VIRGIN MOBILES USA

PRICING FOR THE VERY FIRST TIME

Prepared by-

Course-

Marketing Management
Instructor-

Prof. R. Srinivasan
Marketing Case Study -Virgin Mobile

Chanpreet Singh
Sachin Sharma
Surabhi Kala
Swapnil Soni
DoMS, IISc
2 Apr 2014

ex

ntroduction-Virgin Group

ntroduction-Virgin Mobile

irgin Mobile Ventures

irgin Mobile USA

ase Questions

Pricing strategy

Addressing the Customers dissatisfaction

Telecom Market Comparison India Vs USA

duction-Virgin Group

gin Group
Private limited company

try

Conglomerate

ded

1970

der

Richard Branson

quarters

London, United Kingdom

erved

Global

ue

15 billion (2012)

oyees

Approximately 50,000

Britain's Flag Carrier

Milestones
A seventeen-year-old Richard Branson launches his first two businesses
Virgin opens Britains first residential recording studio
Virgin Games is launched
First national radio station hits the airwaves
Virgin Media becomes the UK's first quadplay company
Virgin Mobile goes Global

duction-Virgin Group

gin Group Products

nking
Internet

erages

ravel

Music

o games

Radio

sumer
tronics

Books
Cosmetics

ancial
rvices

Jewellery

ilms
Houseware

Retail

Mobile Phones

Commercial
spaceflight

n Mobile
Ansoff Growth Matrix

ay into new Market with new Productversification

Market

Product

n Mobile

gin Mobile Launch

Countries

Partners

peration

UK

NTL Telewest

Australia

Optus network

USA

Sprint

Canada

Bell Canada

France

Carphone Warehouse

South Africa

Cell C

India

Tata Teleservices

Poland

PLAY

Singapore

Singtel

Qatar

Qatar Telecom

unct

n Mobile - Ventures
United Kingdom

Success

lar Operation in UK

Million customers in 3 years

trys 1st MNVO (Mobile Network

al Operator)
Strategy

pany leased Network space from

tsche Telekom

Singapore

Failure
Cellular Operation in Singapore
Joint venture with Singapore Telecom
Fewer than 30,000 customers in 5 years
Cause
Saturation of market
Virgins hip & trendy positioning

n Mobile USA

A, Year 2011

s:
bile market seems to have 50% penetration with 130
on mobile subscribers
group 15-29 yrs came out to be less penetrated in
s of Mobile usage
s young demography was projected to have good
th in next 5 years

e:

players didnt target this potential customer segment

s segment had been underserved; their specific needs
not been met

Not just a call

n Mobile USA

rch for Service provider

Search for Leadership

S Telecommunications holding company

oviding wireless services
ajor global Internet carrier
largest U.S. wireless network operator

50-50
Richard Branson & Daniel Schulman

niel Schulman, CEO, Virgin Mobile USA

We would be entering with a brand that had little US name recognition

ept for Airline.. Its these kind of opportunities where a team can define
elf and if this could be pulled off it would be unbelievable..

n 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

estion-1

EN VIRGIN MOBILES TARGET

UCTURE ITS PRICING? WHICH
CASE WOULD YOU CHOOSE
FITABILITY IMPLICATIONS OF
ER SUITABLE ASSUMPTIONS.

MARKET, HOW SHOULD IT

OF THE OPTIONS GIVEN IN
AND WHY? DISCUSS THE
THE PLAN CHOSEN BY YOU

ng strategy

verall Goal in choosing pricing structure

ence dont trust industry pricing plan.

portunity

Must reach target market : YOUTH!

Create a positive lifetime value
(LTV) for every customer.
- Must be able to make money

Three main options

1.
2.
3.
Need A Breakthrough

Clone the industry prices.

