Virgin Mobiles USA: Marketing Management

Virgin Mobiles USA
PRICING FOR THE VERY FIRST TIME
Prepared by-
Course-
Marketing Management
Instructor-
Prof. R. Srinivasan
Marketing Case Study -Virgin Mobile
Chanpreet Singh
Sachin Sharma
Surabhi Kala
Swapnil Soni
DoMS, IISc
2 Apr 2014
Index
Introduction-Virgin Group
Introduction-Virgin Mobile
Virgin Mobile Ventures
Virgin Mobile USA
Case Questions
Pricing strategy
Addressing the Customers dissatisfaction
Telecom Market Comparison India Vs USA
2 Apr 2014
Virgin Group
Type
Private limited company
Industry
Conglomerate
Founded
1970
Founder
Richard Branson
Headquarters
London, United Kingdom
Area served
Global
Revenue
15 billion (2012)
Employees
Approximately 50,000
Britain's Flag Carrier
Year
Milestones
1960
A seventeen-year-old Richard Branson launches his first two businesses
1970
Virgin opens Britains first residential recording studio
1980
Virgin Games is launched
1990
First national radio station hits the airwaves
2000
Virgin Media becomes the UK's first quadplay company

Virgin Mobile goes Global
2 Apr 2014
Virgin Group Products
Banking
Internet
Beverages
Travel
Music
Video games
Radio
Consumer
electronics
Books
Cosmetics
Financial
Services
Jewellery
Films
Houseware
Retail
Mobile Phones
Commercial
spaceflight
2 Apr 2014
Virgin Mobile
Ansoff Growth Matrix
Foray into new Market with new ProductDiversification
Market
Product
2 Apr 2014
Virgin Mobile
Virgin Mobile Launch
Year
Countries
Partners
In operation
1999
UK
NTL Telewest
2000
Australia
Optus network
2002
USA
Sprint
2005
Canada
Bell Canada
2006
France
Carphone Warehouse
2006
South Africa
Cell C
2011
India
Tata Teleservices
2012
Poland
PLAY
2001
Singapore
Singtel
2010
Qatar
Qatar Telecom
Defunct
2 Apr 2014
Virgin Mobile - Ventures

Singapore
United Kingdom
Success
Failure
Cellular Operation in UK
Cellular Operation in Singapore
2.5 Million customers in 3 years
Joint venture with Singapore Telecom
Countrys 1st MNVO (Mobile Network

Virtual Operator)
Fewer than 30,000 customers in 5 years

Cause
Strategy
Saturation of market
Company leased Network space from

Deutsche Telekom
Virgins hip & trendy positioning
2 Apr 2014
Virgin Mobile USA

USA, Year 2011
Facts:
Mobile market seems to have 50% penetration with 130
million mobile subscribers
Age group 15-29 yrs came out to be less penetrated in
terms of Mobile usage
This young demography was projected to have good
growth in next 5 years
Issue:
Big players didnt target this potential customer segment
This segment had been underserved; their specific needs
had not been met
Not just a call

2 Apr 2014
Virgin Mobile USA

Search for Service provider
Search for Leadership
US Telecommunications holding company

Providing wireless services
Major global Internet carrier
3rd largest U.S. wireless network operator
50-50
Richard Branson & Daniel Schulman
Daniel Schulman, CEO, Virgin Mobile USA

..We would be entering with a brand that had little US name recognition
except for Airline.. Its these kind of opportunities where a team can define
itself and if this could be pulled off it would be unbelievable..
2 Apr 2014
Virgin Mobile- Promotion

VirginXtras
Text Messaging
Online Real Time Billing
Rescue Calling
Wake Up call
Ring Tones
Fun Clips
The Hit List
Music Messenger
Movies
Daniel Schulman
Our
market
research
indicates that VirginXtras will
attract and retain the youth
segment
10
2 Apr 2014
Question-1
GIVEN VIRGIN MOBILES TARGET MARKET, HOW SHOULD IT
STRUCTURE ITS PRICING? WHICH OF THE OPTIONS GIVEN IN
THE CASE WOULD YOU CHOOSE AND WHY? DISCUSS THE
PROFITABILITY IMPLICATIONS OF THE PLAN CHOSEN BY YOU
UNDER SUITABLE ASSUMPTIONS.
2 Apr 2014
Pricing strategy
Overall Goal in choosing pricing structure
Audience dont trust industry pricing plan.
Opportunity
Must reach target market : YOUTH!

