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Create a positive lifetime value (LTV) for every customer and thereby
make money
Consumer wants
No contracts
Increased Churn
No Pricing Buckets
No Hidden Fees
Lower
Operating
Margins
No Credit Checks
More Uncollectibles
Consumer Confusion
Great Service
Increased Costs
For this virgin would require to design a new pricing structure which would cover
all the pain points of customers as well as ensure a long term strategic
perspective in choosing a pricing structure. The evaluation of all the alternatives
is explained below in 2nd question.
Q2.The case lays out three pricing options. Which option would you
choose and why? In designing your pricing plan, be as specific as
possible with respect to the various element under considerations (e.g.,
contracts, the size of the subsidies, hidden fees, average per-minute
charges, etc.).
Option 1: Clone the Industry Prices
1. Simple message
Pricing competitively.
MTV applications.
Pros
Easy to Promote.
Consumers are used to
BUCKETS and peak/offpeak distinctions.
Savings on advertising
budget costs.
Simple packaging
Cons
Pros
Cons
big profit
May trigger competitive
reaction
Student
Make calls
whenever
necessary and can
avoid.
Care about price
Price sensitive.
Elastic demand
It appears that the all new pricing structure is the most suitable from the
customers point of view. The feasibility of the plan needs to be studied before
going with the price structure.
Business Model
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
Structure
Clone the
industry
Price below
competition
New plan
with
contract
2%
1-(0.02*12)
= 0.76
New Plan
without
contract
6%
1-(0.06*12)
= 0.28
Churn rate
Annual
retention
rate
Yearly
margin
2%
1-(0.02*12)
= 0.76
6%
1-(0.06*12) =
0.28
22* $12=
$264
22* $12=
$264
5%
22/1.21*
$12=
$218.16
5%
22/1.21*
$12=
$218.16
5%
Interest
rate
Acquisitio
n cost
LTV
5%
$370
$370
$370
$370
[264/(10.76+0.05)]370
=$540
[264/(10.28+0.05)]370
= -$27.14
[218.16/(10.76+0.05)]370
=$382
[218.16/(10.28+0.05)]370
=$86.68
The above calculation shows that the option 1 and option 3 with contract is
profitable for virgin mobiles however if virgin manages to reduce the customer
acquisition costs by making contracts with mobile manufacturers then it would
establish virgin as low cost player.