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To stem churn, Vonage needs to consider cellphone-type service contract model

 You can tell a lot about how investors regard an individual company's strengths and weaknesses by assessing the first day of trading after annual or even quarterly fiscals are released.Vonage did so yesterday.
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Written by Russell Shaw on
 

You can tell a lot about how investors regard an individual company's strengths and weaknesses by assessing the first day of trading after annual or even quarterly fiscals are released.

Vonage did so yesterday. Its net quarterly losses narrowed from $66 million to $62 million over the same quarterly time span one year ago, but investors didn't seem to give a rip.

What set Vonage stock back 7.65% yesterday most likely was a dip in projected subscriber gains. The company previously had earmarked 2.3 million to 2.45 million in pickups, but has scaled those estimates back to 2.2 million to 2.3 million users.

Meanwhile, quarterly customer churn- or the percent of subscribers who opt out in a three-month period, has increased from 2.3 to 2.6 percent from 3Q 2005 to 3Q2006.

Although Vonage CEO Mike Snyder says that improvements in customer care will drive churn back down, it is difficult to find solace in these numbers.

What they tell us is that Vonage may have already exhausted its pickup potential among early adopters, and is having some degree of difficulty crossing the chasm toward mass adoption by some new customers who may have been drawn to Vonage out of curiousity driven by all those "woohoo ads" and promotions.

It could be that complexities and glitches that are, almost as a matter of faith, less tolerated by non-technical mainstream users than early adopters, are driving some of this churn. They have one bad experience- a bad router or a customer service call to an offshore call center where Tier1 tech support is not excellent, then they are gone.  

Or maybe when you get to the mainstream audience that Vonage needs to propel impressive subscriber growth, you are dealing with a demographic more likely to stick with trusted brands. Maybe such customers don't think Comcast or Verizon is the greatest, but at least they are a known commodity that is familiar to them. And the voice-enabled IMers are so much cheaper.

In-home Vonage tech support, announced a few months ago, should help. But can that really ease the majority of mainstream users' concerns?

I believe that short of selling the company, a good short-term strategy for Vonage would be to  offer substantial discounts on calling rates for those customers who would be willing to sign a optional one-year or even two-year service agreement with a hefty pro-ratd cancellation charge that would kick-in after an initial 30-day trial period.

The concept would be to make Vonage that much more irresistible to join, but a bit more painful to leave.

Such pricing could be on the Skype model, with an allotment of pre-paid minutes per month. This might attract at least some bargain-hunters.

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