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Virgin Mobile Case

Virgin Mobiles Chosen Target Market: Demographic 15-29 demographic. [Exhibit 2: Mobile penetration by age group] This segment is either in college, just leaving their homes or getting their first cell Needs phone. They have inconsistent usage needs and calling patterns depending upon if they are in school or vacation. Low disposable income. Behaviors Attitudes They use their phones for more than just making calls. They are addicted to downloading accessories such as ringtones etc. They use 100-300 minutes / month They see their phone as a reflection of their personality and as a fashion statement.

Benefits Allows virgin to pursue an underserved segment that has low penetration and potential for robust growth. Encourage customer loyalty and retention by being the first product that customer has used This segment tends to be social and will help word of mouth awareness

Risks This segment usually has poor or low credit and may default on contracts

This segment may not be profitable enough in terms of usage. Industry is mature and Virgin Mobile is a new concept. Significant investment will be required to build a brand

Much more appreciative of the VirginXtras and other mobile entertainment features Benefits desired are aligned with Virgins core capabilities [ability to provide fun and value for money]

This segment may not use their phones enough to justify the customer acquisition cost The low touch marketing strategy may not result in large volume of sales.

I agree with the target market selection as this segment is best placed to align with Virgins resources and features. Virgin brand promises to deliver fun, honesty and value for money and its relationships with youth oriented vendors such as MTV helps build appeal to the youth segment.

Positioning Strategy
Positioning Statement. To young mobile consumers, Virgin Mobile is the cell-phone provider that offers a fun and value for money mobile experience because Virgin understands and can deliver what young people want. I agree with Virgin Mobiles positioning as it meets the basic criteria of value, fit and uniqueness. Its target customers, the 18-29 year old population who views their cell-phone as a fashion accessory, will be attracted by the benefits offered via Virgins association with youth focused magazines and networks such as Vibe, XXL and MTV. Also, in positioning itself as a fun and value for money brand, Virgin is leveraging its core values, ones that have held it in good stead across multiple enterprises in different domains. Moreover, by focusing on street events and stunts, Virgin is further accentuating the fun-ness aspect of its promise. Lastly, given the competitive environment, this positioning is unlikely to be copied by any major cellular provider as some of these publicity stunts may turn off other customers. Furthermore, a new entrant may not have enough of a brand to pull it off like Virgin can. Lastly, by promising a fun and value for money experience, Virgin Mobile is trying to appeal on emotional and functional benefits of the brand as opposed to the attribute level where it may find itself lacking to its mainstream competitors. [Brand positioning pyramid is available in the appendix] Product offering: By focusing on delivery of content, features and entertainment via its tie-ups with MTV, VH-1 and Nickelodeon, it aims to build revenue from mobile entertainment as opposed to just phone usage. Extra youth oriented content such as text messaging, ring tones will also attract the core 18-29 year old demographic that use phones for texting, fashion accessory. Channel strategy: Unlike its mainstream competitors which used retail outlets and mall kiosks to sell phones via high touch salespeople, Virgin Mobile sells its products where its demographic already shops such as Target, Best Buy. This demographic is used to buying consumer electronics and Virgin has positioned itself as another consumer electronic. This saves on sales commissions while allowing consumers full access to the product. Advertising/promotion/merchandising/packaging strategy: By staying focused on teens and young adult entertainment and sponsoring street events and youth magazine op-ed pieces, Virgin is closely aligned with its desired customers and what they respond to. The packaging [phone and

point of sale] is also aimed to communicate accessibility, ease of use and fun without requiring high touch salespeople. For the national carriers, advertising spending typically ranged from $75 to $105 per customer acquired. Given Verizons $650 million advertising spending, Virgin Mobiles $60 million is low and with a target of 1 million user, it means $60 per customer. Although Virgin plans to pursue a very focused advertising approach, initially, more investment may be required to build its brand.

