Virgin Mobiles USA:

Pricing for the Very First Time

Harvard Business School Case

Prem Prakash Dewani

Professor (Marketing), IIM Lucknow
Case Explores Aspect of Pricing
1. Newer Market
2. Market Characteristics are provided( Saturated and
Switching Behaviour of the consumer)
3. Disloyal Customers

4. Customer Loyalty and CLV

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Case Explores Aspect of Pricing
1. Pricing Levels
2. Pricing Structure

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Case Explores Aspect of Pricing
1. Situation Analysis
2. Problem Statement
3. Options Available
4. Criteria for Evaluation
5. Evaluation of Every Option
6. Recommendations
7. Contingency Plan
8. Conclusion
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Case Explores Aspect of Pricing
Pricing Levels
 The overall amount a customer pays
 Pricing levels on both demand and profitability
 Break-even analysis
 Estimates of customer acquisition cost
 Estimates of customer lifetime value

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Case Explores Aspect of Pricing
Pricing Structure
 Buffet Pricing Structure VS a la carte pricing
 Pre-paid plans VS post-paid plans
 Contracts
 Hidden fees
 Subsidies

 Effect of this on purchase decision and post-

purchase behaviour
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Objectives of the
CASE?

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 Objectives of the CASE

To examine the interplay between pricing,

target market selection, and a firm’s overall
value propositions

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 Objectives of the CASE

To demonstrate the multiple ways firms can

create paths to profitability
 Lowering customer acquisition cost
 Increasing retention rates
 Reducing service cost
 Changing consumption pattern

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 Objectives of the CASE

To illustrate the importance of adopting a

long-term strategic perspective in choosing a
pricing structure

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 Option 1 & 2

Pricing Approach Similar to

the Major Carriers

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 Pricing Structure
from the Customer
Perspective
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Various Sources of Customer Discontent

Contracts

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Various Sources of Customer Discontent

Buckets

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Various Sources of Customer Discontent

Hidden Cost

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Various Sources of Customer Discontent

Off-Peak / On-Peak
Differentials

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Various Sources of Customer Discontent

Credit Checks

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Various Sources of Customer Discontent

Complex Sales
Process

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Various Sources of Customer Discontent

Privacy Concern

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Various Sources of Customer Discontent

Poor Services

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 Pricing Structure
from the Carrier/
Firm’s Perspective
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 Firm’s Perspective
Most of the sources causing
customer dissatisfaction i.e.
bucket pricing, contract etc are
source of firm’s Profit

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 1. Contracts
Annual Churn Rate –with Contract = 2 %*12
months (Case P5) = 24 %

Annual Churn rate without Contract= 6 %*12

months (Case P8) =72 %

The Difference = 72 % - 24 % = 48 %
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 1. Contracts
AT & T with customer base 20.5 M (Case Exhibit 1)

Additional customer lost to churn = 48 % * 20.5 M =

9.84 Million Customers

Acquisition cost per customer $ 370 (Case p2)

Total cost of offsetting higher churn rate

=$ 370 * 9.84 M = $ 3.64 Billion
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 2. Bucket Pricing
Case Exhibit 9 a and 9 b

Customers are not always adept at estimating

their future calling patterns

Pricing buckets allow the carriers to advertise

low per minute rates

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 2. Bucket Pricing
‘If all customers actually signed up for the
optimal plan for their usage, the carriers
would be ,making far less money than
they are today’ Schulman

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 3. Hidden Fees, Credit Checks, Poor
customer services

‘By hidden fees Firms are able to promote

low per minute pricing levels and collect
extra revenues

Rigorous Credit Checks

Poor Customer Services

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 A Cycle of Customer Dissatisfaction
Complex Sales Process

Multiple Credit Check

Target Complex Pricing Plans
Customers Multiple Options
Multiple Buckets
Business Consumers, Hidde Fees
Heavy/Light Users
etc. Poor Services

Forced Contracts

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A Cycle of Customer Dissatisfaction
Complex Sales Process

Credit Check

Complex Pricing Plans Customer

Multiple Options
Multiple Buckets Dissatisfaction
Hidde Fees

Poor Services

Forced Contracts

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 A Cycle of Customer Dissatisfaction

Continuous Industry Churn

High churn rates mean that carriers must re-
acquire 24 % of their customers base each
Customer year just to stay even
Dissatisfaction
High Customer Acquisition
Cost
Because of high customer dissatisfaction
rates, acquiring new customers is a tough sell

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 A Cycle of Customer Dissatisfaction

Continuous Industry Churn Financial

High churn rates mean that carriers must re-
acquire 24 % of their customers base each Pressures to
year just to stay even *Lock in customers using
contracts
*Cut corners in customer
High Customer Acquisition service to reduce cost
*Aggressively promote low
Cost prices to attract customers
Because of high customer dissatisfaction *Use hidden fees and pricing
rates, acquiring new customers is a tough sell bucket to increase margins

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 A Cycle of Customer Dissatisfaction
Complex Sales Process
Financial
Pressures to Credit Check
*Lock in customers using
contracts
Complex Pricing Plans
Multiple Options
*Cut corners in customer Multiple Buckets
service to reduce cost Hidde Fees
*Aggressively promote low
prices to attract customers Poor Services
*Use hidden fees and pricing
bucket to increase margins Forced Contracts

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 Pricing Levels
1
Acquisition Cost = $ 370 (case p 2)
1. Advertising per gross Add = $ 75-$100 (footnote case p-5)
2. Sales commission paid per subscriber = $ 100 (case p5)
3. Handset Subsidy provided to the subscriber = $ 100 to $ 200
(Case p 9)
4. Total = $ 275- $ 405 (roughly $ 340)

