Virgin Mobile: Pricing Strategy

Marketing Management II

Why Virgin over others?- Customer Acquisition Plan

Existing Carriers Retail Outlets, Kiosks in Malls, High end electronic stores, specialty stores Packaging- In a box, fully packed Highly dependent on sales force Cost of Handset: $150-$300 Customers discounted rates : $60-$90 Commission to distribution partners - $100 Advertising Cost- $ 75-$ 105 per customer Virgin Mobile Youth shops-Target, Sam Goody music, Beat Buy Packaging similar to electronic goods No sales force Cost of handset: $60-$100

Commission to distribution partners -$30 Advertising Cost- $60 per customer

Option 1: Clone the Industry Prices

Priced competitively according to prevailing industry strategy with a few key advantages like differentiated applications and superior customer service Simple message: -Pricing competitively -MTV applications -Superior customer service Better off peak hours Fewer hidden fees Virgin Xtras

Contd: Option 1
Advantages Easy to promote. Consumers are used to buckets and peak/off-peak distinctions. Savings on advertising budget costs. Simple packaging could save costs on high commissioned sales people.

Disadvantages
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 structure Pricing slightly below the competition Maintain buckets of minutes Price per minute set below industry average in certain key buckets for target market Target young market that uses 100 to 300 minutes

Contd: Option 2
Advantages 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. Disadvantages 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 unfavourable image. May trigger off competitive reactions.

Option 3: New price plan

Shorten or eliminate Contracts Contract provide a hedge against churn Estimated churn rises from 2% to 6% Allows 18yrs and younger to purchase the product ( target market ) Prepaid service Currently 92% of subscribers have post-paid plans Higher churn rate Difficult to recoup Acquisition Costs (AC) Morgan Stanley research suggests AC must be at or below $100 for prepaid to be viable Need a method to add minutes(such as Website) added expenditure

Handset subsidies Eliminate all hidden fees and off-peak hours Concept of LTV

Acquisition Cost for other carriers

Expense Handset Subsidy Advertisement Lower End ($) Higher End ($) 90 75 210 105

Commission Other overhead

Total

100 22
287

100 42
457

Average

372

Acquisition Cost for Virgin Mobile

Expense Amount ($)

Handset Subsidy
Advertisement Commission Other overhead

0
60 30 10

Total

100

Lifetime Value
Average Usage (mins) Charges/min in cents 100.00 20.00 150.00 20.00 200.00 15.00 250.00 15.00 300.00 12.00

ARPU in $
CCPU Margin LTV prepaid LTV Postpaid

20.00
9.00 11.00 0.00 57.14

30.00
13.50 16.50 50.00 135.71

30.00
13.50 16.50 50.00 135.71

37.50
16.88 20.63 87.50 194.64

36.00
16.20 19.80 80.00 182.86

Target Consumer Behaviour

Makes calls whenever necessary and can seek to avoid calls that come with a higher price Students care about the price of calls and hidden costs and thus are price sensitive Demand is ELASTIC with price A percentage decrease in price will result in a larger percentage increase in quantity demanded (calls made)