GROUP 2BDemin WangKrishna RathnamSitian BuSi Han

Pricing Strategies Analysis

Company Objective

1 Million Subscribers

Young Customers

Competitors & Market Shares

Current US. Population:284.97 MillionsCurrent US. 15-1920.3 Millions

Cost Structures

$370 Acquire a Customer

• Monthly cell phone bill $52, representing about 417 minutes of use. The cost to serve a customer $30 a month

• Commissions fee in traditional industry channels $100

• Handset subsidy provided to the subscriber $100-$200

• Verizon alone spent more than $650 million advertising

Marketing Mix (4P)

• VirginXtras – delivery of content and entertainment

• Contract with handset manufacturer Kyocera

• MVNO – Hosted on Sprint’s PCS network

• Youth magazine editors of publications such as The Complex, Vibe, and XXL to publish advertorials

• Cast of The Full Monty, a Broadway show

• A number of high-profile street marketing events

• Channels where youth shop like Target, Sam Goody music stores, and Best Buy

SWOT Analysis

Strengh• lower cost• more functions• efficient advertising

Weakness• limited budget• low-value customers• low quality

Opportunity• high growth market• customers are flux in their lives• entertainment are prefered

Threat• the crowded celluar market• high potential churn rate• low-credit customers

PRICING Objective

• We want to make sure our prices are competitive

• We want to make sure we can make money

• We don’t want to trigger off competitive reactions

Life Time Value of Mobile Industry

Total Value (TV) = LTV × DM = 55% P × U

TV = ( – AC ) × D55% P × U1 – r + i

= unit price= usage= retention rate= interest rate= acquistition cost= demand

PURi

ACD

the Acquisition Cost of Virgin is $90 - $190

Industry VirginAdvertising 120 60Headset Subsidy 150 0-100Commission Fee 100 30AC total $370 $90-$190

120 ~ 650 × 20% x ~ 60 x = (120 × 60) / (650 × 20%) x = 60

5 Options to make pricing strategies

D rLower Price ↑ –No Contract ↑ ↓Pre-Paid ↑ ↓Lower Handset Subsidy ↓ ↑No Hidden Fee & Off-peak – –

Using the combinations of options to develop 3 Pricing Strategies

3 pricing strategies below

1# Clone the Industry Prices2# Price Below the Competition3# A Whole New Plan

1# 2# 3#Lower Price × ✓ ?No Contract × × ?Pre-Paid × × ?Lower Handset Subsidy × × ?No Hidden Fee & Off-peak × × ?

Price Bucket Comparison

Industry

1#

2#

100 min 200 min 300 minIndusry $26 $30 $271# $21 $34 $362# $15 $22 $21

Bucket Fee per Month

Only Deference between 1# and 2# is PRICE

For: r = 98%, i = 5%, AC = 190, Hidden Fee = 5$

100 min 200 min 300 minLTV 1# 2261 3487 3676LTV 2# 1696 2356 2261ΔD/D 33% 48% 63%ε.critical -0.858 -0.897 -0.905

If |ε| > 0.9, the 2# pricing strategy is more valueble than 1#

Combination Options to development New Plan 3#

3#1 3#2 3#3 3#4 3#5Lower Price × ✓ × × ×No Contract ✓ ✓ ✓ ✓ ✓Pre-Paid × × ✓ ✓ ✓Lower Handset Subsidy × × × ✓ ✓No Hidden Fee & Off-peak × × × × ✓P*U / month 34$ 30$ 34$ 34$ 34$r 0.94 0.94 0.92 0.93 0.93LTV 2150 1910 1790 2055 2055ΔD/D(1#) 62.2% 82.6% 94.8% 69.7% 69.7%

1% retention rate decrease will need more than 10% sales increase

New Pricing Plan is the trade-off between Sales and retention rate

Explanation of New Plan 3#

100 min 200 min 300 minIndustry Unit Price 26¢ 15¢ 9¢Unit Price 22¢ 17¢ 9¢Customer Unit Price 27¢ 19.5¢ 10.5¢Month Fee 27$ 39$ 31.5$ΔD/D(1#) 62.1% 69.7% 101.0%

OptionsLower Price ×No Contract ✓Pre-Paid ✓Lower Handset Subsidy ✓No Hidden Fee & Off-peak ✓

Similar Price Structure with Industry Level

✓ Little price competitive ✓ Won’t trigger price war ✓ Can make money

– Easily keep profit without dramatic increase sales

No Hidden Fee & Lower Off-peak

✓ Won’t trigger price war – Easily increase sales, especially for teenagers ? Lose price competitive ( IMC & Brand Equity )

Explanation of New Plan 3#

100 min 200 min 300 minIndustry Unit Price 26¢ 15¢ 9¢Unit Price 22¢ 17¢ 9¢Customer Unit Price 27¢ 19.5¢ 10.5¢Month Fee 27$ 39$ 31.5$ΔD/D(1#) 62.1% 69.7% 101.0%

OptionsLower Price ×No Contract ✓Pre-Paid ✓Lower Handset Subsidy ✓No Hidden Fee & Off-peak ✓

No Contract & Pre-paid

– Easily increase sales, especially for teenagers? Decrease retention rate ( for teenagers )

Lower Handset Subsidy

✓ Little price competitive ✓ Can make money by decrease AC

– Increase the retention rate ? Decrease sales ( compare with Nokia )

Explanation of New Plan 3#

Revenue from Mobile Entertainment Services

TV = (LTVmobile + LTVE ) × D

Recommendation for Virgin Mobile

• Investigate the elasticity (ε) of teenagers

• Investigate the retention rate change of teenagers

• Highly recommend New Pricing Plan 3#

Thanks