs. A tight clamp on marketing enabled the company to record its first operating cash surplus.

It was a milestone the company desperately needed. With bond holders owed $250 million at the end of the year, Vonage has to convince its financiers it has a long-term business model. But with three percent of the customer base deserting each month, Vonage has to find 234,000 customers a quarter just to maintain the status quo. And with each new customer costing on average around $240 Vonage is paying out $56 million a quarter--or $225 million a year--just to keep its current customer numbers.

Reading the myriad of blogs and forums on why customers give up on Vonage it comes down to a combination of technology and service. Any IP system is inherently less reliable than traditional telephony. While many of the issues are ISP related, customers simply want a phone that works. if it doesn't, they want someone to fix it, quickly.

Operational excellence has not been Vonage's calling card. And again there is a litany of distressed Vonage users who left out of frustration with the poor service response. All voice communication firms struggle with churn, but as the industry responds with triple-play offerings, Vonage's pure-play looks uncompetitive. Vonage chief Jeffrey Citron admitted as much yesterday when he said the cable companies had caught Vonage "behind the gun." Citron then went on to make an unconvincing argument why Vonage's single offering customized to market segments (Florida Hispanics, busy moms, etc.) would win the day. -Tom