Virgin mobiles pricing for the very first time

Marketing Case Study -Virgin Mobile

P R I C I N G F O R T H E V E R Y F I R S T T I M E

2 Apr 2014

Virgin Mobiles USA

Prepared by-

Chanpreet SinghSachin Sharma

Surabhi KalaSwapnil Soni

DoMS, IISc

Course-Marketing Management

Instructor-Prof. R. Srinivasan

2Marketing Case Study -Virgin Mobile

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



2 Apr 2014

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

Year Milestones

1960 A seventeen-year-old Richard Branson launches his first two businesses

1970 Virgin opens Britain’s 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

Britain's Flag Carrier

Virgin Group

4Marketing Case Study -Virgin Mobile 2 Apr 2014


Virgin Group Products

Banking

Beverages

TravelVideo games

Consumer electronics

Financial Services

Films

Internet

Music

Radio

Books

Cosmetics

Jewellery

Houseware Retail Mobile PhonesCommercial spaceflight


Virgin Mobile

2 Apr 2014

Ansoff Growth Matrix

Mark

et

ProductForay into new Market with new Product- “Diversification”


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

Virgin Mobile Launch

Defunct

2001 Singapore Singtel

2010 Qatar Qatar Telecom

Virgin Mobile


Virgin Mobile - Ventures

2 Apr 2014

Success

Cellular Operation in UK

2.5 Million customers in 3 years

Country’s 1st MNVO (Mobile Network Virtual Operator)

United Kingdom Singapore

Failure

Cellular Operation in Singapore

Joint venture with Singapore Telecom

Fewer than 30,000 customers in 5 years

Strategy

Company leased Network space from Deutsche Telekom

Cause

Saturation of market

Virgin’s hip & trendy positioning


Virgin Mobile USA

2 Apr 2014

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 didn’t target this potential customer segment • This segment had been underserved; their specific needs had not been met

USA, Year 2011

Not just a call…


Search for Leadership

Virgin Mobile USA

2 Apr 2014

• US Telecommunications holding company • Providing wireless services • Major global Internet carrier• 3rd largest U.S. wireless network operator

Search for Service provider

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.. It’s these kind of opportunities where a team can define itself and if this could be pulled off it would be unbelievable..”


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”

2 Apr 2014


GIVEN VIRGIN MOBILE’S 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

Question-1


Pricing strategy

2 Apr 2014

Overall Goal in choosing pricing structure

Need A Breakthrough

Must reach target market : YOUTH!

Create a positive lifetime value (LTV) for every customer.

- Must be able to make money

Three main options

1. Clone the industry prices.2. Price below competition.3. A whole new plan.

Audience don’t trust industry pricing plan.

Opportunity


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.


Pricing strategy

Minutes

Option 1 : Pricing Structure


Pricing strategy

Option 1 : Benefits and Shortcomings

ProsAndcons

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


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.


Pricing strategy

Option 2 : Pricing Structure

18 2 Apr 2014Marketing Case Study -Virgin Mobile

Pricing strategy

Option 2 : Benefits and Shortcomings

ProsAndcons

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 doesn’t mean big profit May trigger competitive reaction


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


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.


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.

ApproachIncreasing subsidies so that

phones are cheaper than competition.

Getting consumers to feel more invested and loyal.


Pricing strategy

Hidden Fees Off-peak hours

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.

Target marketYoung people!

Price insensitive. Demand is inelastic. Rarely worry about

charges. Call in office hours.

Make calls whenever necessary and can avoid.

Care about price Price sensitive. Elastic demand

Business person

Student


Pricing strategy

What is LTV?

ARPU CCPU M AC LTV

Average Revenue per user

Cash cost per user(45% of ARPU)

Monthly Margin(ARPU-CCPU)

Acquisitioncost

LifetimeValue

R: Retention rate= 1- churn ratei= interest rate = 5%

-Sales commission-Advertising per gross add-subsidy cost

Value of customer in terms of how much service or product he will purchase in his lifetime.

