Virgin Mobile USA:

Pricing for the Very First Time

 Company Background
Introduction Case Background
Issue of Concern

Market Research
All Options
Analysis
Theory Application
Calculation

Virgin Response
Conclusion Recommendations
Inviting Questions
2
 Introduction Analysis Conclusion

• Virgin, a leading branded venture capital organization,

Company is one of the world's most recognized and respected
Background
brands.

Case • Conceived in 1970 by Sir Richard Branson, the Virgin

Background Group has gone on to grow very successful business
in sectors ranging from mobile telephony, to
Issue of
transportation, travel, financial services, leisure,
Concern music, holidays, publishing and retailing.
• Virgin has created more than 200 branded companies
worldwide, employing approximately 50,000 people,
in 29 countries.
[Source: company website -
Available from: http://www.virgin.com/AboutVirgin/WhatWeAreAbout/WhatWeAreAbout.aspx] 3
 Introduction Analysis Conclusion

Company
Background

Case
Background

Issue of
Concern

4
 Introduction Analysis Conclusion

Sir Richard Charles Nicholas Branson (born 18 July

1950), is an English entrepreneur, best known for his Virgin
Company
Background brand, a banner that encompasses a variety of business
organizations. The name Virgin was chosen because a
female friend involved in setting down the initial record shop
Case commented that there weren't any virgins left amongst them.
Background Today, his net worth is estimated at about £4 billion (US$7.8
billion) according to The Sunday Times Rich List 2006, or
US$3.8 billion according to Forbes magazine.
Issue of
Concern
E

[Source: Mediaman Australia

Available from: http://www.mediaman.com.au/profiles/branson3.html] 5
 Introduction Analysis Conclusion

A student magazine, a small mail order record company and a

1970s recording shop were founded/ opened under the Virgin name.
Company
Background

1984 Virgin Atlantic Airways and Virgin Cargo launched.

Virgin Group

Case
Background 1988 Virgin Broadcasting, Virgin Hotels, Virgin Megastores, etc.

Issue of 1990s Virgin Rail, Virgin Games, Virgin Cola, Virgin Travel, etc.
Concern

2000s Virgin Mobile, Virgin Bikes, Virgin Blue, Virgin Digital, etc.

[Source: company website -

Available from: http://www.virgin.com/AboutVirgin/WhatWeAreAbout/WhatWeAreAbout.aspx] 6
 Introduction Analysis Conclusion

Company
Background

Case
Background …

Issue of
Concern

7
 Introduction Analysis Conclusion

Company
Background

Case
Background

Issue of
Concern

8
 Introduction Analysis Conclusion

Company
Virgin Group
Background

Air Travel Mobile Financial Retail Music Internet

Case
Background Virgin Atlantic: 51% Virgin Mobile Virgin Money: 100% Entertainment: 98.5% Virgin Cars: 25%
V2: 52.5%
(UK): 100% Victory: 89% Virgin Wines: 45%
Virgin Express: 59.8%
Virgin Mobile Virgin Net: 51%
Virgin Blue: 29.1%
(Aus):75% Virgin Student: 85.5%
Virgin Mobile
(USA): 50%
Issue of
Concern
Rail Hotel & Leisure Drinks
Virgin Retail Group: 51% Virgin Hotel Group: 91% Virgin Drinks: 100%
Thetrainline.com: 86% Virgin Active: 36%
Virgin Active S.A.: 27%

Note: % indicates percent ownership

[Source: Adapted from Virgin Management Ltd.
Available from: https://www.blackwellpublishing.com/grant/docs/15Virgin.pdf] 9
 Introduction Analysis Conclusion

Company We believe in making a difference. In our customers' eyes,

Background
Virgin stands for value for money, quality, innovation, fun and
a sense of competitive challenge. We deliver a quality service
Case by empowering our employees and we facilitate and monitor
Background
customer feedback to continually improve the customer's
experience through innovation.
Issue of
Concern
------- Virgin Group Website

[Source: http://www.virgin.com]
10
 Introduction Analysis Conclusion

• Is this an opportunity for restructuring a

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

11
 Introduction Analysis Conclusion

• Rapidly growing industry.

Company
Background • Typical market where the customer has been
ripped off or under-served, where there is
confusion and/or where the competition is
Case complacent.
Background
• Market segment ( 15-29 ages group) being
ignored.
Issue of
Concern • Big players have not capitalized on this segment
• Competitors slow to react to ever-changing
customer mindset

12
 Introduction Analysis Conclusion

• Dan Schulman was appointed CEO.