Create a positive lifetime value (LTV)
for every customer.
- Must be able to make money
Three main options
1.
2.
3.
Clone the industry prices.

Price below competition.
A whole new plan.
Need A Breakthrough
12
2 Apr 2014
Pricing strategy
Option 1 : Clone the industry prices

1. Simple message
.
Pricing competitively.
.
MTV applications.
.
Superior customer service.
2. Better Off-peak hours.
3. Fewer hidden fees.
13
2 Apr 2014
Pricing strategy
Option 1 : Pricing Structure
Minutes
14
2 Apr 2014
Pricing strategy
Option 1 : Benefits and Shortcomings
Pros
And
cons
Easy to Promote.
Consumers are used to BUCKETS and
peak/off-peak distinctions.
Savings on advertising budget costs.
Simple packaging
Hard for a new entrant.

No flexibility in calling habits.
No price distinction hence consumers are not
willing to switch
15
2 Apr 2014
Pricing strategy
Option 2 : Price below competition

1. Similar structure
.
Pricing slightly below the
competition.
2. Maintain buckets of minutes.
. Price per minute set below
industry average in certain key
buckets.
. Target young market that uses
100 to 300 minutes.
16
2 Apr 2014
Pricing strategy
Option 2 : Pricing Structure
17
2 Apr 2014
Pricing strategy
Option 2 : Benefits and Shortcomings
Pros
And
cons
Maintain
BUCKETS
and
volume
discounts with price per minute set below
industry average.
Offer best off-peak hours and less hide
charges so consumer will know virgin
mobile is cheaper and simple.
Expand size of market that results in
greater sales and profit
Earnings from each consumer will be less

Sales growth doesnt mean big profit
May trigger competitive reaction
18
2 Apr 2014
Pricing strategy
Option 3 : Radically new plan

1. Shorten or eliminate
contracts.
2. Prepaid service.
3. Handset subsidies.
4. Eliminate all hidden fees
and off peak hours.
5. Concept of LTV
19
2 Apr 2014
Pricing strategy
Contracts: Does it make sense to shorten subscription terms or eliminate them?
1) Contract provides a hedge against churn.

2) Estimated churn rises from 2 to 6%.
Advantage: It allows 18 years and younger to purchase the product.
Prepaid
Vs
Postpaid
Fact: 92% of subscribers have postpaid plan.

Concerns:
Prepaid arrangements have prohibitive pricing.
(35-50 cents per minute to as high as 75 cents)
Phone use was infrequent.
Higher churn rate.
No loyalty to provider.
Recoup acquisition cost.
Morgan stanley research suggest that acquisition cost must be
at or below $100 for prepaid to be viable.
Need a method to add minutes.
20
2 Apr 2014
Pricing strategy
Handset subsidies
Fact
Currently carriers purchase
handsets from major
manufacturers at a cost of $150 to
$300.
Carriers then subsidize user $100$200 ---becomes part of
acquisition cost.
Approach
Increasing subsidies so that phones
are cheaper than competition.
Getting consumers to feel more
invested and loyal.
21
2 Apr 2014
Pricing strategy
Hidden Fees
Goal: Make pricing very
simple.
What you see is what
you get
1)Rolling inner prices of
taxes and fees into final
prices.
2)Make money.
Off-peak hours
Price insensitive.
Demand is inelastic.
Rarely worry about
charges. Call in office
hours.
Business person
Make calls whenever

necessary and can avoid.
Care about price
Price sensitive.
Elastic demand
Target market
Young people!
Student
22
2 Apr 2014
Pricing strategy
What is LTV?
Value of customer in terms of
how much service or product
he will purchase in his lifetime.
Value of keeping customers
loyal
ARPU
CCPU
AC
LTV
Average
Revenue per
user
Cash cost per

user
(45% of
ARPU)
Monthly
Margin
(ARPUCCPU)
Acquisition
cost
Lifeti
me
Value
R: Retention rate= 1- churn rate

i= interest rate = 5%
-Sales commission
-Advertising per
gross add
-subsidy cost
23
2 Apr 2014
Pricing strategy
Acquisition Cost
Advertising per gross add$75-$100
Sales commission-$100
Handset subsidy-$100-$200
Total- $275-$400
Acquisition cost
$370
Breakeven Analysis
Monthly ARPU- $52
Monthly cost to serve- $30
Monthly
margin=($52$30)=$22
roughly-
Time to breakeven on acquisition cost

