Appendix

Industry pricing analysis:

Retention rate for contract = 1 – 0.02*12 = 0.76Retention rate for non-contract = 1 – 0.06*12 = 0.28

 Industry

Contract No contractRetention rate 0.76 0.28Price $ 52 $ 52 Variable cost $ 30 $ 30 Contributing margin $ 22 $ 22 Interest rate, i 5% 5%AC $ 370 $ 370 LTV $ 540.34 $ (27.14)

Option 1:

Acquisition cost for virgin – Sales commission per person = $ 301 year marketing cost = $60 million / 1 million customers = $60Handset cost = $80 * (225-150)/225 = $27Total acquisition cost = $117Price to be charged from customer = $52*(1-6/29) = $41CCPU = 45% of revenues

  Option 1Contract

Retention rate 0.76Price $ 41 Variable cost $ 19 Contributing margin $ 23 Interest rate, i 5%AC $ 117 LTV $ 821.93

Option 2:

Price to be charged from customer = $52*(1-0.125) = $41Discount in peak hours = 12.5% (Assumed) – It can be lower also and reduce the contributing margin.

  Option 2Contract

Retention rate 0.76Price $ 46 Variable cost $ 20 Contributing margin $ 25 Interest rate, i 5%AC $ 117 LTV $ 918.85

Option 3:

  Option 3No contract

Retention rate 0.28Price $ 13 Variable cost $ 6 Contributing margin $ 6.93 Interest rate, i 5%AC $ 117 LTV $ (8.67)

Sensitivity analysis for option 3:

  Option 3 Sensitivity AnalysisNo contract

Retention rate 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28Price $ 13 $ 18 $ 20 $ 22 $ 24 $ 30 $ 50 $ 63Variable cost $ 6 $ 8 $ 9 $ 10 $ 11 $ 14 $ 23 $ 28Margin $ 6.93 $ 9.90 $ 11.00 $ 12.10 $ 13.20 $ 16.50 $ 27.50 $ 34.72Interest rate, i 5% 5% 5% 5% 5% 5% 5% 5%AC $ 117 $ 117 $ 117 $ 117 $ 117 $ 117 $ 117 $ 117LTV $ (8.67) $ 37.62 $ 54.76 $ 71.90 $ 89.05 $ 140.48 $ 311.90 $ 424.46Price per min $ 0.063 $ 0.09 $ 0.10 $ 0.11 $ 0.12 $ 0.15 $ 0.25 $ 0.32

Breakeven analysis:

AC $ 117 Number of minutes per month (Average) 200Price charged 200*PCost to company 0.45*200*PProfit 0.55*200*PIndustry BE months = Virgin's BE months 16.8 monthsP per min $ 0.063 Contractual price ($52/417) $ 0.12 Perceived price ($52/200) $ 0.26

Breakeven months 16.8 months 3 months 3.36 months* 4 months 6 months 10 months 12 months

P per min $ 0.063 $ 0.35 $ 0.32 $ 0.27 $ 0.18 $ 0.11 $ 0.09

*The churn rate for non-contract plan is 6% and based on this we have assumed that 1 person will use Virgin’s plan for 3.36 months (12*0.28).

Value based pricing:

Variable cost = 6.4 cents per min

Perceived value = 32 cents per min

Market penetration = 9 cents per min

Market Skimming = 12 cents per min