Virgin Mobile USA: Pricing Strategy

Prepared by Section S3 Group 4

Abhishek Sharma FT13300 Arjun Choudhry FT13312 Garv Sharma FT13325 Irene Eltham FT13337 Mrityunjay Arya FT13350 Ramachandran FT13362 Sonali Das FT13374 Vijaykumar Bale FT13386

Situation Analysis
Virgin Mobile is planning to launch its service in the US Market by July 2002 . They have done exceedingly well in the U.K (2.5 mil consumers in 3 years.) They had however failed in the Singapore Market. The Telecom industry in USA was saturated and considered to have reached Maturity Virgin Mobiles plan was to capture an unsaturated market segment: The youth segment between the ages 15-29 In an effort to capture this segment they plan on offering customers a wide variety of value added services: Virgin Xtras. They are to decide on a good Pricing strategy.

Pricing Strategies
Option 1: Follow Industry Advantages: Same Cost with Value added services Easy to Promote Differentiation through better off-peak hours and fewer hidden costs. Disadvantages: Poor credit quality of the targeted segment, will reduce the target market further. Loss of Competitive advantage in terms of price. Difficult to penetrate the market without lower prices.

Option 2: Price Below the Competition: Advantages: Fits with the requirement of the target market, i.e lower prices. Will enable better penetration Disadvantages: Lower Margins. May cause a price war.

Option 3: A whole new plan: Advantages: Totally differentiated plan Specifically customized for the target market Will significantly aid market penetration Disadvantages: May lead to higher churn rate. Would require mechanisms like web and physical phone cards (for prepaid).

Option 3: Evaluation
Industry Acquisition Costs: $370 (Given) ARPU:$ 52 CCPU:$ 30 Monthly Margin:$52-$30 =$ 22 Churn rate (with contract) 2% per month Retention rate(r): 1-0.2*12= 0.76 Churn rate (without contract) 6% per month Retention rate(r): 1-0.6*12= 0.28 Interest: 5% LTV (with contract) = ((22*12)/(1-.76+.05)) 370 = $540 LTV (without contract) = ((22*12)/(1-.28+.05)) 370 =$ -27.14 Hence, it is not feasible for the industry to have a no contract strategy.

Eliminating Hidden Costs

In Industry , $ 29 cellular bill becomes $35 due to hidden costs which is an increase of 21%. If Virgin absorbs the hidden costs :
Monthly Margin = $22/1.21 = $18.18

Break even time without hidden cost =370/18.18 = 20 months For further analysis we have assumed that consumers are not exposed to any hidden charges.

Option 3: Virgin Evaluation

Acquisition cost : Commission to distributors = $30 Advertising cost per gross add = $60 mil/1 mil(expected customers) = $60 Virgins handset cost: $60 to $100 (consider $100) Assume subsidy = 10% (to make virgin handset cost similar to industry handset cost) Hence, Subsidy = $10 Total acquisition cost = 30+60+10 = $100 LTV (with contract) = ((18.18*12)/(1-.76+.05)) 100 = $652.27 LTV (without contract) = ((18.18*12)/(1-.28+.05)) 370 =$ 183.32 Since, LTV without contract >0, we can use this option to penetrate the market.

Calculating Price
Virgins average customer usage =(100+300)/2 = 200 min/month Let, price per min = p Monthly ARPU = 200*p CCPU = .45*ARPU = .45*200*p = 90p Monthly Margin = 200p 90p = 110p LTV = ((110p*12)/(1-.28+.05)) 100 > 0

p >$ 0.06

Recommendation
Virgin Mobile should chose a price per minute > $0.06 or 6 cents depending on the desired profit margin. Keeping in mind that Industry Price range for consumer usage of 100300 min is 10 to 25 cents Virgin Mobile can differentiate its service in the following ways :
No hidden costs No contracts No peak off peak hours Flexibility of prepaid

Virgin will benefit from :

Positive LTV Low handset subsidy Economical for company as well as for customers

Thank you!