Virgin Mobile USA: Pricing for the First Time

Case Group Assignment

Answer 1

Any pricing plan chosen for Virgin has to meet the following requirements as mentioned in the case:

1. Pricing structure must be competitive

2. Do not trigger reactions from competitors.
3. Result in profit by creating positive Lifetime Value (LTV) for each customer.

Option 1 “Clone the industry prices”

Advantages

This pricing plan will be easy to promote. It can save advertising costs as it is cheaper to promote what is actually an industry practice.
This saved cost can be used in packaging to make the product more understandable with the assistance of sales personnel. Virgin
Mobile can differentiate itself by providing better off-peak hours and fewer hidden charges. This method will allow Virgin to save on
sales personnel costs by putting their differentiation features on the product packaging.

Disadvantages

Option 1 offers less flexibility in calling habits, which in this scenario are different for the target market. With no real price distinction
consumers might not be willing to purchase Virgin products just for VirginXtra Features. This plan has hidden charges which in any
case are disliked by targeted niche. Moreover it would be hard for a new entrant to create differentiation using readymade pricing
arrangement.

Option 2 “Price below the competition”

Advantages

Lower prices than industry average for certain buckets. These buckets would mainly of 100 to 300 minutes which are generally used
by target market. This option has the potential to expand the size of market and result in greater sales. Moreover it would offer best
off-peak hour and few hidden charges and make the overall price cheaper, plain and simple.

Disadvantage

Average revenue per unit will be lower. Sales growth does not essentially translate into big profits. This plan has the possibility to
trigger competitive reactions. In addition it has the possibility to be perceived as a low quality service which deciphered as poor
image.

Option 3 “A whole new plan”

This would involve coming up with a totally different pricing structure and counter various pricing dimensions differently. The pros
and cons of each pricing area are highlighted below.

Shorten or eliminate contracts: Contracts play a vital role in keeping low churn rate. Industry average churn rate is 2% which can
shoot up to 6% in case of shortening or eliminating them. However there are some related positive aspects as well. Cellular contracts
require credit checks. As young customers have poor credit quality them often not qualifies for contracts. So eliminating contracts can
provide better reach to the target market. Secondly, those users who are under 18 years of age would not be requiring their parents to
sign contracts for them, resulting in higher probability for customer acquisition.

Prepaid versus post-paid: Morgan Stanley research suggests AC must be at or below $100 for prepaid to be viable. Although there
are concerns with prepaid plan such as investment in web or physical phone card, possibility of high churn rate, high promotion cost
as this is not widely accepted industry practice and people use it only as a safety device. However, with the target market Virgin
intends to cater to, credit checks are a huge no-no for them and the benefit of prepaid plans is that no credit checks are required. So in
this case, pre-paid plans are advised.

Handset subsidies: Lowering subsides can prove to be a good strategy. Reason being, firstly it will make consumers feel more
invested and loyal towards the brand, which can also counter the risk of more churning, associated with eliminating contracts.
Secondly it will reduce customer acquisition cost and effect the LTV positively.

Off-peak hours: The target market has different off-peak hours than business personals. Altering industry off-peak hours according to
youth needs is recommended.

Hidden fees: Young user do not like hidden charges and take it as an act of cheating. By making pricing simple and promoting it in a
way that it look competitive can help in better customer acquisition.
Conclusion

The analysis of all pricing options, mandatory requirements and given constrainers for pricing, Option 3 is recommended to Virgin
Mobile with features like no contract, prepaid package, relatively higher subsidies and off-peak hours different then industry and
aligned with targeted youth customers.

MARKET SHARE (OPTION 1) MARKET SHARE (OPTION 2) MARKET SHARE (OPTION 3)

Subscribers (Page 1, 1st paragraph) 500,000 Subscribers (Page 1, 1st paragraph) 750,000 Subscribers (Page 1, 1st paragraph) 1,000,000
Total Subcribers 130,000,000 Total Subcribers 130,000,000 Total Subcribers 130,000,000
Market Share 0.38% Market Share 0.58% Market Share 0.77%

MONTHLY REVENUE FROM OPTION 1 MONTHLY REVENUE FROM CALLS FOR OPTION 2 MONTHLY REVENUE FROM CALLS FOR OPTION 3
Minutes per customer 200 Minutes per customer 200 Minutes per customer 200
Charges per minute (Exhibit 10a) 0.15 Charges per minute (Exhibit 10b) 0.1 Charges per minute 0.425
VAS revenue 12.82 VAS revenue 12.82 VAS revenue 12.82
Total Revenue 42.82 Total Revenue 32.82 Total Revenue 97.82

INDUSTRY OPTION 1 OPTION 2 OPTION 3

Monthly cell phone bill 52 42.82 32.82 97.82
Cost to serve a customer (Page 3, 1st paragraph) 30 19.27 14.77 44.02
Monthly margin 22 23.55 18.05 53.80
Churn rate 24% 24% 24% 72%
Retention rate 76% 76% 76% 28%
Interest rate 5% 5% 5% 5%
Acquisition Cost 370 250 150 100
LTV 540.34 724.54 596.95 738.46

Assumptions:
Monthly minutes per customer are 200. The target market uses between 100-300 minutes per month so average is taken.
Charges per minute for option 3 is an average of what prepaid customers charge i.e. 35-50 cents
VAS Revenue: From exhibit 3 it can be seen that in 2001 the revenue was 10 billion and in 2002 it was 30 billion. So an average of the two is taken as the yearly revenue.
The acquisition cost for Option 1 & 2 have been assumed to be 250 and 200
Answer 5

Virgin mobile is a company with a hip and trendy image and it seeks to give its customers value
for money, quality, innovation and fun. It intends to give its customers something fresh, more
valuable than the competitors. The company was going to be targeting the consumers aged
between 15 to 29 years and for that it needed to deliver something that would attract them and
this came in the form of Virgin Xtras. This would involve delivery of content, features and
entertainment that would appeal to the youth. Exclusive contract with MTV was signed to
deliver to Virgin Mobile customers, exclusive content from Nickelodeon, MTV, VH1 etc. The
content would include exclusive wallpapers, , graphics, ringtones etc. According to Virgin
Mobile, MTV networks was home to the most recognized youth brands while Virgin brand is all
about fun, honesty and great value for money so the relationship was very powerful. These
features were expected to bring about additional usage and generate user loyalty.

In essence the value proposition by Virgin Mobile seems very attractive as it goes hand in hand
with the entire image of the company and the target market.

Apart from this, the channel strategy of distributing at place where the youth shop perfectly
complements the product. Virgin intends to make the packaging user friendly creating an
experience which is similar to that of purchasing any electronics item. The reason for this
approach is that Virgin understood that unlike business customers, Virgin Mobile’s target market
would want to touch and see the product and not talk to a salesperson to obtain information about
the product. Also, since Virgin Mobile had a miniscule advertising budget as compared to its
competitors, it needed to create its strategy wisely so that it could reach its target audience at the
minimum possible cost. They featured attractive displays at retailers where their target audiences
shopped with see through packaging which allowed the target market to see the product
themselves.