Value of keeping customers loyal


Pricing strategy

Acquisition Cost Advertising per gross

add- $75-$100 Sales commission-$100 Handset subsidy-$100-

$200

Total- $275-$400 Acquisition cost roughly-

$370

Breakeven Analysis

Monthly ARPU- $52 Monthly cost to serve-

$30 Monthly margin=($52-

$30)=$22

Time to breakeven on acquisition cost = $370/$22= 17 months


Pricing strategy

Lifetime value Analysis

Option 11)r(annual retention rate): 1-(0.02*12) = 0.762)M (yearly margin): 22* $12= $2643)i(interest rate) : 5%4)AC(acquisition cost): $370LTV=[264/(1-0.76+0.05)]-

370 =$540

Option 21)r(annual retention rate): 1-(0.06*12) = 0.282)M (yearly margin): 22* $12= $2643)i(interest rate) : 5%4)AC(acquisition cost): $370LTV=[264/(1-0.28+0.05)]-

370 = -$27.14


Pricing strategy

Option 3aWith

contract

$29 -- $35 due to hidden cost(21% decrease)1) r(annual retention rate): 1-(0.02*12) = 0.762)M (yearly margin): 22/1.21=$218.163)i(interest rate) : 5%4)AC(acquisition cost): $370

LTV=[218.16/(1-0.76+0.05)]-370 =$382

Option 3bWithoutcontract 1)r(annual retention rate):

1-(0.06*12) = 0.282)M (yearly margin): $218.163)i(interest rate) : 5%4)AC(acquisition cost): $370

LTV=[218.16/(1-0.28+0.05)]-370 = -$86.68


Pricing strategy

Lifetime value Analysis Results

Option

1 2 3a 3b

LTV +$540 -$27.14 +$382 -$86.68

+valueAcceptabl

e

A different approach1)Lowering customer Acquisition cost

• Sales commission: $30• Advertising per gross add: $60• Handset subsidy: $30Total customer Acquisition cost= $120

2)Embracing additional pricing elements3)Developing competitive positioning through pricing.


Pricing strategy

Achieving profitability

1. Breakeven Analysis Given the acquisition Virgin’s $120 acquisition cost,

what would the company have to charge on a per-minute basis (P) to equal the industry’s break-even time of 17 months, assuming that Virgin’s 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

r (annual retention rate): 1 - (0.06 * 12) = 0.28

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

LTV Analysis: Eliminating contracts


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

Question-2



Sources of customer

dissatisfaction

contracts

Complex sales

process

privacy concerns

Credit checks

Poor customer service

Hidden fees

Bucket pricing


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

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 company’s 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

2 Apr 2014


33 2 Apr 2014Marketing Case Study -Virgin Mobile

No contracts

A Consumer Friendly Plan: Potential Problems

Increased Churn

Consumers want….. But the problem is …..

No Pricing Buckets

No Hidden Fees

Lower Operating Margins

No Peak/Off Peak Hrs

No Credit ChecksMore

Uncollectibles

Simple Sales Process

Sales commission reduction

Great Service Increased Costs



Lowering Customer Acquisition Costs

1. On sales commissions

• 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.

2. On advertising costs

• Virgin plans to spend much less than its competitors (approx. $60 million for the year. Given the company’s 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 .

3. On handset subsidies

• 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

4. Virgin total acquisition costs: $120

• Sales commission: $30• Advertising per gross ad: $60• Handset subsidy: $30



Embracing Additional Pricing Elements

1. Pre-paid requirement – no contract

• 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)

2. 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.)

2 Apr 2014



Developing a Highly-Differentiated Positioning

1. A highly-differentiated service proposition

• Rescue Rings• Wake-Up Calls• VirginXtras…

2. A highly-differentiated pricing proposition

3. An opportunity to tap into the consumer resentment with a non-cynical, 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)

2 Apr 2014



A Consumer Friendly Plan: Potential Solutions

2 Apr 2014

No contracts Increased Churn

Consumers want… But the problem is …..

No Pricing Buckets

No Hidden Fees

Lower Operating Margins

No Peak/Off Peak Hrs

No Credit ChecksMore

Uncollectibles

Simple Sales Process

Consumer Confusion

Great Service Increased Costs

Lower Acquisition

Costs

Simplified Pre-paid Planeliminates

confusion, no uncollectibles, fewer service

calls

Lower Subsidies

A possible solution is …..



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

Question-3


Telecom Market Comparison

2 Apr 2014

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


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


Source: Telecom Regulatory Authority of India, Press Release No. 72/2012, April 7, 2012, p. 1

Indian scenario


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


Source: Business Monitor International, India Telecommunications Report, 2Q 2012

Indian Vs US


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


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


Source: Business Monitor International, India Telecommunications Report, Q2 2012,

Reason for High Churn Rate in India

Competition MNP


Source: Business Monitor International, India Telecommunications Report, Q2, 2012,


Indian Vs US- Average Revenue Per User (ARPU)

Inference• ARPU for India is very less as compared to that of US• In general it follows a decreasing trend due to market competition


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)

References

http://populationcommission.nic.in/



Marketing Case Study -Virgin Mobile 2 Apr 2014

Thank you!