VIRGIN MOBILE CASE STUDY

Group – 3E
Q.1) Given Virgin Mobile’s target market (14 to 24-year-olds), how should it structure
its pricing?

The group believes Virgin Mobile has two options. The first option is the obvious for their
target market and any new product entering a saturated market, the pricing should be low if
not the cheapest product out in the market. The second pricing structure that would appeal to
Virgin Mobile is pricing their product in the middle or average of the industry standard.
Examining the first pricing structure strategy, it has positive and negative aspects to it. Some
of the positive aspects include taking a great portion of the market share for those customers
who value pricing in choosing their products. This pricing also goes along with Virgin’s target
market, 14-24-year olds. This age group does not have a lot of spending money, if it is their
own, or the parents’ do not want to pay a huge phone bill. The pricing would appeal to their
target market and help create a young and hip image.
While this pricing structure strategy would help gain consumers that value pricing when
choosing their products, it can also work against Virgin Mobile. This pricing can create the
image that the phones do not have as high of a quality if they are priced below the industry
low. This structure would accomplish the goal of attaining a sizable amount of the market
share, but it would not be as profitable as the second pricing structure strategy.
The second pricing strategy looks to gain market share while earning a bigger profit. The
pricing structure strategy would be to conduct research to find out what the industry is pricing.
For example, if the industry low is $49 to a high of $299 then Virgin Mobile should price itself
around $179. This pricing structure strategy would gain a great part of the market share for a
couple of reasons. First, it would send the message that their product has a higher quality
than the lower priced products in the industry, and it would be priced that it is not the most
expensive, so more consumers could afford it. This pricing structure will create the air about
the product as being the new hip product to have. Which is a quality Virgin Mobile’s target
market cares about. This generation wants the latest products that will make them look cool
or good. The negative with this type of pricing is that it won’t gain as big of a portion of the
market share as the first pricing strategy, but it would garner more profit. It could also pose
the threat of being too expensive, if the industry range is higher.

The case lays out three pricing options. Which option would you choose and why? In
designing your pricing plan, be as specific as possible with respect to the various
elements under considerations (e.g., contracts, the size of subsidies, hidden fees,
average per-minute charges, etc.).
Each one of the three different options provide a unique way Virgin Mobile USA can enter the
market and gain a following. However, one option stands apart from the others and fits with
what Virgin Mobile is trying to convey.
That option is option three. Option three is titled “A Whole New Plan.” The idea behind it is
starting afresh and coming up a different pricing structure that is different from everything out
on the market now. This is the most radical and risky of the three options, but if executed
correctly can proved to be profitable and the right choice.
In designing your pricing plan, be as specific as possible with respect to the various
elements under considerations (e.g., contracts, the size of the subsidies, hidden fees,
average per-minute charges, etc.).
Some specifics Dan Schulman discussed that would be incorporated into this option would
be: no contracts, prepaid compared to post-paid, no hidden fees, and off-peak hours.
Declaring Virgin Mobile would not have contracts is huge, but when considering their target
market, it fits. When considering Virgin Mobile’s target market ranges from 14 to 24, it would
guarantee the younger teens would be able to purchase their products. If they had contracts
Virgin Mobile’s under 18 target market wouldn’t be able to sign the contracts, they would have
to get a guardian or parent. Another fault with their younger target market is their bad credit.
If Virgin Mobile eliminated contracts, then they are creating that setting for more customers.
Those customers would be a mixture of those that wouldn’t be credit approved at Virgin
Mobile’s competitors.
Prepaid vs. post-paid minutes is another important variable when considering option three.
This detail takes into mind the different lifestyles of their target market. The consumers might
be occasional users and this quality would be ideal for them. It also goes along with the group
of consumers who do not have good credit. This group of consumers tends to purchase
prepaid plans since they don’t require credit checks.
When purchasing any item or service, you do not want to be deceived. This is the idea behind
no hidden fees. Most of Virgin Mobile’s competition hits their customers with hidden fees
which causes them to be unhappy and distrust the company and brand. Virgin Mobile’s
solution is simple, eliminate all hidden fees. This will create the image of “what you see is
what you get,” which will help attain more of the youth market and even some unhappy
customers of their competitors.
While eliminating hidden fees, Virgin Mobile also looked more closely at their off-peak hours.
They decided to re-examine them. The company recognized that their target market doesn’t
live the same lifestyle as an adult, so Virgin Mobile created the service which made sense to
their target market.
All these features that Virgin Mobile would incorporate into their “A Whole New Plan” set them
apart from the competition. Option three provides Virgin Mobile with the ability to stick with
the company’s value proposition of always being innovative and supplying the best products
and services to consumers.

