Virgin Mobile USA

:
Pricing for the Very First Time

Pankaj Murudkar (063) Vinay Nadar (064) Sachin Bajaj (066)

SYMBIOSIS INSTITUTE OF OPERATIONS MANAGEMENT

Virgin Mobile

Idea

Virgin Mobile USA Background
‡ Executive team was formed in 2001 
Dan Schulman was CEO

‡Launch date was July 2002 
Goal was to have 1 million total subscribers by the end of the first year and 3 million by fourth year

‡A natural extension of Britain based Virgin brand 
Challenge existing status-quo Offer better service and opportunities for customers where competition is complacent with pro-active and quick measures Focus on understanding and meeting customer needs

Virgin Product Portfolio

«

Entry Strategy 
Mobile Virtual Network Operator o No need of Physical Infrastructure o Cost Reduction Technique  Hip & Trendy 

    

Is this an opportunity for restructuring a market and creating competitive advantage? What are the competitors doing? Is the customer confused or badly served? Is this an opportunity for building the Virgin brand? Can we add value? Will it interact with our other businesses? Is there an appropriate trade-off between risk and reward?

Identifying US Market 
Overcrowded market with 6 national

carriers and a large number of regional and affiliate providers Matured market with 50% industry penetration  Penetration among demographic aged between 15 to 29 was significantly lower Growth rate projected to be robust for the next 5 years Big players ignored this market 
due to poor credit rating of target customers Average cost of acquisition was expensive compared against the benefits Low-value customers in terms of long term financial growth

Virgin Xtras Focus On Youth

Revenue for Mobile Entertainment Service was expected to increase VIRGIN XTRAS steadily in next few years

‡ Access to MTV-branded accessories and phones ‡ Text messaging ‡ Rescue Ring ‡ Online Real-time Billing ‡ Wake up Call ‡ Ring tones  Exclusive Fun Clipsof branding with Nickelodeon, VHN-1 & MTV. ‡ Contracts ‡ The Hit List  Innovative Handsets design of Kyocera Make at cheap rates. ‡ Music Messenger ‡ Movies  Advertisements on only youth channels. 
Availability of Handsets at Target Sam Goody Music Stores, Best Buy.

Overall Goal in Choosing Pricing Structure 
Must reach our target market: Youth!  Create a positive Lifetime Value (LTV) for every customer

1. Clone the Industry Prices Options 2. Price Below Competition 3. A Whole New plan

Option 1 Clone the Industry prices 
Competitive pricing with greater emphasis on a key advantages like differentiated applications [MTV] & superior customer service.  Differentiated Product offering ± better off-peak hours & fewer hidden fees  Advantages to Virgin being its lower commission offering to retailers and ³explains it all´ product packaging  Greater margin on the product offering with lower advertising costs.

Option 1: Clone the Industry prices
Pros & Cons
Easy to promote. Consumers are used to µbuckets¶ and peak/off-peak distinctions. Savings on advertising budget costs. Simple packaging could save costs on high commissioned salespeople.

Pros and Cons
The target youth market is not stressed. Hard for a new entrant to the market. No flexibility in calling habits; always paying the same high price. With no real price distinction, consumers are not willing to switch over just for the Virgin Extras features.

Option 2: Price below the competition 
Similar pricing structure as the rest of industry but lower actual prices than competitors  Maintain buckets & volume discounts with lower price per minute in certain key buckets  Position as a cost effective product offering, better off-peak hours & fewer hidden charges  Problem being too low on margins

Option 2: Price below the competition
Pros & Cons
Maintain the buckets and volume discounts with price per minute set below industry average. Offer best off-peak hours and few hidden fees so consumers will know Virgin Mobile is cheaper, plain and simple. Expand the size of the market and result in greater sales and profits. Earnings from each consumer will be less. Sales growth does not necessarily mean big profits. Risk of being regarded as low-quality service, thus an unfavorable image. May trigger off competitive reactions.

Pros and Cons

Option 3 : A Whole New Plan
‡An entirely new pricing structure which could be significantly different from competitors  Going in for a shortened subscription contracts or eliminating the contracts  The cons being the churn rate shooting to 6% each month compared to standard 2%  The pros being an attractive deal from customer acquisition viewpoint.  Offering pre-paid plans  The cons being usually high costs because of prohibitive pricing, the stigma associated with pre-paid, high churn out rates & non loyal customers.  Another constraint being some kind of mechanism to add on minutes like a web or physical phone cards  The pros being an attractive deal to consumers with no credit card or with poor credit checks & if acquisition costs are below $100 per new gross add  Lower subsidy costs to Virgin on handsets because of arrangement with Kyocera  Eliminating hidden fees and pointing to the total cost of the product offering  A new definition of off-peak hours as the target consumer falls into a different segment.

Price & Demand Business Customer
The Business Customer

‡ TWO DISTINCTIONS: ± Make calls during office hours ± Rarely worry about the cost of calls (Finance Dept can deal with it) ‡ PRICE INSENSITIVE! ‡ Demand is INELASTIC ‡ A percentage decrease in price will have a smaller percentage increase in Quantity Demanded (Calls made)

Price & Demand student Customer
The student customer ‡ TWO DISTINCTIONS ± You make calls whenever necessary and can seek to avoid calls that come with a higher pricetag ± Students CARE about the price of calls ‡ PRICE SENSITIVE ‡ Demand is ELASTIC ‡ A percentage decrease in price will result in a larger percentage increase in quantity demanded (calls made)

Demand - based Pricing
Mobile phone company revenue: ‡ The revenue gain from increased quantity must be greater than the revenue loss from dropping the price ‡ Since our target market is Youth, whose demand is relatively elastic, downward adjustment in price is relevant! A>B for Revenue Gain!

Option 3 : A Whole New Plan
‡An entirely new pricing structure which could be significantly different from competitors  Going in for a shortened subscription contracts or eliminating the contracts  The cons being the churn rate shooting to 6% each month compared to standard 2%  The pros being an attractive deal from customer acquisition viewpoint.  Offering pre-paid plans  The cons being usually high costs because of prohibitive pricing, the stigma associated with pre-paid, high churn out rates & non loyal customers.  Another constraint being some kind of mechanism to add on minutes like a web or physical phone cards  The pros being an attractive deal to consumers with no credit card or with poor credit checks & if acquisition costs are below $100 per new gross add  Lower subsidy costs to Virgin on handsets because of arrangement with Kyocera  Eliminating hidden fees and pointing to the total cost of the product offering  A new definition of off-peak hours as the target consumer falls into a different segment.

Calculating Lifetime Value (LTV)
M LTV !  AC 1 r  i
ARPU CCPU M AC LTV Lifetime Value

Average Cash Cost per user Revenue = 45% of ARPU per user

Monthly Margin Acquisition Cost = ARPU - CCPU

r: retention rate = 1 ± churn rate i : interest rate = 5%

-Sale commission -Advertising per gross add -Subsidy cost

Thank you

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