VIRGIN MOBILE USA: PRICING

CASE ANALYSIS
Siddharth Dhamija
Section- F
S No. 23

OVERVIEW
Objective To develop a pricing strategy for a new wireless service
Target Segment Teens and Twenties
Business Model MVNO No fixed cost or investment in physical
infrastructure
Virgins Brand Personality Innovative, fun, pro-active and challenging
Identify and enter areas, where competitors are complacent or customers
taken for a ride by existing players

CORE COMPETENCY
Making a difference in the eyes of the customer in terms of :
Value for Money
Quality
Innovation
Fun
A sense of Coolness

SEGMENTATION
Identified the age segment where the Industry penetration was the
lowest, that is, between 15 years to 29 years of age
Growth rate among this segment is projected to be robust for the next 5
years
Existing players ignored this segment due to poor credit quality, irregular
usage etc
Mobile Phone penetration
60
40

Mobile Phone penetration

20
0
Age 15-19

Age 20-29

Age 30-59

Identified the income segment with a low disposable income and high
aspiration for trendiness.

USA Demography by Income

1
15
32

Upper Class
32

Upper Middle Class

Lower Middle Class
Working Class
Lower Class

VALUE PROPOSITION
Basic intent was to appeal to the youth, market, generate additional usage,
and create loyalty
VirginExtras Integrate entertainment with basic telephone services
Text Messaging, Online Real-Time Billing, Rescue Ring, Wake-Up Call, Ring Tones,
Fun Clips, The Hit List, Music Messenger, Movies.

Packaging colorful and vibrant, Hassle free sale

Availability At places frequented by the youth

VALUE POSITIONING
Holistic marketing approach takes pricing decision based on various factors
3Cs and marketing environment.
Company Pricing should conform to the companys marketing strategy and its
target markets and brand positioning.
Customer Uniform and hassle free pricing which will enhance Customers
satisfaction.
Competition A pricing strategy which will provide the company a distinct
competitive advantage

BUSINESS MODEL
MVNO was successful in UK not in Singapore
Ad budget Approx $ 60 million
Lower commissions - $ 30 per phone as against industry
average of $ 100
Different channel strategy where youth shop

PRICING STRATEGY: POSSIBLE OPTIONS

Option 1: Clone the industry prices
Pros
Ease in implementation
Service and application differentiation
Competitive Off peak hour rates and lesser hidden fees
Cons
No pricing advantage w.r.t competitors
Will not work with Low income segment
Poor credit quality of the targeted segment, will reduce the target
market further
Difficult to penetrate the market without lower prices.

PRICING STRATEGY: POSSIBLE OPTIONS

Option 2: Price below the competition
Pros
Pricing advantage w.r.t competitors
Fits with the requirement of the target market, i.e lower prices.
Cheaper and hence accessible to Low income segment
Will enable better penetration
Cons
Low margin and would need deep pocket
May cause a price war

Option 3: A whole new plan

Pros

Do away with the contracts so as to get Low Credit customers

Prepaid services to help customers decide their own talk plans
Specifically customized for the target market
Subsidized handsets to make the deal attractive
Eliminate all hidden costs

Cons
High churn rate of 6%
Concerns over margins
Concerns over the recovery of cost of handset

After evaluating the Pros and Cons of the three plans, Ive decided to try
Option 3 with Optimal Pricing.

PRICING LEVELS
Break even analysis

Monthly ARPU $ 52
Monthly cost to serve is $ 30
Monthly margin is $ 22 ( 52-30)

Time required to break even on the acquisition cost is

$ 370/22 = 17 months

Annual retention rate in this industry is

Calculated as
1- ( Monthly churn rate * 12 months) =
With Contracts 1 (0.02 * 12) = 0.76
Without Contracts 1 (0.06 * 12) = 0.28

LTV OF CUSTOMERS
As per Exhibit 11 the interest rate is 5 % and an infinite economic life ( N)
Formula for LTV
LTV = M / (1- r +i) AC where
M - Margin customers generates in year a
R - Annual retention rate
i - Interest rate
AC - Acquisition cost
N - Number of years over which the relationship is calculated

LTV CALCULATION
LTV1 = 22 * 12/ 1-.76+.05 minus 370 = $ 540
If eliminating contracts, the LTV would be negative
LTV2 = 22 * 12 / 1-.28 + .05 minus 370= $ -27.14
The industry would lose money on the average customer given current
acquisition costs if it abandon the practice of requiring contracts from their
customers. Hence, it is not feasible for the industry to have a no contract
strategy.

HOW TO COUNTER THE NEGATIVES

Lowering acquisition cost such as sales commission,
advertising costs and handset subsidies

Current industry hand set cost is $ 225

Average taken (150+300)/2 = $ 225
Current industry subsidy is $150 (100+200)/2
Subsidy as a % is 67 calculated as { (150 / 225) *100 }

VIRGINS ACQUISITION COSTS

Handset cost is 60 to100 ( $ 80 on an average)
If virgin were to subsidize handsets by 40% its subsidy would equal to $ 30

Sales commission is $ 30
Ad per gross add is $ 60
Hand set subsidy is $ 30
Total acquisition cost is $ 120

COULD IT ACHIEVE PROFITABILITY

Acquisition costs of virgin is $ 120 versus the industry average of $ 370
Given the acquisition costs, what would virgin have to charge consumers on
a per minute basis to equal the industrys break even time of 17 months

FURTHER CALCULATIONS BASED ON SOME

ASSUMPTIONS
Virgins monthly ARPU 200 minutes ( A mid point is taken given Virgins
estimate of 100-300 minutes per month)
Monthly cost to serve is 45% of revenues ( given in exhibit 11)

Virgins Monthly ARPU = 200 minutes

Monthly cost to serve = .45 * 200 * p where p is price per minute
Virgins monthly margin = 200-90 = 110p
Virgins acquisition costs = 120
To break even in 17 months = 110/17 = 6.4 is the Price per minute

LTV AT VARIOUS PRICE POINTS

(1-.45) (200*12*.064) / 1-.28 + .05 Minus 120 = $ -10.29
(1-.45) (200*12*.10) / 1-.28 + .05 Minus 120 = $ 51
(1-.45) (200*12*.25) / 1-.28 + .05 Minus 120 = $ 309
Customers would not last the 17 months to cover the acquisition costs. In
order to have a positive LTV, Virgin should charge more than 6.4.
This can be anywhere between 10 & 25 cents

WHAT HAPPENED
A pre paid plan
No contracts, hidden charges, peak or off peak hours
Very low hand set subsidies
No credit checks
No monthly bills
Price 25 cents for the first 10 minutes and 10 cents/minute for the rest of the day
A 3 month period in which to use pre paid minutes, plus an additional 2 month
grace period
Handsets with one button access to view current balance/remaining minutes
Customers could purchase additional minutes via the phone or credit card. Users
can also purchase a top-off card through virgins retail channels