Virgin Mobile USA - Pricing

NITIN JAIN

140103116

PRICING TREND BEFORE

VIRGIN IN USA

Over 90% subscribers had contractual

agreements for 1-2 years with providers

Customers signed up for buckets of minutes

If usage>bucket amount charged very high

rates, approx. 40 cents/min

If usage<bucket amount charged monthly fee,

raising per min price

Less charge for off peak than peak time calls

Carriers charged monthly fee to grant additional

off peak hours

Hidden costs were present, not shown in

promotions

ISSUES WITH CURRENT

TELECOM SERVICES

Low penetration among customers aged 15-29

Growth rate predicted to be robust in this segment

in the next 5 years

Target group has been underserved by existing

carriers. Specific needs not met

High cost to serve a customer

Average monthly bill - $52

Cost to serve - $30

Carriers wary of acquiring low value customers,

with monthly bills below $30

OBSERVATIONS MADE BY
VIRGIN

Customers were unable to predict their usage,

chose wrong plans

They think they use more minutes than they

actually do

Target segment actually used less than 300 mins

but thought they used more

The industry was making money from customer

confusion

Lower bucket plans were generally picked, but in

the end they paid much more due to extra usage

On peak and off peak time was not in a right mix

OBJECTIVE

Create value and profitability in the cell phone

service industry

Target age group of 15-29 High growth

opportunity

Goal of building a subscriber base of 1 million by

year 1 and 3 million by year 4

By focusing on the youth market from the

ground up, were putting ourselves in a position to
serve these customers in a way they have never
been served before
- Dan Schulman, CEO, Virgin Mobile USA

SEGMENTATION
Identified the age segment where the Industry
penetration was the lowest, that is, between 15 years
to 29 years of age.
Mobile Phone penetration
50
40
30

Mobile Phone
penetration

20

10
0
Age 15-19 Age 20-29 Age 30-59

VirginXtras

Delivery of content, features and entertainment

Signed an exclusive, multi-year content and marketing agreement with

MTV networks to deliver music, videos, games and other content

MTV also assured airtime on its channel and website

MTV branded accessories, phones, ringtones, text alerts, voice mails

Vote for Favorite videos

Value Added Services :

Text messaging

Online Real-time Billing

Rescue Ring

Wake-up call

Ringtones

Fun clips

Hit List

Music Messenger

Movie bookings and info

VIRGINS GOAL AND

OPTIONS

To make sure their prices are competitive

To make sure they could achieve profit

To not trigger off any competitive reactions

3 waysthe
of achieving
these goals :
Clone
Industry Prices

Price Below the competition

Develop a New Plan

OPTION 1 : CLONE INDUSTRY PRICES

Use same price as competitors

Key advantages such as MTV applications and services,

superior customer service to differentiate it

Offering better off-peak hours and lesser hidden fees

PROS

Easy to promote
Customers are
used to buckets
and peak hours

Less expenditure
on advertising
Simple packaging
Salesperson costs
are saved

Target Youth
market is not
stressed
No flexibility in
calling plans or
price
No real price
distinction
Customers might
not switch to Virgin
because of these
features

CONS

Will not work with

Low income
segment

OPTION 2 : PRICE BELOW COMPETITION

Maintain buckets and volume discounts

Set per minute price below the Industry

Target young market, which uses 100-300 mins

PROS

Offering best offpeak hours and

lesser hidden fees
Conveys a plain,
cheaper and
simple image
Expansion of
market size and
share
Greater sales and
profit

Earnings per
customer will be less
Growth in sales is
not equal to profits
Margins will be less
Risk of being
regarded as a low
quality service,
brand dilution

CONS

May trigger
competitive
reactions

OPTION 3 : DEVELOP A NEW PLAN

Shorten or Eliminate Contracts

Contracts guarantee annuity stream

Allow 18 years or below to purchase the product

Churn rate 2%

Prepaid Service

92% subscribers had postpaid

Rate per min in prepaid was high and was used on occasional
basis

High churn rates

New mechanism and infrastructure required

Handset subsidies

Eliminate hidden fees and off-peak hours

What you see is what you get

Rolling hidden costs into pricing, but keeping it competitive

Off peak hours must benefit the target group

Minute usage is different from business class

PROS

PROS AND CONS OF NEW

PLAN
Eliminating contracts
gives a new edge of
customers
Lowering prepaid
costs will result in
greater market share
What you see is what
you get

This will gain the trust

of customers and
increase market
share

Prepaid can
skyrocket churn rate
TG may not be able
to purchase the
product if contracts
are eliminated
Accomodating
hidden costs in
pricing was a difficult
task
Off peak hours had to
be adjusted

CONS

Concerns over cost

recovery of handset

EVALUATION OF OPTION 3

Commission for distributor = $30

Advertising costs = $ 60 million

Customer base = 1 mill ( expected )

Adv cost/customer = 60/1=$60

Handset cost = $60 to $100 = $100

Assuming a subsidy of 10%

Subsidy = 0.1*100=$10

Total Acquisition Cost ( AC ) = $ ( 30+60+10 ) = $100

Suppose Virgin absorbs hidden costs, which is 21 % (

increase from $ 29 to $ 35 )

Monthly margin = [ARPU ( $52 ) CCPU ( $30 )]/1.21 = $

18.18

Break even time = $370/$18.18 = 20 months

Calculation of LTV

LTV with contract = 18.18*12/1-0.76+0.05 100 = $652

LTV without contract = $ 183

This strategy can be used for market penetration

Pricing

Avg usage per customer per month = (100+300)/2 =

200 mins

ARPU = 200 x p where p = price/min

CCPU = 45% of ARPU = 90xp

Margin = ARPU-CCPU = 110xp

LTV ( without contract ) = (110xpx12/1-0.28+0.05 )

100 >0

Hence, p>$0.06

RECOMMENDATION

Choose price/min > $0.06 or 6 cents, depending on the

required profit margin

Keeping in mind that the average industry price for this usage
range is 10-25 cents

Differentiating elements :

No hidden costs

No contracts

No off peak hours

Flexibility of using prepaid

Benefits for Virgin :

Positive LTV

Low handset subsidy

Economical for company and customer