Case #2: Virgin Mobile - WordPress.com · change under any of the three pricing scenarios discussed in the case (page 7 – 8)? Include a supporting ... Treacy and Wiersama Model

CASE #2: VIRGIN MOBILE MRK519-MMT

Travis Beitler SN#054 579 131

[email protected]

eca.ca Professor Duncan Reith

ReithProfessor Duncan

Reith

TRAVIS BEITLER 1

CASE #2: VIRGIN MOBILE

Table of Contents 1. Provide a specific analysis/decomposition of the business model of a cellular phone company. This is

to be in the “Business Model Canvas” format. A supporting explanation is not required but if you feel

one is necessary; it should be no more than one paragraph. ...................................................................... 2

2. Using either the Treacy and Wiersema or the Porter models, which generic business strategy or

business strategies is Virgin proposing to follow? Does the generic business strategy (or strategies)

change under any of the three pricing scenarios discussed in the case (page 7 – 8)? Include a supporting

explanation for your answer to both questions that should be no more than one paragraph for each

question. ....................................................................................................................................................... 3

Treacy and Wiersama Model – Virgin Mobile .......................................................................................... 3

Product Leadership – Innovation / Risk Oriented Management Style ................................................. 3

Customer Intimacy – Reach and Range: Meaningful Distribution ........................................................ 4

3. What is the customer lifetime value of an average cell phone customer? Assume a five year contract,

less than 100% retention in spite of the contract, no residual value, and a 12% per year discount rate. ... 6

4. What happens to the CLTV of this customer if contracts are eliminated? .............................................. 6

5. Explain how you calculated retention rates (maximum two paragraphs). .............................................. 7

6. Provide a recommendation on the new product introduction business case outlined in the Appendix

to this marking outline. The recommendation should be based solely on the quantitative analysis using

NPV and IRR as your primary decision tools. Your answer should be one sentence with your properly

formatted spreadsheets (Base, Innovation, Change) included at the end of your case and as a tabs in

your spreadsheet. ......................................................................................................................................... 8

Base Case .................................................................................................................................................. 8

Innovation ................................................................................................................................................. 8

Change ...................................................................................................................................................... 8

Works Cited ................................................................................................................................................... 9

TRAVIS BEITLER 2


1. Provide a specific analysis/decomposition of the business model of a

cellular phone company. This is to be in the “Business Model Canvas”

format. A supporting explanation is not required but if you feel one is

necessary; it should be no more than one paragraph.

TRAVIS BEITLER 3


2. Using either the Treacy and Wiersema or the Porter models, which

generic business strategy or business strategies is Virgin proposing to

follow? Does the generic business strategy (or strategies) change under

any of the three pricing scenarios discussed in the case (page 7 – 8)?

Include a supporting explanation for your answer to both questions that

should be no more than one paragraph for each question.

Treacy and Wiersama Model – Virgin Mobile

Product Leadership – Innovation / Risk Oriented Management Style

Sir Richard Branson and the Virgin brand have frequently operated under taking risks, and improving

product/service innovation for their consumer’s fulfillment (Virgin Airlines, Virgin Records, and

“Business Stripped Bare”, a book by Richard Branson, are excellent examples). This pictorial chart

demonstrates how Virgin does it through Virgin Mobile:

Virgin Mobile Kyocera Phones Enriched Content/Customization - MTV:

o Production of the actual Virgin Mobile Service, and contractual agreement with Kyocera

(“Party Animal”/ “Super Model” – phones).

o Unique features on phone which include:

Multitude of Ringtones: Consumer customization in choice

Music: Available through contractual agreement with MTV

Graphics, Television: Appears on the MTV show “Total Request Live” where

consumers can engage through television (completely unique in mobile

category)

Games – Unique games only available to Virgin Mobile customers

Customization: Highly customizable phone with a plethora of colour choices,

and faceplates.

TRAVIS BEITLER 4


Experiential Marketing Events: Engagement with young hip crowd through events which include

the “Full Monty”

Magazine/Internet Content: Unique content featured through magazines (“Complex” “Vibe”

“XXL”) and website, which engages consumers.

Each feature excels at fulfilling customer needs through unique industry service/product innovation, and

taking risks associated with being different.

Customer Intimacy – Reach and Range: Meaningful Distribution

Virgin Mobile successfully attracts their target market – youth: hip/young 19-29, through a finely tuned

distribution channel. This pictorial chart outlines how, where, when, what, and why it hits the niche

youth segment:

Virgin Mobile Kyocera Brick and Mortar – Retail Chains

o Production of the actual Virgin Mobile Service, and contractual agreement with Kyocera

(“Party Animal”/ “Super Model” – phones).

o Brick and Mortar Retail Chains:

Each model of phone is distributed to relevant youth shopping points: Circuit

City, Media Play, Target, Best Buy, Sam Goody, Virgin Megastores.

Youth frequently visit these locations to purchase electronics (MP3 Players,

DVD’s, Video Games, etc.)

Customer Accessibility – Clamshell Package:

o Majority of youth prefer to not have to deal with sales agent at point of purchase

o The clamshell packaging allows the consumer to physically access the product freely

without a middleman (sales agent).

Target Market Purchase 19-29:

o Through strategically selected retail locations (relevant), customer accessibility (hassle

free) the customer then makes a purchase.