Financial Analysis on Pricing Options

Virgin Mobile has three pricing options: 1) clone industry prices, 2) price below the competition, and 3) create a whole new plan. Their profitability is summarized below

Customer Acquisition Cost [1] Price per Minute [2] # Of Minutes [3] Average revenue per unit per month [4] Annual Cash cost per user [5] Monthly margin [6] Annual Customer Retention Rate [7] Interest rate [8] Lifetime Customer Value Time required to break-even in

Clone the industry prices $110

Price below the competition $110

New plan $110

$0.15 200 $35

$0.10 200 $25

$0.25 200 $45

$15.75 $19.25 76% 5% 686.55 5.714 months

$11.25 $13.75 76% 5% 458.965 8 months

$24.75 $30.25 34% 5% 361.428 3.63 months

As can be seen, Virgin should pursue the new plan that eliminates contracts, uses a prepaid option and gets rid of hidden fees. In doing so, it breaks even the fastest. While, the LTV is lower than the other plans, it implies struggles with the other providers to pursue options A and B which would potentially increase the customer acquisition cost thereby lowering the projected LTV.

Pricing Recommendation

Cellular providers charged customers a fixed fee based on a contract. If the customers used more than the bucket of minutes they had signed up for, they were charged with a higher rate. The underlying logic is that customers cant pay their optimal rate and end up either signing for lower bucket plans which result in penalties for overuse or a bigger bucket leaving most of their minutes unused. Providers also charged additional fees that were one time in nature and often classified as service charges that customers had no choice but to pay for. To sum up, the underlying uncertainty in usage prevents the customers from selecting the optimal plan. Virgin Mobile should choose to utilize a pricing plan that attracts their chosen segment- the 18-29 youth and helps build a loyal customer following that fits Virgins values. As this segment is most likely to have poor credit, Virgin should move away from the contract-driven plans and adopt a prepaid model. Also, by eliminating all hidden costs and peak/ off-peak pricing, Virgin provides a clear cost benefit to this segment who dont have the same usage pattern as a traditional 30-59 business customer. While this approach best fits Virgins values and strategy, it can result in high churn rate [~6%]. By cloning the industry prices, Virgin Mobile will not be able to differentiate itself to its target segment or attract this segment by providing a unique and credible alternative to the mainstream industry brands. While this approach will be easier to introduce [piggybacking on competitors promotional activities], it doesnt take into account the target segment calling habits, which abhor contracts and hidden fees and treat hidden fees differently. Pricing below the industry is also not a good sustainable move to build a loyal customer base. While this strategy will definitely attract customers, the earning per customer will be lesser and it will be difficult to sell value add services [VirginXtras]. By operating on low margins, it may be difficult to compete with another new low priced competitor and may lead to customer exodus. It also doesnt put emphasis on the features and benefits offered by the Virgin Mobile experience. Virgin should structure the pricing plan as follows: Contracts: Virgin mobile should eliminate contracts. This will be a clear differentiator and one that is unlikely to be emulated by its mainstream competitors who rely upon credit checks to weed out low credit worth consumers. While estimated churn will rise to 6%, this will also open the door to a growing segment that would not need parental approval to sign up. As a corollary, keeping the price sensitivity and low credit worthiness of its target demographic in mind, Virgin Mobile should opt for prepaid plans that will reduce its risk Handset subsidies: These should be reduced or eliminated. This will have the dual effect of letting customers buy what fits their lifestyle as well as minimize the customer acquisition cost.

Hidden fees: These should be eliminated resulting in one final price that a customer can expect and then budget for. It will also save the need to employ sales people to explain product pricing. Average per minute charges: This value has to be greater than $0.18 since this option assumes all hidden fees are eliminated. Traditionally, a $29 plan ended up being $35 so adding $6 hidden cost to $30 plan = $36 and for $200 minutes that is a cost of $0.18. On the upper end, industry rates were $0.35-$0.50. I assume Virgin will price somewhere in this range but at the lower end so prices dont seem prohibitive to the target segment. Peak/off-peak prices: Usage pattern for the youth demographic is different from the traditional uses [business use]. Given that this segment is price sensitive, lower off-peak prices will drive greater demand. They should price above the market for peak usage but price below the market for off-peak prices. As mentioned above, Virgin should charge per minute rate of $0.25 for peak minutes and less than $0.15 for off peak. The important thing is to clearly define peak and nonpeak usage and not make it based on the hour of the day as is the case for traditional cellular providers.