Q.2) How confident are you that the plan you have designed will be profitable?
Provide evidence of the financial viability of your pricing strategy.
I believe that the pricing strategy I’ve chosen will be extremely profitable for VM. By targeting
younger customers and providing them with good value, VM could be successful in such a
competitive and saturated cell phone market. As seen in Exhibit 3, revenue for mobile
entertainment was projected to increase over the next few years. By analysing the LTV data
presented in Exhibit 11 and the market penetration data from Exhibit 2, VM has the potential
to acquire most (if not all) of its customers with a positive lifetime value. For example, the
penetration of the “15-29” age group in the U.S. was way below that of Japan and the U.K.
Thus, it is critical for VM to think of creative ways about how it can make its service unique
and able to cater to the needs of a younger customer base. Just looking at today’s society in
the U.S., you can see how teenagers and the younger generation tend to be highly tech-savvy
and willing to adopt new technologies.
Nowadays, teens in the U.S. have greater access to cash (i.e. through their parents, part-time
jobs, etc.), and are willing to spend money on the latest gadgets and technology such as the
iPod, PlayStation, etc. So, if VM offers the flexible pricing plans along with added features
such as VirginXtras, text messaging and downloadable content, it should be very appealing
to the younger crowd. This would generate a large amount of profits for VM, in addition to its
regular usage plans. Also, the trend nowadays is that many parents tend to view cell phones
as an easy way to stay in touch with their children and are more willing to spend money on a
cell phone as a safety measure.

At the same time, these parents lead busy lifestyles and would appreciate the “no contracts
or hidden fees” pricing offered by VM. Parents could easily “recharge” their child’s cell phone
minutes by using cash or debit card. Also, VM did not require commissioned sales reps to sell
its phones and plans. This would save the company a tremendous amount of money in terms
of salary and rental costs. VM would also save money on advertising costs, since its phones
are placed in mass merchandisers and major retailers as an off-the-shelf item. Their phones
would be easily visible and available for purchase. By offering a simple pricing plan and
greater flexibility, VM would be able to acquire customers more easily with lower costs

Q.3) The cellular industry is notorious for high customer dissatisfaction. Despite the
existence of service contracts, the big carriers churn roughly 24% of their customers
each year. Clearly, there is very little loyalty in this market. What is the source of all of
this dissatisfaction?

The source of all the dissatisfaction stems from many different things. Most consumers do not
trust the industry pricing plans. Companies advertise, “free this” or “free that”, but young
people know that there are many different hidden charges, and they resent this. Consumers
these days are savvy, and they hate feeling like they are being used. Other factors include
contracts, pricing, buckets, hidden fees, and off-peak hours. Over 90% of all subscribers in
the U.S. have contractual agreements with their cellular providers. The contracts are generally
for a period of one to two years and require rigorous credit checks. This is very unsettling for
many consumers. People don’t like being “tied down” to a cellular provider or the strenuous
credit check.
Hidden prices play another factor in this dissatisfaction. These include taxes, universal service
charges, and many one-time costs. Many plans also have established “buckets” of minutes.
Customers then sign-up for a bucket of minutes. However, if the customer exceeds their
allotted bucket of minutes they are penalized with extremely high rates. On and off-peak hours
are also concerning. All of these various pricing strategies have led to the dissatisfaction of
the consumer’s experience.

Q.4) How have the various pricing variables (contracts, pricing buckets, hidden fees,
off-peak hours, etc.) affected the consumer experience?

The contracts are for the most part for a time of one to two years, and require thorough credit
checks. This is very disrupting for some buyers. Individuals don't care for being "secured" to
a cell supplier or the strenuous credit check. Hidden costs play another factor in this
disappointment. These incorporate expenses, all-inclusive assistance charges, and
numerous one-time costs. Numerous plans additionally have built up "buckets" of minutes.
Clients at that point pursue a basin of minutes. In any case, if the client surpasses their
distributed can of minutes they are punished with amazingly high rates. On and off-peak hours
are additionally concerning. Initially, off-peak hours started at 6:00pm, and afterward it step
by step changed to 9:00pm. These different pricing systems have prompted the
disappointment of the shopper's understanding. These pricing procedures have likewise
prohibited a statistic that is anticipated to be extremely hearty for the following five years; the
buyers matured 15 to 29. With the thorough credit checks expected to achieve a phone this
gigantic statistic doesn't qualify. Numerous more youthful customers either have no credit or
awful credit. Another stipulation to get a call telephone is that you must be 18 years old. This
by itself rejects some portion of the statistic.

Why haven’t the big carriers responded more aggressively to customer

dissatisfaction?

The big carriers including AT&T, Cingular, and Verizon carry so much of the market share.
Out of the 103 million subscribers in the United States all three of these big carriers have of
market share of at least 20 million subscribers. That’s over half of the market. The big carriers
have such a monopoly on the cell phone industry that it is not necessary for them to try to
improve their customer dissatisfaction rates.

Q.5) How do the major carriers make money in this industry? Is there a financial logic
underlying their pricing approach?