Company
Background
• The company entered into a 50-50 joint venture with
Sprint in which Virgin Mobile USA‟s services would be
Case hosted on Sprint‟s PCS network.
Background
• Under the agreement, Virgin Mobile would purchase
minutes from Sprint on an as-used basis.
Issue of
Concern
• The goal of Virgin Mobile USA is: to have 1 million
total subscribers by the end of 2002 and 3 million by
year 2006.

13
 Introduction Analysis Conclusion

The first to offer m-commerce services to all customers

via VirginXtras, irrespective of their handsets.
Company
Background • Access to MTV-branded accessories and phones
• Text messaging
• Rescue Ring
Case
Background • Online Real-time Billing
• Wake up Call
Issue of
• Ring tones
Concern • Fun Clips
• The Hit List
• Music Messenger
• Movies

14
 Introduction Analysis Conclusion

180 40%

Number of Subscribers Growth Rate

Company 160 35%

Background
140
30%
Number of Subscribers (in millions)

120
25%

Market Growth Rate

Case
100
Background
20%

80

15%
60
Issue of
10%
Concern 40

20 5%

0 0%
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Year

15
 Introduction Analysis Conclusion

Carrier

35
30
Company
Millions

25
Background 20
15
10
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Background

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Subscribers

Issue of
Concern 19% 15% AT&T
Cinular
Verizon
1%
3% VoiceStream
20% Alltel
11% Sprint
U.S.Cellular
5% Leap
5% Other Carriers
[Source: The Case] 21%
16
 Introduction Analysis Conclusion

Company “ If we can figure out a way to create

Background
value so that we can successfully enter a
very competitive and saturated market,
Case
Background and also create profitability with this target
segment, then we will have truly
Issue of accomplished something big.”
Concern

17
 Introduction Analysis Conclusion

70 ₵

60 ₵
Market
Research 50 ₵

All 40 ₵
Options
30 ₵

Theory 20 ₵
Application
10 ₵

Calculation 0 ₵

100 200 300 400 500 600 700 800

Contract Commitment - Minutes

[Source: Adapted from company data, Morgan Stanley Research]

18
 Introduction Analysis Conclusion

70 ₵

Market
60 ₵
Research
Price Per Minute

50 ₵
All
Options 40 ₵

30 ₵
Theory
Application
20 ₵

10 ₵
Calculation
0 ₵
100 300 500 700

Contract Commitment - Minutes

[Source: Adapted from company data, Morgan Stanley Research]

19
 Introduction Analysis Conclusion

Market • Must reach our target

Research
market: Youth!
All • Create a positive Lifetime
Options
Need to find a Breakthrough! Value (LTV) for every
Theory customer
Application
– We must be able to
Calculation make money!

20
 Introduction Analysis Conclusion

1. Clone the Industry Prices

Market
Research
Options 2. Price Below Competition
All
Options
3. A Whole New plan
Theory
Application Options 1, 2 ?

Calculation Or 3?

21
 Introduction Analysis Conclusion

Market
Research
• Simple message:
All
- Pricing competitively
Options - MTV applications
Theory
- Superior customer service
Application
• Better off peak hours
Calculation
• Fewer hidden fees

22
 Introduction Analysis Conclusion

70 ₵

60 ₵ Industry and Virgin

Market
Research
50 ₵

All 40 ₵
Options
30 ₵

Theory
20 ₵
Application
10 ₵
Calculation
0 ₵

100 200 300 400 500 600 700 800

Minutes

[Source: Adapted from company data, Morgan Stanley Research]

23
 Introduction Analysis Conclusion

C Easy to promote.
Market C Consumers are used to „buckets‟ and
Research peak/off-peak distinctions.
C Savings on advertising budget costs.
All C Simple packaging could save costs on high
Options commissioned salespeople.