TRAVIS BEITLER 5


The generic strategy of Virgin switches from a Customer Intimacy/Product Leadership focus to a

Customer Intimacy/Operating Excellence focus with the their plans for option #1 (“Clone the Industry

Prices”) and option #2 (“Price Below the Competition”). With option #1, Virgin is technically copying the

current industry standard with price structures, with few differences (customer service). Their aim is to

control transactions (cost effective). Considering their limited advertising budget, it’s difficult for them

to develop a differentiation strategy (McGovern, 7). With option #2, Virgin is focussed on maximizing

their profit by low-balling the competition. This plans leans to a cost-effective strategy, while

maintaining strong expected customer service; providing better off-peak hours than competitors

(McGovern, 8).

TRAVIS BEITLER 6


3. What is the customer lifetime value of an average cell phone

customer? Assume a five year contract, less than 100% retention in spite

of the contract, no residual value, and a 12% per year discount rate. Acquisition Cost (AC) – “In addition, in an industry in which the average cost to acquire a

customer was roughly $370” (McGovern, 2)

Contract Selling Price – “In fact the average monthly cell phone bill for the national carriers was

$52…” (McGovern, 3)

Variable Costs of Cell Phone (Service Fee) – “Because the cost to serve a customer was roughly

$30 a month…” (McGovern, 3)

o Contract Selling Price – Variable Costs of Cell Phone (Service Fee) = Contribution Margin

(CM)

Discount Rate/Interest Rate/Hurdle Rate etc. (d) – 12% as provided in the rubric, question 3.

Churn Rate (Retention) – As the rubric provides “less than 100% retention”, that number is a bit

vague. After some research into the case, the industry average churn rate came to 2% per

month (McGovern, 8).

Solution:

4. What happens to the CLTV of this customer if contracts are

eliminated? If the contracts were to be eliminated, the effective churn rate would increase to 6% each month

(McGovern, 8)

TRAVIS BEITLER 7


Using this strategy Virgin would lose -$55.71 per customer.

5. Explain how you calculated retention rates (maximum two

paragraphs). There is nuggets of information throughout the case in regards to retention rates. The first clue is 2%

churn rate on the average cell phone customer in the industry (McGovern, 8). The second clue for churn

rates and how it affected the contract decision, came from the 6% expected churn rate of eliminating

contracts (McGovern, 8). By eliminating contracts, Virgin gains more customers through acquisition.

However, by doing so they also lose customers that were once under contract (prefer prepaid vs.

contract). Furthermore, customer loyalty comes into question when given the option of prepaid vs.

contract.

The appeal from this of course is the fact that Virgin is trying to gather the youth generation. Anyone

under the age of 18 (which represents a large segment of what Virgin is after), is able to now have a

mobile phone, contract free. While churn rates for customers will remain low with the contract (as

they’re expected to re-sign, staying with service provider), if Virgin decides to eliminate contracts, that

churn rate will rise to 6%.

TRAVIS BEITLER 8


2015 2016 2017 2018 2019 2020

($'000's) ($'000's) ($'000's) ($'000's) ($'000's)

Net Income/Cash Flow -$20,000 $35,940.00 $20,313.58 $19,927.65 $19,418.67 $18,782.58

Net Income/Cash Flow % of Sales 29.96% 22.04% 20.94% 19.79% 18.58%

2015 2016 2017 2018 2019 2020

Net Income/Cash Flow $17,980.00 $19,666.17 $20,058.73 $19,313.67 $17,574.88

Net Income/Cash Flow % of Sales 29.98% 29.50% 27.86% 25.38% 22.21%

2015 2016 2017 2018 2019 2020

($'000's) ($'000's) ($'000's) ($'000's) ($'000's)

Net Income/Cash Flow -$20,000 $17,960.00 $647.41 -$131.08 $105.00 $1,207.70

Net Income/Cash Flow % of Sales -0.01% -7.46% -6.92% -5.59% -3.63%

Net Present Value -$3,146.52

IRR -0.82%

6. Provide a recommendation on the new product introduction business

case outlined in the Appendix to this marking outline. The

recommendation should be based solely on the quantitative analysis

using NPV and IRR as your primary decision tools. Your answer should be

one sentence with your properly formatted spreadsheets (Base,

Innovation, Change) included at the end of your case and as a tabs in your

spreadsheet.

Base Case

Innovation

Change

While Eureka Gen Ex is an innovative product, it’s a good idea to remain with the current product

(Eureka Power Pack) for the following reasons:

NPV – The NPV after a 5 year period, shows a loss of -3,146.52 (results in a loss of money over

time)

IRR – The IRR demonstrates that the project has no positive return during its period (a loss of

growth vs. gain)

TRAVIS BEITLER 9


Works Cited McGovern, Gail. "Virgin Mobile USA: Pricing for the Very First Time." Briefcases Harvard Business

School (2007): 1-19. Web. 30 Oct. 2015.

Marking Rubric

Criteria Possible Marks

Analysis/Decomposition of the business model (diagram with words)

/10

Determination of Virgin Mobile generic business strategy (or strategies) with short explanation

/5

Customer lifetime value of an average cell phone customer (showing assumptions and including supporting information)

/10

Impact on CLTV if contracts are eliminated (showing assumptions and including supporting information)

/10

Explanation of how retention rates were calculated /5 Recommendation on new product introduction including supporting financial models (Base, Innovation, Change)

/20

Total Marks for Case Submission /60

In-Class Quiz /10

Total Marks for Virgin Mobile /70

TRAVIS BEITLER 10


TRAVIS BEITLER 11


TRAVIS BEITLER 12


TRAVIS BEITLER 13


TRAVIS BEITLER 14


Documents

Case #2: Virgin Mobile - WordPress.com · change under any of the three pricing scenarios discussed in the case (page 7 – 8)? Include a supporting ... Treacy and Wiersama Model