16 Feb 2009
Customer lifetime value … how can Vonage survive?
After writing last week about why Sirius XM is likely to end up in Chapter 11, from a customer lifetime value perspective, I was looking around for other companies in a similar situation (customer subscription business, facing financial difficulties).
Vonage (www.vonage.com) is an independent US-based IP phone services provider. I can vouch for the quality of their services, since I was a user for several years. Unfortunately, they have encountered losses for several quarters and have raised debt exceeding $500 MM.
Vonage is going to release its annual results in late February. Meanwhile I analyzed their Q3 results (click here) from a customer lifetime value perspective.
Here are the summarized customer lifetime value metrics:
- ARPU (Revenue per user per month): $ 28.96
- Direct monthly variable cash costs : $7.20
- Monthly fixed opex cash costs (excludes depreciation, interest, taxes), mainly SG&A: $9.82
- Subscriber acquisition cost: $ 301.4 (of which $48 is spent on equipment subsidy)
- Monthly Churn rate: 3.1% ; which implies an average lifetime of 32 months
- Capital (assets less cash) of $315 MM (which amounts to $120 per subscriber)
Each new subscriber generates $ 385 of cumulative lifetime cashflow (($28.96 – $7.20 – $ 9.82)*32).
This is barely enough to compensate for the upfront SAC of $301 per gross add and capital requirement of $120 per subscriber, after discounting.
I think Vonage can survive if they continue to improve their business in the following ways:
- Launch a proactive retention strategy (use predictive analytics to understand which customer is likely to churn, and launch proactive offers to retain them) to reduce the churn rate
- Reduce SG&A costs ($73 MM in Q3) by optimizing the salesforce
- Reduce marketing costs ($254 per gross add) by:
- re-examining the channel strategy (using direct and other low-cost channels (e.g., referral) as opposed to distributors and retail)
- continue reducing online advertising costs (click here)
- Increase ARPU (which currently is only a few $ more than the monthly unlimited subscription rate) — by promoting services that generate incremental ARPU (international calling, faxing, virtual phonelines)
Would love to hear what you think…