Theory Pros and Cons

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

24
 Introduction Analysis Conclusion

• Similar structure
Market
Research – Pricing slightly below the
competition
All
Options • Maintain „buckets‟ of
Theory minutes
Application
– Price per minute set below
industry average in certain
Calculation
key buckets
– Target young market that
uses 100 to 300 minutes

25
 Introduction Analysis Conclusion

70 ₵

Market 60 ₵
Research
50 ₵

All 40 ₵
Options Industry
30 ₵
Theory
Application 20 ₵

10 ₵
Calculation
0 ₵

100 200 300 400 500 600 700 800

[Source: Adapted from company data, Morgan Stanley Research]

26
 Introduction Analysis Conclusion

C Maintain the buckets and volume discounts

with price per minute set below industry
Market average.
Research C Offer best off-peak hours and few hidden fees
so consumers will know Virgin Mobile is
All cheaper, plain and simple.
Options C Expand the size of the market and result in
greater sales and profits.
Theory
Pros and Cons
Application
D Earnings from each consumer will be less.
D Sales growth does not necessarily mean big
Calculation profits.
D Risk of being regarded as low-quality service,
thus an unfavorable image.
D May trigger off competitive reactions.

27
 Introduction Analysis Conclusion

Radically New Plan!

Market
Research
• Shorten or eliminate
Contracts
All
Options • Prepaid service
Theory
• Handset subsidies
Application
• Eliminate all hidden
Calculation fees and off-peak hours
• Concept of LTV

28
 Introduction Analysis Conclusion

Market
• Does it make sense to shorten
Research
subscription terms or eliminate them
All
Options
altogether?
– Contract provide a hedge against churn
Theory
Application – Estimated churn rises from 2% to 6%
Calculation • Allows 18yrs and younger to purchase
the product

29
 Introduction Analysis Conclusion

Currently 92% of subscribers have post-paid plans

Market
Research Concerns:
• Prepaid arrangements now have prohibitive pricing
All
Options
- 35 – 50 cents per minute up to 75 cents
- Phone use that is very infrequent
Theory • Higher churn rate
Application
• Recoup Acquisition Costs (AC)
• Morgan Stanley research suggests AC must be at or
Calculation
below $100 for prepaid to be viable
• Need a method to add minutes (such as Website)

30
 Introduction Analysis Conclusion

• Currently carriers purchase

Market
Research
handsets from major
manufacturers at a cost of
All $150-$300.
Options

• Carriers then subsidize the end

Theory
Application user $100-$200 (becomes part
of AC).
Calculation
• How do we minimize the AC?
• Does this matter to our target
market?

31
 Introduction Analysis Conclusion

Hidden Fees
Market
Research • Goal: Make the pricing very simple
– “What you see is what you get!”
All
Options • Rolling all these normally hidden costs that
Theory
include taxes and fees into the final price
Application
Off-Peak Hours
Calculation • Consider the target market: Young People!
- Minute usage is very different

32
 Introduction Analysis Conclusion

The Business Customer

Market
Research • TWO DISTINCTIONS:
– Make calls during office
All hours
Options
– Rarely worry about the cost
Theory
of calls (Finance Dept can
Application deal with it)
• PRICE INSENSITIVE!
Calculation • Demand is INELASTIC
• A percentage decrease in price
will have a smaller percentage
increase in Quantity Demanded
(Calls made)
33
 Introduction Analysis Conclusion

The student customer

Market • TWO DISTINCTIONS
Research – You make calls whenever
necessary and can seek to
All
avoid calls that come with a
Options higher pricetag
– Students CARE about the
price of calls
Theory
Application • PRICE SENSITIVE
• Demand is ELASTIC
• A percentage decrease in price
Calculation will result in a larger percentage
increase in quantity demanded
(calls made)

34
 Introduction Analysis Conclusion

Market Mobile phone company

Research
revenue:
• The revenue gain from
All
Options
increased quantity must be
greater than the revenue
loss from dropping the price
Theory
Application • Since our target market is
Youth, whose demand is
relatively elastic, downward
Calculation adjustment in price is
relevant! A>B for Revenue Gain!

35
 Introduction Analysis Conclusion

Option 1 : Clone industry

Industry pricing Xtras

Market
Research -Same price of handset offered Hidden Fee
-Same churn rate of 2%
All Off-peak hour
Options

Theory Option 2 : Price below

Application
Industry pricing Xtras
Calculation -Same price of handset offered Hidden Fee
-Same churn rate of 2%
Off-peak (1) hour

Priced (5c) below

36
 Introduction Analysis Conclusion

Option 3 : New pricing structure: prepaid

Market
Research

Xtras
All Average monthly revenue
Options from minute usage Hidden Fee
= Avg. min + avg. minute charge

Theory
Off-peak (1) hour
Application -Same price of handset offered
-Churn rate of 6%