APPENDIX A: Calculations and Assumptions Clone the industry prices $110 $0.15 200 200 * $0.15 + $5 Price below the competition $110 $0.10 200 200 * $0.10 + $5 New plan $110 $0.25 200 200 * $0.25 + $5

Customer Acquisition Cost [1] Price per Minute [2] # Of Minutes [3] Average revenue per unit per month [4] Annual Cash cost per user [5] Monthly margin [6] Annual Customer Retention Rate [7] Interest rate [8] Lifetime Customer Value Time required to break-even in months

45% * $35 = 45% * $25 = 45% * $55 = $15.75 $11.25 $24.75 55% * $35 = $19.25 55% * $25 = $13.75 55% * $55= $30.25 1- 12* 2% = 76% 5% 12*19.25/ (1-0.76 + .05) 110 = 686.55 110/19.25= 5.714 1- (12* 2)%= 76% 5% 12*13.75/ (1- 0.76 + .05) 110 = 458.965 110/13.75= 8 1- 12*6%= 28% 5% 12*30.25/ (1- 0.28 + .05) 110 = 361.428 110/30.25= 3.63

[1] Customer Acquisition Cost Assumptions Industry Customer Acquisition Cost = $370 Virgin Mobile Customer Acquisition Cost = advertising per gross ad + sales commission paid per subscriber + handset subsidy provided = $60 + $30 +$20 = $110 Advertising cost per customer= $60 Sales = $30 [By opting for different channels and product packaging, an attempt was made to cut down on sales commission] Subsidy = $20 Industry handset subsidy: 67% [handset cost: $150-$300; handset subsidy: $100 -$200] Assume Virgins subsidy around half of industry: 33% [Virgins handset cost: $60- $100] [2] Price per Minute assumptions Industry Average Price per Minute = $52 for 417 minutes = $.125 per minute Virgin Average Price per Minute assumptions [Assuming 200 minutes use] Option A: cloning the industry = $0.15 [Exhibit 9A] Option B: Pricing below the industry = $0.10 [Exhibit 9B] * Option C: New plan = $0.20 This value has to be greater than $0.18 since this option assumes all hidden fees are eliminated. Traditionally, a $29 plan ended up being $35 so adding the $ hidden cost to $30 plan = $36 and for $200 minutes that is a cost of $0.18. On the upper end, industry rates were $0.35-$0.50. I assume Virgin will price somewhere in this range but at the lower end so prices dont seem prohibitive to the target segment. [3] Number of minutes: From the case, 100-300 is average usage of the target demographic.

[4] Average revenue per unit per month Average revenue per unit per month = Total number of minutes * revenue per minute + Additional revenue from VirginXtras, ringtones etc Assuming additional revenue to be = $5 Virgin Mobile Average revenue per minute Option A: cloning the industry = $0.15 * 200 + $5 = $35 Option B: Pricing below the industry = $0.10 * 200 + $5= $25 Option C: New plan = $0.25 * 200 + $5 = $55 [5] Annual Cash cost per user = 45% of Annual ARPU [Exhibit 11] [6] Monthly margin = Average revenue per unit per month [ARPU] CCPU = 55% * ARPU [7] Annual Retention Rate = 1 12* Monthly churn Monthly churn = 2% for customers under contract and 6% for prepaid customers [8] Interest rate = 5% as given in the case [9] Lifetime Customer Value = Annual contribution margin/ (1-Annual customer retention rate + interest rate) customer acquisition cost [10] Months to breakeven = Customer acquisition cost/ monthly contribution margin

Brand positioning pyramid for Virgin mobile

Fun Emotional Benefits Functional benefits Price Attributes Changeable faceplate Appearance Value for money VirginXtras Colorful packaging Reflects right image about me Meets my needs Responsive and helpful staff

No hidden fees No hassles contracts

Entertainment features

Note: The left hand side covers the tangible aspects and the right hand side of the pyramid focuses on the intangibles.