Vonage's New Referral Payments: Foolish Or Frugal?

CenterNetworks editor and New York entrepreneur Allen Stern reports that Vonage has desperately upped its bounty for referring new customers. If you’re a Vonage subscriber and refer a friend to sign up for Internet phone service, Vonage now apparently compensates you with two months of free service, a free month of service for your friend, and a $50 American Express gift card for each of you. Total retail value: $175. “You have to wonder just how much they can give away before it starts to hurt financially,” Stern ponders.

Being Vonage sceptics ourselves, we ran some numbers.  And you know what?  Assuming Vonage can reduce its marketing spending accordingly, the new program may actually save it money. 

According to Vonage’s first-quarter financial stats, it costs the company $9.53 per month to provide service to each phone line.  Even if we add that to the $175 total cost of this program ($100 in gift certificates, a good portion of which will never be used–it’s ever thus–plus three free months), the total is still is far less than the $273 per new customer that Vonage spent on marketing in the first quarter.

Vonage expects to spend $310 million on marketing this year, but must reduce that amount going forward if it hopes to become profitable. Boosting referral programs won’t outright solve that problem, but it might help. And if Holmdel, N.J.-based Vonage can build existing-customer loyalty and cut their churn rate in the process, all the better.

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