= $370/$22= 17 months
24
2 Apr 2014
Pricing strategy
Lifetime value Analysis

Option 1
LTV=[264/(1-0.76+0.05)]-370
1)r(annual retention rate):

1-(0.02*12) = 0.76
2)M (yearly margin): 22* $12= $264
3)i(interest rate) :
5%
4)AC(acquisition cost):
$370
=$540
Option 2

1-(0.06*12) = 0.28
2)M (yearly margin): 22* $12= $264
5%
$370
LTV=[264/(1-0.28+0.05)]-370
= -$27.14
25
2 Apr 2014
Pricing strategy
Option 3a
With
contract
LTV=[218.16/(1-0.76+0.05)]370
=$382
Option 3b
Without
contract
LTV=[218.16/(1-0.28+0.05)]370
= -$86.68
$29 -- $35 due to hidden cost

(21% decrease)
1) r(annual retention rate):
1-(0.02*12) = 0.76
2)M (yearly margin):
22/1.21=$218.16
5%
$370

1-(0.06*12) = 0.28
2)M (yearly margin): $218.16
5%
$370
26
2 Apr 2014
Pricing strategy
Lifetime value Analysis Results
Option
LTV
+$540
-$27.14
3a
3b
+$382
-$86.68
+value
Acceptable
A different approach
1)Lowering customer Acquisition cost
Sales commission: $30
Advertising per gross add: $60
Handset subsidy: $30

Total customer Acquisition cost= $120
2)Embracing additional pricing elements

3)Developing competitive positioning through pricing.
27
2 Apr 2014
Pricing strategy
Achieving profitability
1. Breakeven Analysis
Given the acquisition Virgins $120 acquisition cost, what would

the company have to charge on a per-minute basis (P) to equal
the industrys break-even time of 17 months, assuming that
Virgins customers use 200 minutes per month (a midpoint of
estimate p. 7)?
Monthly ARPU: 200(P)
Monthly cost-to-serve (45% - Ex. 11): (0.45)*[200(P)]
Monthly margin: [200(P)] - [90(P)] = 110(P)
Virgin Acquisition Cost: $120
Price to Break-Even: 120 / 110(P) = 17
P = 6.4 cents
LTV Analysis: Eliminating contracts
r (annual retention rate):
LTV (6.4): [(0.064 * 110 * 12) / (1 0.28 + 0.05)] 120= - $10.29

LTV (10): [(0.10 * 110 * 12) / (1 0.28 + 0.05)] 120 = $51
LTV (25): [(0.25 * 110 * 12) / (1 0.28 + 0.05)] 120 = $ 309
1 - (0.06 * 12) = 0.28
28
2 Apr 2014
Question-2
THE CELLULAR INDUSTRY IN THE US HAS A VERY HIGH RATE
OF DISSATISFACTION RESULTING IN CUSTOMER CHURN. HOW
HAVE THE VARIOUS PRICING ELEMENTS AFFECTED THE
DISSATISFACTION AND WHAT HAVE THE BIG PLAYERS DONE
TO REDUCE THE CHURN?
2 Apr 2014
30
2 Apr 2014
Reasons for dissatisfaction

Customer under contract leads to lower churn rate
Hidden charges allows the company to promote at lower per minute
pricing
levels.
A complex sales process, which in turn drives costly sales commissions.

