Virgin Mobile USA: Pricing for the Very First Time

By: Group 3 Ashmit,Gaurav,Kandarp,Riddhiman, Mehtaj and Tulikaa

Virgin Group: Profile

Virgin is a leading branded venture capital organisation and is one of the world's most recognised and respected brands. Conceived in 1970 by Sir Richard Branson, the Virgin Group has gone on to grow very successful businesses in sectors ranging from mobile telephony to transportation, travel, financial services, media, music and fitness. Virgin has created more than 300 branded companies worldwide, employing approximately 50,000 people, in 30 countries. Global branded revenues in 2009 exceeded 11.5 billion (approx. US$18 billion).

Virgin Group: Some Logos

Company Values
We believe in making a difference. In our customers' eyes, Virgin stands for value for money, quality, innovation, fun and a sense of competitive challenge. We deliver a quality service by empowering our employees and we facilitate and monitor customer feedback to continually improve the customer's experience through innovation.
------- Virgin Group Website

[Source: http://www.virgin.com]

What Virgin Looks for?

Is this an opportunity for restructuring a market and creating competitive advantage? What are the competitors doing? Is the customer confused or badly served? Is this an opportunity for building the Virgin brand? Can we add value? Will it interact with our other businesses? Is there an appropriate trade-off between risk and reward?

Why Mobile Industry?

Rapidly growing industry. Typical market where the customer has been ripped off or under-served, where there is confusion and/or where the competition is complacent. Market segment ( 15-29 ages group) being ignored. Big players have not capitalized on this segment Competitors slow to react to ever-changing customer mindset

Virgin Mobile USA

Dan Schulman was appointed CEO. The company entered into a 50-50 joint venture with Sprint in which Virgin Mobile USAs services would be hosted on Sprints PCS network. Under the agreement, Virgin Mobile would purchase minutes from Sprint on an as-used basis. The goal of Virgin Mobile USA is: to have 1 million total subscribers by the end of 2002 and 3 million by year 2006.

US Wireless Market Share in 2001

Carrier 35 30 25 20 15 10 5 0 Millions

Subscribers

AT&T Cinular

1% 2%

19%

15%

Verizon VoiceStream Alltel Sprint U.S.Cellular

10%

21%

5%

22% 5%

Leap Other Carriers

[Source: The Case]

Pricing model-option 1
clone the industry prices : plan to replicate the existing model Pros simple to promote as people are already aware of the plan Consumers are used to buckets and peak/off-peak distinctions The plan could be put on the packaging so that customer can understand it without the help of salesperson No hidden fees unlike competitors
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continued
Cons
The target market youth issues are not addressed by repeating the same plan as offered by industry There is no differentiating element in their plan. Customer may not simply switch for virgin extra features No flexibility in calling plan
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Option 2
Offers actual prices slightly lesser than that of competition price per minute will be less industry average for key buckets basically targets youth who uses 100-300 min bucket

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Continued
Pros the bucket in which the prices are lowered is mainly used by youth segment which is the target group of virgin Combined with better off peak hours and less hidden fees creates an offering which is better than that of competitors Many price conscious customers may simply take virgin plan for its lower prices regardless of the fact it is a new entrant
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Continued
Cons
earning per customer will be less though the no of customers will increase it may not have same impact on profits this may also result into price wars leading to price cut from competitors negating the strength of this scheme may be regarded as a low quality service because of lower call rates
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Option 3
It involved creating an entirely different pricing structure
eliminating of shortening contracts promoting prepaid customers providing cheaper phone less hidden fees and better off peak hours.

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continued
Pros
by eliminating contract the under 18 segment can be tapped as they are not allowed to enter into contracts pre paid was altogether totally different proposition for customers in USA. This allowed them to in control of their mobile bill. Cheaper handset will pull customer towards virgin mobiles By removing hidden fees and off peak hours the service will be hassle free for customers
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Continued
Cons
Not having the contracts will increase the churn rates By having pre paid plans the churn rates will increase leading to a danger that customers might not be able to recoup its customer acquisition costs Subsidizing the mobile handset will decrease the profit margin while it may not appeal to target group
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Option 3 most preferred strategy

Radically new aggressive strategy which is likely to have a far reaching effect on the market Option1 offers no differentiated scheme as compared to other companies Option 2 on the other hand just offers a price discount which can be easily replicated by the other competitors
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Benefits of option 3
eliminating contracts which can help create new customer segment for virgin mobiles cheaper handset will also pull price conscious customers to virgin mobiles Pre paid plan strategy may also appeal to customers who are budget conscious and do not take this plan because of its prohibitive prices No hidden cost and better off peak hours

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3.The cellular industry is notorious for high customer dissatisfaction. Despite the existence of service contracts, the big carriers churn roughly 24% of their customers each year. Clearly, there is very little loyalty in this market. What is the source of all of this dissatisfaction? How have the various pricing variables (contracts, pricing buckets, hidden fees, off-peak hours, etc.) affected the consumer experience? Why havent the big carriers responded more aggressively to customer dissatisfaction?

