Pankaj Murudkar (063)Vinay Nadar (064)Sachin Bajaj (066)

Virgin Mobile USA: Pricing for the Very First Time

SYMBIOSIS INSTITUTE OF OPERATIONS MANAGEMENT

Virgin Mobile Idea

• Executive team was formed in 2001Dan Schulman was CEO

•Launch date was July 2002Goal was to have 1 million total subscribers by the end of the first year and 3 million by fourth year

•A natural extension of Britain based Virgin brandChallenge existing status-quoOffer better service and opportunities for customers where competition is complacent with pro-active and quick measuresFocus on understanding and meeting customer needs

Virgin Mobile USA – Background

……

Virgin Product Portfolio

Entry Strategy

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?

Mobile Virtual Network Operatoro No need of Physical Infrastructure o Cost Reduction Technique

Hip & Trendy

Overcrowded market with 6 national carriers and a large number of regional and affiliate providers

Matured market with 50% industry penetration

Penetration among demographic aged between 15 to 29 was significantly lower

Growth rate projected to be robust for the next 5 years

Big players ignored this market due to poor credit rating of target customersAverage cost of acquisition was expensive compared against the benefits Low-value customers in terms of long term financial growth

Identifying US Market

Virgin Xtras – Focus On Youth

Revenue for Mobile Entertainment Service was expected to increase steadily in next few years

Exclusive Contracts of branding with Nickelodeon, VHN-1 & MTV.

Innovative Handsets design of Kyocera Make at cheap rates.

Advertisements on only youth channels.

Availability of Handsets at Target Sam Goody Music Stores, Best Buy.

VIRGIN XTRAS

• Access to MTV-branded accessories and phones• Text messaging• Rescue Ring• Online Real-time Billing• Wake up Call• Ring tones• Fun Clips• The Hit List• Music Messenger• Movies

1. Clone the Industry Prices

2. Price Below Competition

3. A Whole New plan

Options

Must reach our target market: Youth!

Create a positive Lifetime Value (LTV) for every customer

Overall Goal in Choosing Pricing Structure

Competitive pricing with greater emphasis on a key advantages like differentiated applications [MTV] & superior customer service.

Differentiated Product offering – better off-peak hours & fewer hidden fees

Advantages to Virgin being its lower commission offering to retailers and “explains it all” product packaging

Greater margin on the product offering with lower advertising costs.

Option 1 Clone the Industry prices

Pros and Cons

Easy to promote. Consumers are used to ‘buckets’ and

peak/off-peak distinctions. Savings on advertising budget costs. Simple packaging could save costs on high

commissioned salespeople.

The target youth market is not stressed. Hard for a new entrant to the market.No flexibility in calling habits; always paying

the same high price.With no real price distinction, consumers are

not willing to switch over just for the Virgin Extras features.

Option 1: Clone the Industry pricesPros & Cons

Similar pricing structure as the rest of industry but lower actual prices than competitors

Maintain buckets & volume discounts with lower price per minute in certain key buckets

Position as a cost effective product offering, better off-peak hours & fewer hidden charges

Problem being too low on margins

Option 2: Price below the competition

Pros and Cons

Maintain the buckets and volume discounts with price per minute set below industry average.

Offer best off-peak hours and few hidden fees so consumers will know Virgin Mobile is cheaper, plain and simple.

Expand the size of the market and result in greater sales and profits.

Earnings from each consumer will be less.Sales growth does not necessarily mean big

profits.Risk of being regarded as low-quality service,

thus an unfavorable image. May trigger off competitive reactions.

Option 2: Price below the competition Pros & Cons

•An entirely new pricing structure which could be significantly different from competitors

Going in for a shortened subscription contracts or eliminating the contracts

The cons being the churn rate shooting to 6% each month compared to standard 2%

The pros being an attractive deal from customer acquisition viewpoint.

Offering pre-paid plans

The cons being usually high costs because of prohibitive pricing, the stigma associated with pre-paid, high churn out rates & non loyal customers.

Another constraint being some kind of mechanism to add on minutes like a web or physical phone cards

The pros being an attractive deal to consumers with no credit card or with poor credit checks & if acquisition costs are below $100 per new gross add

Lower subsidy costs to Virgin on handsets because of arrangement with Kyocera

Eliminating hidden fees and pointing to the total cost of the product offering

A new definition of off-peak hours as the target consumer falls into a different segment.

Option 3 : A Whole New Plan

The Business Customer

• TWO DISTINCTIONS:– Make calls during office hours– Rarely worry about the cost of

calls (Finance Dept can deal with it)

• PRICE INSENSITIVE!• Demand is INELASTIC• A percentage decrease in price

will have a smaller percentage increase in Quantity Demanded (Calls made)

Price & Demand – Business Customer

The student customer• TWO DISTINCTIONS

– You make calls whenever necessary and can seek to avoid calls that come with a higher pricetag

– Students CARE about the price of calls

• PRICE SENSITIVE• Demand is ELASTIC• A percentage decrease in price will

result in a larger percentage increase in quantity demanded (calls made)

Price & Demand – student Customer

Mobile phone company revenue:• The revenue gain from

increased quantity must be greater than the revenue loss from dropping the price

• Since our target market is Youth, whose demand is relatively elastic, downward adjustment in price is relevant!

A>B for Revenue Gain!

Demand - based Pricing

•An entirely new pricing structure which could be significantly different from competitors

Going in for a shortened subscription contracts or eliminating the contracts

The cons being the churn rate shooting to 6% each month compared to standard 2%

The pros being an attractive deal from customer acquisition viewpoint.

Offering pre-paid plans

The cons being usually high costs because of prohibitive pricing, the stigma associated with pre-paid, high churn out rates & non loyal customers.

Another constraint being some kind of mechanism to add on minutes like a web or physical phone cards

The pros being an attractive deal to consumers with no credit card or with poor credit checks & if acquisition costs are below $100 per new gross add

Lower subsidy costs to Virgin on handsets because of arrangement with Kyocera

Eliminating hidden fees and pointing to the total cost of the product offering

A new definition of off-peak hours as the target consumer falls into a different segment.

Option 3 : A Whole New Plan

ACir

MLTV

1

ARPU CCPU

M AC LTV

Average Revenue per user

Cash Cost per user= 45% of ARPU

Monthly Margin

= ARPU - CCPU

Acquisition CostLifetime Value

r: retention rate = 1 – churn rate

i : interest rate = 5%

r: retention rate = 1 – churn rate

i : interest rate = 5%

-Sale commission

-Advertising per gross add

-Subsidy cost

-Sale commission

-Advertising per gross add

-Subsidy cost

Calculating Lifetime Value (LTV)

Thank you