Bucket pricing system often lead to confusion with customers and so they
are penalized.
Off-Peak/On-Peak differentials add to customer confusion and off-peak
period has shrunk over time
31
2 Apr 2014

Virgin Mobile A Different Approach
1.
From a customer perspective, an "ideal" plan would probably

include a number of elements which would have a potentially
negative impact of the companys financial
2.
but Virgin can use a number of different managerial tools to

counter these negatives, for example:
.
Lowering Customer Acquisition Costs
Embracing Additional Pricing Elements
Developing
a
Highly-Differentiated
Competitive
Positioning through a new services package and a new pricing
proposition
32
2 Apr 2014
onsumer Friendly Plan: Potential Problems

Consumers
want..
No contracts
But the problem is

..
Increased Churn
No Pricing Buckets
Lower
Operating
Margins
No Hidden Fees
No Peak/Off Peak
Hrs
No Credit Checks
More Uncollectibles
Simple Sales Process
Sales commission
reduction
Great Service
Increased Costs
33
2 Apr 2014

Lowering Customer Acquisition Costs
1.
On sales commissions
2.
Because of a different channel and merchandising strategy where "consumers can pick up the
phone without a salesperson helping them" , Virgin expect its sales commissions to be $30 per
phone, as opposed to $100 for the industry average.
On advertising costs
3.
On handset subsidies
.
.
4.
Virgin plans to spend much less than its competitors (approx. $60 million for the year. Given
the companys target to acquire 1 million customers during this period, the advertising cost will
be $60 per gross ad, compared to the industry average of $75 to $100 .
Virgin handsets cost the firm between $60 to $100 compared to an industry average of $150 to
$300 because the company plans to stay away from selling high-end phones to young
customers.
If Virgin is decided to offer subsides at half the rate of the industry average (current industry
handset cost / subsidy = 67%), then this subsidy would be roughly ($80 * 35%) = $30
Virgin total acquisition costs: $120

.
.
.
Sales commission: $30

Advertising per gross ad: $60
Handset subsidy: $30
34
2 Apr 2014

Embracing Additional Pricing Elements
1.
Pre-paid requirement no contract
2.
Eliminate the problem of uncollectible

Eliminate the need for credit check
Simplify the selling process
Encourage trial (and therefore potentially lower
customer acquisition costs)
Lower costs-to-serve (simplified billing, reduced number
of service calls related to pricing disputes)
A completely transparent, simple (one-size fits-all)

per-minute price no form of pricing
discrimination being practiced by the competition
(pricing buckets, on/off-peak policies, hidden fees,
etc.)
35
2 Apr 2014

Developing a Highly-Differentiated Positioning
A highly-differentiated service proposition
1.
Rescue Rings
Wake-Up Calls
VirginXtras
2.
A highly-differentiated pricing proposition
3.
An opportunity to tap into the consumer resentment with a noncynical, non-manipulative and radically different pricing approach, one
that promises full transparency, no traps and no (bad) surprises, all at
a fair price (customer rage management)
36
2 Apr 2014

A Consumer Friendly Plan: Potential Solutions
Consumers
want
No contracts
But the problem is

..
Increased Churn
A possible
solution is ..
Lower Subsidies
No Pricing Buckets
Lower
Operating
Margins
Lower
Acquisition
Costs
No Credit Checks
More Uncollectibles
Simple Sales Process
Consumer
Confusion
Great Service
Increased Costs
Simplified Prepaid Plan

eliminates
confusion, no
uncollectibles,
fewer service calls
No Hidden Fees
No Peak/Off Peak
Hrs
37
2 Apr 2014
Question-3
HOW WOULD YOU COMPARE THE US MARKET AND THE INDIAN
MARKET FOR THE SAME CUSTOMER SEGMENT IN TERMS OF
PRICING AND CUSTOMER CHURN? WHAT SHOULD BE THE
STRATEGY FOR PRICE AND CHURN IN INDIA?
2 Apr 2014
Telecom Market Comparison
Characteristic
India
United States
Urban Population
30.30%
82.20%
Mobile Phone Penetration
96.57%
76.67%
3G/4G Penetration by 2016
16.2%
68.3%
Prepaid Mobile Share of Phones
96.2%
21.3%
Churn Rate/Year (not compounded)
73%
21%
Number of SIM Cards/Phone
One to Four
One
Minutes of Use/Subscriber/Month
320
650
Average Revenue/User/Month
$3.10
$50
Cost to subscriber for calls
Per Second
Per Minute
Charging Model
Outgoing Only
Incoming and Outgoing
39
2 Apr 2014