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Sources of dissatisfaction
Hidden fees There are many different hidden charges These include
taxes universal service charges, and many one time costs

Sources of dissatisfaction
Contracts Over 90% of all subscribers in the U.S. have contractual agreements with their cellular providers The contracts are generally for a period of one to two years, and require rigorous credit checks This is very unsettling for many consumers. People dont like being tied down to a cellular provider or the strenuous credit check

Sources of dissatisfaction
Pricing buckets Many plans have established buckets of minutes Customers then sign-up for a bucket of minutes if the customer exceeds their allotted bucket of minutes they are penalized with extremely high rates

Sources of dissatisfaction
On and off peak hours On and off peak hours are also concerns Originally, off-peak hours began at 6:00pm, and then it gradually changed to 9:00pm All of these various pricing strategies have led to the dissatisfaction of the consumers experience

Sources of dissatisfaction
Cramming Millions hit by $2billion in mystery phone charges hidden on their cell bills The practice of cramming began in the 1990s when phone companies started allowing accounts to be used as credit cards

Responses by service providers

None of the big carriers have responded aggressively to this consumer dissatisfaction Out of the 103 million subscribers in the United States all three of these big carriers have of market share of at least 20 million subscribers They have such monopoly that perhaps they do not feel it necessary to try and address customers grievances May be they are also making enough money from providing fraudulent services

5. What do you think of Virgin Mobiles value proposition (the VirginXtras, etc.)? What do you think of its channel and merchandising strategy?

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

Mobile Phone penetration

Value Proposition
Basic intent to appeal to the youth, market, generate additional usage, and create loyalty VirginXtra Integrate entertainment with basic telephony
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

 Making a difference in the eyes of the customer in terms of :

Value for Money Quality Innovation Fun A sense of Coolness

 The exclusiveness of Co-branding with MTV builds Virgin Mobiles Brand equity as MTV is highly recognizable and trusted youth brand. Text messaging is a key selling point to youth, many text messages more then they talk on the phone. Channeling consists of point of purchase marketing where consumers can purchase phones, minutes, and Xtras. Teen consumers also dont have to worry about having credit to open a phone line . They can simply pick up a starter bundle pack and start their service
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Placing the product in youth oriented retailers such as Target, Best Buy and Sam Goody.

These retailers are positioned in youths minds as places that are cool to shop with. Understanding of the teen market to the fact that they use Ecommerce. The fact that Virgin allowed there users to purchase minutes and features online makes their target market more likely to buy there service because of the convenience of dealing with ones phone bill through E-commerce.
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6. Do you agree with Virgin Mobiles target market selection? What are the risks associated with targeting this segment? Why have the major carriers been slow to target this segment?

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 Yes, we agree with Virgin Mobiles target market selection. The penetration was lower and the growth rate among this demographic was projected to be robust for the next five years. Also the mobile communication industry in the United States was overcrowded, increasingly mature, capital intensive and highly competitive. Virgin group believes in making a difference. Virgin stands for value for money, quality, innovation, fun and a sense of competitive challenge. Virgin also believes in moving into areas where customer has traditionally received a poor deal and where competition is complacent. Thus this market which was underserved by the existing carriers could work wonders if the specific needs of this target segment could be met.
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Risk Involved
The young consumers often have poor credit quality. Their usage is also very inconsistent unlike the typical businessperson. These customers are technologically adventurous, easily bored and willing to switch providers. The audience did not trust the industry pricing plans. The young people were aware of the hidden charges and resented it. Thus Virgin Mobile could not afford to get the pricing wrong while designing the offer. It could make or break their success. If this plan was successful, it could trigger competitive reactions from the other big players in the industry.

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Contd.
The company was entering a market where it had little name recognition except for possibly an airline. The risks of adopting a prepaid pricing structure were significant. The prepaying consumers had high churn rates and tended to exhibit no loyalty to a provider once they had used up all of their prepaid minutes.

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The major carriers have been slow to target this segment because of the following reasons:
The customers in this segment have poor credit quality, they necessarily do not have credit cards and dont pass the credit checks that cellular contracts require. Also their calling patterns are very erratic and inconsistent. The average cost of acquiring a customer was roughly $370, so many carriers did not believe it was worth acquiring consumers who might not use their cell phones on a frequent basis. Customers in this segment usually preferred Prepaid plans and the U.S. carriers were extremely wary of prepaying consumers because of their high churn rates.

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