Calculation

37
 Introduction Analysis Conclusion

M
Market LTV = - AC
Research 1- r + i
All
Options ARPU CCPU M AC LTV

Average Monthly
Cash Cost per user Margin Acquisition Cost Lifetime
Theory Revenue
Application
= 45% of ARPU = ARPU - CCPU Value
per user

Calculation r: retention rate = 1 – churn rate

-Sale commission
i : interest rate = 5%
-Advertising per
gross add
-Subsidy cost

38
 Introduction Analysis Conclusion

Assumptions

Market - Year 1 is the immediate target

Research
- Customer with us 1 year for prepaid
- Target average minute per month is 200
All - Target average charge per minute is 15 cent
Options
- Level of subscribers
Option 1: same industry pricing -> less attractive
Theory
-> 500,000 out of 1 million subscribers
Application

Option 2: lower cost -> attractive

Calculation -> 750,000 out of 1 million

Option 3: new pricing structure and features -> most attractive

-> 1 million out of 1 million

39
 Introduction Analysis Conclusion

Item Value
Market
Research Hidden Fee $ (6.00)
Off-peak (1) hour $ (3.00)
All
Options Priced below (5c) $ (10.00)
Option 1 Xtras $ 12.02
Theory
Option 2 Xtras $ 18.03
Application
Option 3 Xtras $ 24.04
Rev. from minute usage $ 30.00
Calculation

40
 Introduction Analysis Conclusion

Xtras Value

Market
Research

All % of the
Options
market
share
Theory
Application

Calculation

# of subscriber x 12 months

41
 Introduction Analysis Conclusion

ARPU CCPU M AC LTV

Market Industry
Research
$52.00 $30.00 $22.00 $270.00 $44.29
Avg.

All Option 1 $55.02 $24.76 $30.26 $160.00 $272.29

Options

Theory Option 2
$51.03 $22.96 $28.07 $120.00 $280.94
Application

Calculation Option 3 $45.04 $20.27 $24.77 $100.00 $253.89

M
LTV = - AC
1- r + i
42
 Introduction Analysis Conclusion

Option 3 - Break Even Point with AC and LTV

Market Let LTV = 0

Research
-> 0 = M/(1 - r - i) – AC
All -> M = 0.11 AC
Options
-> AC = 24.77/0.11
Theory
Application
If LTV = 0 , AC = $225.

That is the max we can go with AC.

Calculation Now with AC at $100,
-For Ads budget, we can spend more
-For the handset, we can lower price or increase quality

43
 Introduction Analysis Conclusion

Option 3 - Break Even Per customer

Market
Research Revenue = Cost
Xtras + minute usage = CCPU + AC Cost
All
Options
Total Net 11.37 0 ~ Break even
Theory With Xtras 0.15 0.09
Application
Without Xtras 0.21

Calculation

44
 Introduction Analysis Conclusion

Market
Research

All
Options

Theory
Application

Calculation

45
 Introduction Analysis Conclusion

Pricing Strategy
Pricing Objective
Sales Maximization
Virgin
Demand Estimate
Response
Current market penetration of target market is only 25%1
Create Demand amongst remaining 75%
Brand Switch by current users
Recommen-
dations Capitalize on Highly Elastic Demand of Target Market
Cost Estimates
Monthly Cost to Serve per Customer
Networking Cost
Questions
Customer Service Cost
Overhead Cost
Customer Acquisition Cost
Subsidy on Cell Phone set
Marketing Communication Cost
Sales commission
Source: http://www.wirelessweek.com/virgin-mobile-details-launch-plans.aspx 46
 Introduction Analysis Conclusion

Pricing Strategy (contd…)

Virgin Competitors‟ Prices

Response ARPU of $52 with 417 minute of use
60 – 20 c per minute for less than 100 minutes
20 – 12 c per minute for 100 to 300 minutes (Virgin Target Market)
Recommen-
35 – 50 c per minute for Pre-paid Costumers (Virgin Target
dations
Market)
Pricing Method
Penetration Pricing
Questions Costs per Unit is inversely related to Number of Subscribers
Reduce CCPU by increase in Number of Subscribers
Increase in Margin will follow

47
 Introduction Analysis Conclusion

Virgin
Response

Recommen-
dations

Questions

48
 Introduction Analysis Conclusion

Final Price !!!!

Virgin
Response
15c per minute with Revenue of $30 per unit
(average use of 200 mins)
Recommen- Target Virgin Xtras Revenue of 15.04
dations
Total Estimated ARPU of $45.04

Questions

49