Indian scenario
Source: Telecom Regulatory Authority of India, Press Release No. 72/2012, April 7, 2012, p. 1
Inference
India has great potential in terms of Telecom market i.e. appox 900 mn subscribers
Although market show increasing trend yet according to the forecast the market is posed to
be saturated in near future
Urban is the major contributor in Telecom consumer market
40
2 Apr 2014

Indian Vs US
Source: Business Monitor International, India Telecommunications Report, 2Q 2012
Inference
In India more customers are Pre-Paid (non-contract) subscribers as compared to those in USA
Pricing policy highly differs in Indian context keeping above in mind
41
2 Apr 2014

Concentric Diversification
Opportunity
for
growth,
targeting the same youth
consumer base with lucrative
services
Inference
Comparatively there is a huge gap exists
between US & India in terms of 3G service
penetration
This helps Virgin to offer diversified
product to the market
42
2 Apr 2014

Churn Rate Comparison
At any period Churn rate of mobile
subscribers is higher in India than that in US
Churn rate in India is increasing in contrast
to that in US
Churn rate directly reflects in LTV (Life
Time Value) and thereby pricing decision
Reason for High Churn Rate in India
Competition
MNP
Source: Business Monitor International, India Telecommunications Report, Q2 2012,
43
2 Apr 2014

Indian Vs US- Average Revenue Per User (ARPU)
Source: Business Monitor International, India Telecommunications Report, Q2, 2012,
Inference
ARPU for India is very less as compared to that of US
In general it follows a decreasing trend due to market competition
44
2 Apr 2014
References
Websites
http://www.virginmobile.in/
http://www.virginmobileusa.com/
http://en.wikipedia.org/wiki/Virgin_Mobile
Tools used
Microsoft Encarta (Encyclopedia for offline references)
Microsoft Excel (for data analysis & graphs)
45
2 Apr 2014
Thank you!
2 Apr 2014

Virgin Mobiles USA: Marketing Management

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Virgin Mobiles USA

PRICING FOR THE VERY FIRST TIME

Addressing the Customers dissatisfaction

Telecom Market Comparison India Vs USA

Marketing Case Study -Virgin Mobile

Private limited company

London, United Kingdom

Britain's Flag Carrier

A seventeen-year-old Richard Branson launches his first two businesses

Virgin opens Britains first residential recording studio

Virgin Games is launched

First national radio station hits the airwaves

Virgin Media becomes the UK's first quadplay company

Marketing Case Study -Virgin Mobile

Marketing Case Study -Virgin Mobile

Foray into new Market with new ProductDiversification

Marketing Case Study -Virgin Mobile

Marketing Case Study -Virgin Mobile

Virgin Mobile - Ventures

Cellular Operation in Singapore

2.5 Million customers in 3 years

Joint venture with Singapore Telecom

Countrys 1st MNVO (Mobile Network

Fewer than 30,000 customers in 5 years

Company leased Network space from

Marketing Case Study -Virgin Mobile

Virgins hip & trendy positioning

Virgin Mobile USA

Not just a call

Virgin Mobile USA

Search for Leadership

US Telecommunications holding company

Daniel Schulman, CEO, Virgin Mobile USA

Marketing Case Study -Virgin Mobile

Virgin Mobile- Promotion

Marketing Case Study -Virgin Mobile

Must reach target market : YOUTH!

Three main options

Clone the industry prices.

Marketing Case Study -Virgin Mobile

Option 1 : Clone the industry prices

Marketing Case Study -Virgin Mobile

Option 1 : Pricing Structure

Hard for a new entrant.

Marketing Case Study -Virgin Mobile

Option 2 : Price below competition

Marketing Case Study -Virgin Mobile

Option 2 : Pricing Structure

Marketing Case Study -Virgin Mobile

Option 2 : Benefits and Shortcomings

Earnings from each consumer will be less

Marketing Case Study -Virgin Mobile

Option 3 : Radically new plan

Marketing Case Study -Virgin Mobile

1) Contract provides a hedge against churn.

Fact: 92% of subscribers have postpaid plan.

Marketing Case Study -Virgin Mobile

Make calls whenever

Cash cost per

R: Retention rate= 1- churn rate

Marketing Case Study -Virgin Mobile

Time to breakeven on acquisition cost