Price below competition.
A whole new plan.

ng strategy

Option 1 : Clone the industry prices

Simple message
Pricing competitively.
MTV applications.
Superior customer service.
Better Off-peak hours.
Fewer hidden fees.

ng strategy

Option 1 : Pricing Structure

Minutes

ng strategy
Option 1 : Benefits and Shortcomings

Pros
And
cons

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

ng strategy

Option 2 : Price below competition

. Similar structure

Pricing slightly below the

competition.
. Maintain buckets of minutes.
Price per minute set below
industry average in certain key
buckets.
Target young market that uses
100 to 300 minutes.

ng strategy

Option 2 : Pricing Structure

g strategy

Option 2 : Benefits and Shortcomings

Pros
And
cons

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 doesnt mean big profit
May trigger competitive reaction

ng strategy

Option 3 : Radically new plan

. Shorten or eliminate
contracts.
. Prepaid service.
. Handset subsidies.
. Eliminate all hidden fees
and off peak hours.
. Concept of LTV

ng strategy

Contracts: Does it make sense to shorten subscription terms or eliminate them?

Contract provides a hedge against churn.

Estimated churn rises from 2 to 6%.
vantage: 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.

ng 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.

Approach
Increasing subsidies so that phones
are cheaper than competition.
Getting consumers to feel more
invested and loyal.

ng strategy
Hidden Fees

Goal: Make pricing very

mple.
What you see is what
ou get
Rolling inner prices of
axes and fees into final
rices.
)Make money.

Target market
Young people!

Off-peak hours
Price insensitive.
Demand is inelastic.
Rarely worry about
charges. Call in office
hours.

Business person

Make calls whenever

necessary and can avoid.
Care about price
Price sensitive.
Elastic demand

Student

ng strategy

What is LTV?

Value of customer in terms of

how much service or product
he will purchase in his lifetime.
Value of keeping customers
loyal

ARPU

CCPU

AC

LTV

Average
Revenue per
user

Cash cost per

user
(45% of
ARPU)

Monthly
Margin
(ARPUCCPU)

Acquisition
cost

Lifeti
me
Value

R: Retention rate= 1- churn rate

i= interest rate = 5%

-Sales commission
-Advertising per
gross add
-subsidy cost

ng strategy

Acquisition Cost

Advertising per gross add$75-$100

Sales commission-$100
Handset subsidy-$100-$200

Total- $275-$400
Acquisition cost
$370

Breakeven Analysis
Monthly ARPU- $52
Monthly cost to serve- $30
Monthly
margin=($52$30)=$22

roughly-

Time to breakeven on acquisition cost

= $370/$22= 17 months

ng strategy

Lifetime value Analysis

Option 1

V=[264/(1-0.76+0.05)]-370

1)r(annual retention rate):

1-(0.02*12) = 0.76
2)M (yearly margin): 22* $12= $264
3)i(interest rate) :
5%
4)AC(acquisition cost):
$370

=$540

Option 2

V=[264/(1-0.28+0.05)]-370

= -$27.14

1)r(annual retention rate):

1-(0.06*12) = 0.28
2)M (yearly margin): 22* $12= $264
3)i(interest rate) :
5%
4)AC(acquisition cost):
$370

ng strategy

Option 3a
With
contract

V=[218.16/(1-0.76+0.05)]-

=$382

Option 3b
Without
contract

V=[218.16/(1-0.28+0.05)]-

= -$86.68

$29 -- $35 due to hidden cost

(21% decrease)
1) r(annual retention rate):
1-(0.02*12) = 0.76
2)M (yearly margin):
22/1.21=$218.16
3)i(interest rate) :
5%
4)AC(acquisition cost):
$370

1)r(annual retention rate):

1-(0.06*12) = 0.28
2)M (yearly margin): $218.16
3)i(interest rate) :
5%
4)AC(acquisition cost):
$370

ng strategy
Lifetime value Analysis Results

Option

LTV

+$540

-$27.14

3a

3b

+$382

-$86.68

+value
Acceptable

A different approach
1)Lowering customer Acquisition cost

Sales commission: $30

Advertising per gross add: $60

Handset subsidy: $30

Total customer Acquisition cost= $120

2)Embracing additional pricing elements

3)Developing competitive positioning through pricing.

ng strategy
Achieving profitability

Breakeven Analysis

Given the acquisition Virgins $120 acquisition cost, what would

the company have to charge on a per-minute basis (P) to equal
the industrys break-even time of 17 months, assuming that
Virgins 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