The majority carriers make money by rolling their customers into contracts, providing both
buckets of minutes usage and post-paid service. Bucket of minutes meant that individuals
had usually 300 minutes and overage would be charged at 40cents/minute. Post-Paid service
allows monthly billing on basis of the customers’ contract. This contract agreement allows a
hedge against churn and a guaranteed annuity stream.
Under the contract, the U.S cellular phone subscribers had to be in a period of 1-2 years
agreement with the cellular providers and require the rigorous credit check. The credit check
allows eliminating individuals who don’t have good credit or have a credit card. Most carriers
knew that people used more minutes than they use, and the extra overage minutes used by
the cellular subscribers made the phone companies profitable. People assumed that they
would use only the minutes bucketed, but they used more overage on average. Plus, the
hidden extra costs of taxes, universal service charges, and other fees increased the profits to
the cellular companies.

Q.6) What do you think of Virgin Mobile’s value proposition (the VirginXtras, etc.)?
What do you think of its channel and merchandising strategy?

The value proposition made by the Virgin Mobile is very straight-forward, honest and
customer-friendly, which go along with Virgin brand image. Because the young customers are
savvy, they understand the hidden charges. Additionally, the added features allow the young
audience to increase their phone usage and make the phone as a part of necessity. Added
Features and the interchangeable faceplates can increase the attractiveness of the phone
usage, as well as customization of the phone. The channel and merchandising strategy are
more affordable to the young audience since they can purchase the phone on their own or
attract middle-age parents with young teenage children. Because the young parents and
children have the option of seeing which phones, they can buy through a starter packet and
avoid speaking with the sales representative, they feel more comfortable and have the option
of purchasing the product more carefully. When people invest more time in purchase thinking,
they feel more empowered and obligated/favoured to using the products. (It’s similar to
advertising effect of seeing the same product over and over, except you can touch and read
the content in detail – which is powerful hands-on experience for customers.

Q.7) Do you agree with Virgin Mobile’s target market selection?

The group agrees with Virgin Mobile’s target market selection, which is between the ages of
fourteen and twenty-four. If marketed successfully, this demographic had the greatest
potential for growth because prior to Virgin Mobile’s entrance, it was the least penetrated.
Virgin Mobile did decide to go forth and enter this market, and have now become very
successful, not only because they tapped into the consumer needs of this younger
demographic, but offered services not yet offered by national service providers.

BENEFITS:
Market Size: Growth & Early Opportunity
The relative attractiveness of the mainstream segment is that this is a growing market,
which allows the Virgin mobile to continuously gain market share growth in the next five
years. Additionally, the niche market allows the Virgin mobile to be competitive different
from the rest, creating an extremely powerful brand for teenagers and young adults.
Brand Advantage
By setting the industry standard early and differentiating from the other carriers, Virgin brand
can easily capture the largely young audience and allow them to create “teenagers” phone
usage culture. Added-Features, phone customizations, and lower pricing all fit the teens and
increase brand-association to Virgin Mobile Phone
Increased Usage
Development of cellular culture in texting, messaging and daily phone usage. The phone is
no longer the business-only requirement, but important part of the people’s life – Wakeup
Call, Social connection, Music Device, and monitors phone bills.
Long-term Users (Teens & Young Adults)
Customer satisfaction would increase the less hidden fees and honest pricing. Association
of positive brand recognition among teens and young adults influence them to be much
more loyal than other cellular brands.

What are the risks associated with targeting this segment?

The largest risk Virgin Mobile faced was the chance of failure; consumers’ not accepting their
service plans. With other service providers being already well established, Virgin Mobile took
a large risk when entering the United States. Consumers are often very brand loyal, especially
with products or services that take up a larger part of their income. This meant that Virgin
Mobile must promote their own products and services, and also concentrate on why they differ
from the competition.

An issue that arises when marketing towards a younger demographic is that this demographic
may not be employed, which is common for high school students and some college students.
The older portion of this demographic probably has lower salaries than that of the thirty to
fifty-nine age demographic, who many of which have established careers with higher salaries.
Multiple risks can come from this issue of lower income. The first of which is quite obvious in
that because an individual does not have an inflow of money, they have no way of payment
to a service provider. Either this is the case, or the parents of these children do not have
enough disposable income to provide a cell phone and service to their child.

Why the major carriers have been slow to target this segment?

During the time of Virgin Mobile’s entrance into the market, there were six national cell phone
carriers, none of which marketed towards the younger demographic. One of the reasons why
these carriers were reluctant to market towards this demographic was that they required a
credit check upon signing a contract with the service provider. This becomes a problem
because a large portion of this demographic, teenagers, have not yet acquired credit cards,
therefore not possessing any credit at all.

Another reason why other service provider has been slow to target a younger demographic
is because they wanted to be “safe”, in that they wanted to target business men and women
(the thirty to fifty-nine age demographic). This demographic is consistent with their cell phone
use; using a higher number of minutes every month. Because of this high number of minutes
used, they pay for a highly monthly rate plan. It would be a risk for these providers to market
to a younger demographic because of their inconsistent minute usage per month.