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 Pricing Levels
2
Breakeven Analysis
1. Monthly ARPU (average revenue per unit)=$52 (case p-3)
2. Monthly cost to serve = $ 30 (case p3)
3.Monthly Margins = $ 22

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 Pricing Levels

Time required to
breakeven = $370/$22
= 17 months
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Lifetime Value (LTV) Analysis

1. LTV = M/(1-r+i)-AC

2. LTV = (22*12)/(1-0.76+0.05)-370 = $ 540

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 LTV: Eliminating Contracts

1. LTV = M/(1-r+i)-AC

2. LTV = (22*12)/(1-0.28+0.05)-370 = -$ 27.14

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LTV: Eliminating Hidden Cost

1. LTV = M/(1-r+i)-AC
2. Hidden cost = $35-$29 = $ 6 on $ 29 = 21 %

3. Monthly margin reduction = $22/ 1.21 =

$18.18

4. LTV = (22*12)/(1-0.28+0.5)-370 = -$ 27.14

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LTV: Eliminating Hidden Cost
Breakeven would become
370/ 18.18= 20 Months

LTV with contract

= (18.18*12)/(1-0.76+0.05)-370 = $ 382

LTV without contract

= (18.18*12)/(1-0.28+0.05)-370 = -$ 86.68
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Option 3: Different
Pricing Strategy

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 Option 3: Different Pricing
Customer Characteristics:
 Highly Dissatisfied and Confused

Segment Chosen to Serve

 Fail Credit Check and Week credit History
 Uneven Usage Pattern
 Low Credit Limit
 Limited Disposable Income

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Customer Wants and problems
No Contracts Increased Churn
No Pricing Bucket

No Hidden Fees Lower Operating Margins

No Peak / Off Peak Hrs

No Credit Check
More Uncollectible

Simple Sales Process Customer Confusion

Great Service Increased Cost

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Lower Acquisition Cost?
Advertising
Subsidies on Handsets

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Current Industry Handset Cost $ 150 to $ 300 (225) Case p 3

Current industry handset subsidy = $ 100 to $ 200 (150) (Case

p 9)

Current industry handset subsidy as a % = 67 %

Virgin handset Cost = $ 60 to $ 100 (80) case p 5

If virgin were to subsidize handsets by 35 % to 40
%, subsidy would equal $ 30
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 Virgin Mobile
Sales Commission =$ 30
Advertising per gross Add = $ 60
Handset Subsidy = $ 30
Total Acquisition Cost $ 120

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Embracing Other Pricing Elements

Offering Pre-Paid Plan?

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 Pre-paid Plan
Would eliminate uncollectible
Eliminate need for credit check
Simplify the sales process (entirely new set of
channel opportunities)
Encourage Trial Rates
Lower cost to service (Billing and service calls)

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 High Differentiated
Competitive Positioning
Rescue Rings, Wake up Calls

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Customer problems and Solutions
No Contracts Increased Churn Lower Subsidies
No Pricing Bucket
Lower
Acquisition Cost
No Hidden Fees Lower Operating Margins
Offset Loss in
No Peak / Off Peak Hrs LTV

No Credit Check
More Uncollectible
Simplified Pre-
Simple Sales Process Customer Confusion
paid Plans
Great Service Increased Cost
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A customer Friendly Plan:
Could it Achieve
Profitability?
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 Breakeven Analysis
Virgin’s Monthly APRU = 200 minutes * P
(p = price per minute)

Monthly cost to Serve = 0.45 * 200 * P

Monthly Margins = (200P)- (90 P) = 110 P

Acquisition Cost = $ 120

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 Breakeven Analysis
To Breakeven in 17 Months

120/ 110P = 17

=0.064 Dollars = 6.4 Cents

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Lifetime Value Analysis (LTV)
(0.064*200*12)(1-0.45)/(1-0.28+0.05)-120 = -10.29

Pricing Estimates
(1-0.45)(200*12*p)/(1-0.28+0.05)-120>0

1320p/0.77> 120

P>0.07 7 Cents
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 Lifetime Value Analysis (LTV)
At 10 cents per minute the LTV would be $ 51

At 25 cents per minute the LTV would

be $ 309

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What Happened?

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 Virgin Price Plan
A pre-paid plan
No contracts
No Hidden Charges
No peak or off peak hours
Very Low handset subsidies
No credit check
No monthly bills
Price: 25 cents per minute for the first 10 minutes in a day, 10
cents/ minute for the rest of the day
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 Virgin Price Plan
A 3 months period in which to use pre paid minutes plus an
additional 2 months grace period
Handsets with one button access to view current
balance/remaining minutes
Customers could purchase additional minutes via the phone
or web using a credit card: users could also purchased top off
card through Virgin’s retail channel

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 A Cycle of Customer Satisfaction
Simple Sales Process

Narrow No Credit Check

Target Simle Pricing Plans
Segment: Full Transparency
Easy to Understand
Young People No Hidden Fees etc
between the ages of
14 and 24 years Great Services

No Contracts

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 A Cycle of Customer Satisfaction
Simple Sales Process

No Credit Check

Simple Pricing Plans Customer

Full Transparency
Easy to Understand Satisfaction
No Hidden Fees etc

Great Services

No Contracts

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 A Cycle of Customer Satisfaction

Lower than Expected

Churn Rate
Customer
Satisfaction

Lower Customer
Acquisition Cost

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 A Cycle of Customer Satisfaction

Lower than Expected

Churn Rate Financial
Flexibility to
*Eliminate Contracts
• Offer Great Customer
Service
Lower Customer • * Offer competitive per-

Acquisition Cost minute rates

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