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 physicalinfrastructure

• Virgin’s Brand Personality – Innovative, fun, pro-active and challenging

• Identify and enter areas, where competitors are complacent or customerstaken 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

0

20

40

60

Age 15-19 Age 20-29 Age 30-59

Mobile Phone penetration

Mobile Phone penetration

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

1

15

32

32

USA Demography by Income

Upper Class

Upper Middle Class

Lower Middle Class

Working Class

Lower Class

Identified the income segment with a low disposable income and high

aspiration for trendiness.

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 company’s marketing strategy and its target markets and brand positioning.

• Customer – Uniform and hassle free pricing which will enhance Customer’s 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 industryaverage 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, I’ve 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) = 1 – 0.02 * 12 = 0.76

1- ( Monthly churn rate * 12 months) = 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

• 22 * 12/ 1-.76+.05 minus 370 = $ 540

• If eliminating contracts, the LTV would be negative

• 22 * 12 / 1-.28 + .05 minus 370= $ -27.14

• The industry would lose money on the average customer given currentacquisition costs if it abandon the practice of requiring contracts from theircustomers. Hence, it is not feasible for the industry to have a no contractstrategy.

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 }

VIRGIN’S 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 ona per minute basis to equal the industry’s break even time of 17 months

FURTHER CALCULATIONS BASED ON SOME ASSUMPTIONS

• Virgin’s monthly ARPU 200 minutes ( A mid point is taken given Virgin’sestimate of 100-300 minutes per month)

• Monthly cost to serve is 45% of revenues ( given in exhibit 11)

• Virgin’s Monthly ARPU = 200 minutes

• Monthly cost to serve = .45 * 200 * p where p is price per minute

• Virgin’s monthly margin = 200-90 = 110p

• Virgin’s 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 monthgrace period

• Handsets with one button access to view current balance/remaining minutes

• Customers could purchase additional minutes via the phone or credit card. Userscan also purchase a top-off card through virgin’s retail channels