PRICING

Case Study-
VIRGIN MOBILE USA: PRICING FOR THE VERY FIRST TIME

Submitted By,
Ankita Beniwal
F20124
Q1. Given Virgin’s mobile target market, how should it structure its pricing? Which of
the options given in the case would you choose and why?

The main objectives of Virgin Mobile were ensuring competitive pricing, enhancing the
bottom line of the organization and targeting the youth but not triggering the competitors
through pricing. The analysis of given 3 plans in the case are as following:
Strategy -1: Clone the industry prices
The primary focus of this strategy was competitive pricing, inclusion of hidden charges,
ensuring superior customer services and the discrimination based on off-peak hours. The
advantages
The advantages associated with this strategy are:
 The package is simple to offer and promote
 The cost on advertisements could be greatly reduced
 Customers are accustomed to industrial practices on ‘buckets’ and distinctions based
on peak and off-peak
The disadvantages are:
 There is no price discrimination
 Industry imposes stern rules for new entrants
 Inflexible calling plan
Strategy -2: Pricing below competition
This strategy is similar to the previous strategy. Virgin Mobiles offers a lower price than
competitors. This is accomplished by setting the bucket price lower than the industry price.
This is used to capture the teen target market over the course of 100 to 300 minutes.
The advantages are as follows:
 The price for buckets, per minute rate was set below industry standards, and volume
discounts were also offered
 Market expansion strategy, which resulted in increased sales and, ultimately, higher
profits
 Because the hidden charges were lower and the best off-peak plan was offered, more
customers would be drawn into the plan.
The disadvantages are as follows:
 Because lower-than-industry charges are offered, the profit per customer will be lower
 This may elicit reactions from competitors
Strategy -3: The is all about whole new pan with features such as offering prepaid services,
handset subsidies, elimination of hidden fees and off-peak hours, shorten the contracts period
and inclusion of LTV concepts
Acquisition cost comprises of sales commission ($100), advertising ($75 to $100) and
subsidy cost ($100 to $200). Thus, from the given information the approximate AC is
estimated to be $370. The interest rate is given as 5%. Also, it is given that
Monthly ARPU = $52 and Monthly cost to serve = $30 which helps in computation of
Monthly margin = Monthly ARPU – Monthly cost to serve = $52 - $30 = $22.
Thus, the breakeven could be calculated as AC/Monthly margin = $370/ $22 = 17 months

Thus, from the above analyses we could observe that the Strategy-1 and Strategy-3 without
contracts seems to give positive LTV. It is also evident that the LTV of strategy-1 is high and
the constrains followed also seems to be on par with the industry standards. Thus, of the
given 3 it is the strategy-1 the best choice to opt for.
Q2. Give Evidence of the financial viability of your pricing strategy.
Now upon inculcating the charges planned by Virgin mobiles which is lesser than the
industry standards as following, the better pricing approach could be framed:

AC = sales commission ($30) +advertising ($60) + subsidy ($30) = $120

Assuming the break even as of industry standard which 17 months the per minute charges
with an assumption of total duration of call being 200 minutes is computed as following:
Thus, upon calculating LTV with the churn rate of 6% when no contracts are given and with
110 as monthly margin and the above as per minute charge it is found to be 10.29. But upon
increasing the price to 0.1 the LTV is found to be $51.Thus, this new strategy with reduce
expenses and eliminated contracts which would attract more teen customers would result in
increased sales, more profits and gain market share of teen customers which are found to be
compliance with the objective of the Virgin mobiles