How Can Vonage Break Through the Churn Ceiling?

We saw yesterday how Vonage's current churn rate and their gross monthly subscriber additions combine to create an absolute limit on the number of subscribers in their customer base, which I called a "churn ceiling."  If Vonage's astronomical 3.3% churn rate continues, their churn ceiling is just under 2.9M subscribers.

There are two ways to raise the churn ceiling:

1. Reduce the rate of churn, or
2. Increase the rate of subscriber additions

We'll look at the first of these today, and will save the task of increasing subscriber additions for tomorrow.

Since going public in the 2nd quarter of 2006, Vonage's monthly churn has ranged between 2.3% and 3.3%, with the general trend being toward higher churn.  In an interesting post on the Bear On Business Blog yesterday, Dan Caruso postulated that Vonage's worsening churn could be due to an increasing average customer tenure, noting that early in a company's life, all of the customers are newer and are less likely to churn, but as the company ages a greater percentage of their customer base is at the end of a contract and has the option of churning.  Also yesterday, a commenter speculated that wireless substitution is eroding VoIP customers more quickly than landline customers.  Both of these theories seem reasonable to me, and I will add a couple more: 

• Cable VoIP services are eroding Vonage's customer base more quickly than landline customers because Vonage customers have already demonstrated a willingness to try VoIP, and Cable VoIP services have the twin advantages of bundling and managed quality of service. 
• Vonage itself is somewhat to blame for a lack of focus on customer service in the past.

Reducing the churn rate is a tall order for Vonage, but they are saying they are trying to address the things that are in their control.  They are at least making an effort to fight their bundling competitors by partnering with Covad to resell DSL-based Internet access.  They are also ramping up customer service and new product development efforts. 

Call me a pessimist if you must, but I don't believe these efforts will cut Vonage's churn rate back to the 2.3% level.  My best guess is that with a concerted effort their churn rate will settle down to between 2.5% and 3.0%. 

Where would that put Vonage's churn ceiling?  The chart below plots the churn ceiling for three different churn levels:

If Vonage continues to add just 96,000 subscribers per month, with a 3% churn rate, Vonage tops out at under 3.2M subscribers.  With a 2.5% churn rate, the ceiling is just over 3.8M subscribers.

Clearly, churn reduction by itself isn't going to get Vonage where it wants to go... the company's investors wouldn't be excited at the prospect of topping out at 3.5M subscribers.  In addition to reducing churn, Vonage is going to need to ramp up subscriber growth.  More on that, tomorrow!

Comments

[Parkite]

Good point on cable voip.

Funny how a lack of focus on basic customer service always comes back to haunt you. Damn capitalism!

The Covad resale agreement seems like desperation. A resale of a resale.