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June 21, 2006

Vonage Strays from Direct Response Advertising Fundamentals

Today's entry is one from the mail bag. Our colleague Ben Monaghan has shared with us his pointed perspective as both a direct response advertising veteran and customer of the direct marketing-driven internet phone company, Vonage.

Ben's letter illustrates very well how a company with a great product falters as a result of trying to act big rather than be smart enough to actually get big. We wonder whether it's true that Wall Street and Madison Avenue together have tanked just as many companies as they've helped. No doubt they've both made more money in their relationship with Vonage than Vonage has. We welcome your thoughts on the matter. Here are Ben's (with permission):

"I love Vonage. I can say without reservation it is the best phone service I have ever had and, at $24.95 for unlimited calling, the cheapest. Setting it up couldn't be easier - no waiting on technicians and no complicated instructions. So why didn't I jump on the opportunity to buy into their IPO offering?

Simple: I watched their advertisements.

Sure, there were other signs. The fact that they were burning through money, had yet to turn a profit, had a ridiculously high customer acquisition cost and was facing heavy competition didn't exactly boost my confidence. But at the end of the day, it was their advertising that drove me off. The more I saw of it (and given last year's marketing expense of $243 million - there was a lot to see!), the more it became clear that they did not understand Direct Response Marketing.

Vonage's marketing foibles illustrate a typical conflict direct response marketing experts confront when designing their campaigns. How do you establish brand awareness yet maintain strong direct response advertising fundamentals - specifically high call volume or Web hits and low customer acquisition costs or, similarly, cost per orders?

In the early days of direct response, most companies simply chose to ignore brand. At the end of the day, they argued, the brand didn't matter. What mattered were sales, and sales were driven not by an image campaign but by the age-old problem-solution model and an unbeatable offer. If your creative didn't serve this end, it was useless. Maintain strong direct response advertising fundamentals, good service and customer retention strategies and "brand" would follow as a result of the increased exposure funded by profitable advertising that conveys a consistent message.

But anyone who has seen Vonage's TV ads or their sponsorship of high profile events like World Cup Soccer and Indy Racing has to wonder what's going on.

Vonage's marketing was headed by Dean Harris, whose expertise resided squarely in online marketing. Under Harris's guidance the company implemented an impressive online marketing presence, spending more on online advertising than any other company in 2005. During that time they were true to the direct response mantra of sales over brand, choosing primarily simple text ads over rich media effects and concentrating on volume of ads over sophistication.

Unfortunately when they expanded their marketing to other channels, they strayed from this formula, seduced by the sirens of Madison Avenue more interested in showcasing their creative prowess than advancing their client's sales. The results were predictable. A flashy TV campaign that is more memorable for branding Vonage as a hip company than it is for selling phone services. In fact, the ad's creative is so distracting (usually a humorous physical comedy bit in the background as a speaker elaborates on the service in the foreground) that most viewers never even hear the speaker. It's as if someone decided, "You know, what we have to say isn't interesting enough or of value enough to simply say it." Thus, in essence, communicating to the viewer that Vonage doesn't believe in their product enough to even feature it in their own ad.

In short, it's a disaster. I can only guess at what Vonage's internal advertising profitability reports look like, or if anyone is even reading them. Perhaps at this point they have thrown all direct response fundamentals to wind and have become so desperate that they are spending desperately to try and stop their IPO from its free fall. After all, brand seems to have become another business buzzword, a concept that is more important to the MBA Wall Street crowd than it is to Main Street consumers. And clearly that is whom Vonage is trying to impress, caught up in the fervor of selling their stock to investors when they should be trying to sell their phone service to customers.

Eventually they'll run out of money, and become one more failed company that, at the end of the day, simply didn't understand Direct Response Marketing and hired an upscale ad agency that similarly didn't understand Direct Response Marketing; another company seduced by the trappings of building brand at the cost of sales.

Which is too bad, because I really like the phone service."

Posted by Jeff Small & Brett Astor at 09:36 AM | Permalink