LTV Analysis: Eliminating contracts

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

estion-2

CELLULAR INDUSTRY IN THE US HAS A VERY HIGH RATE

DISSATISFACTION RESULTING IN CUSTOMER CHURN. HOW
E THE VARIOUS PRICING ELEMENTS AFFECTED THE
SATISFACTION AND WHAT HAVE THE BIG PLAYERS DONE
REDUCE THE CHURN?

essing the Customers dissatisfaction

contracts

Bucket
pricing

Peak time
differentials

Sources of
customer
dissatisfaction

Hidden fees

Poor
customer
service

Complex
sales process

privacy
concerns
Credit
checks

essing the Customers dissatisfaction

sonsfordissatisfaction

ustomer under contract leads to lower churn rate

dden charges allows the company to promote at lower per minute

icing levels.

complex sales process, which in turn drives costly sales commissions.

ucket pricing system often lead to confusion with customers and so they
e penalized.

f-Peak/On-Peak differentials add to customer confusion and off-peak

riod has shrunk over time

essing the Customers dissatisfaction

gin Mobile A Different Approach

From a customer perspective, an "ideal" plan would probably

include a number of elements which would have a potentially
negative impact of the companys financial
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

essing the Customers dissatisfaction

nsumerFriendly Plan:Potential Problems

Consumerswant..
No contracts

Buttheproblemis..
Increased Churn

No Pricing Buckets
No Hidden Fees

Lower
Operating
Margins

No Peak/Off Peak
Hrs
No Credit Checks

More Uncollectibles

Simple Sales Process

Sales commission
reduction

Great Service

Increased Costs

essing the Customers dissatisfaction

ering Customer Acquisition Costs

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.
On advertising costs
Virgin plans to spend much less than its competitors (approx. $60 million for the year. Given
the companys 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 .
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

Virgin total acquisition costs: $120

Sales commission: $30

Advertising per gross ad: $60
Handset subsidy: $30

essing the Customers dissatisfaction

mbracing Additional Pricing Elements

Prepaid 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 coststoserve (simplified billing, reduced number of service
calls related to pricing disputes)

A completely transparent, simple (onesize fitsall) perminute

price no form of pricing discrimination being practiced by the
competition (pricing buckets, on/offpeak policies, hidden fees,
etc.)

essing the Customers dissatisfaction

eveloping a Highly-Differentiated Positioning

A highly-differentiated service proposition
Rescue Rings
Wake-Up Calls
VirginXtras
A highly-differentiated pricing proposition
An opportunity to tap into the consumer resentment with a noncynical, 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)

essing the Customers dissatisfaction

onsumerFriendly Plan:Potential Solutions

umerswant

No contracts

Buttheproblemis..

Apossiblesolutionis..

Increased Churn

Lower Subsidies

Lower
Operating
Margins

Lower
Acquisition
Costs

Credit Checks

More Uncollectibles

ple Sales Process

Consumer
Confusion

Simplified Prepaid Plan

eliminates
confusion, no
uncollectibles,
fewer service calls

Pricing Buckets

o Hidden Fees

Peak/Off Peak
Hrs

Great Service

Increased Costs

estion-3

W WOULD YOU COMPARE THE US MARKET AND THE

IAN MARKET FOR THE SAME CUSTOMER SEGMENT IN
MS OF PRICING AND CUSTOMER CHURN? WHAT SHOULD
THE STRATEGY FOR PRICE AND CHURN IN INDIA?

com Market Comparison

Characteristic

India

United States

an Population

30.30%

82.20%

bile Phone Penetration

96.57%

76.67%

4G Penetration by 2016

16.2%

68.3%

paid Mobile Share of Phones

96.2%

21.3%

73%

21%

One to Four

One

utes of Use/Subscriber/Month

320

650

rage Revenue/User/Month

$3.10

$50

t to subscriber for calls

Per Second

Per Minute

rging Model

Outgoing Only

Incoming and Outgoing

rn Rate/Year (not compounded)

mber of SIM Cards/Phone

com Market Comparison

an scenario

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

rence
a has great potential in terms of Telecom market i.e. appox 900 mn subscribers
hough market show increasing trend yet according to the forecast the market is posed
saturated in near future
ban is the major contributor in Telecom consumer market

com Market Comparison

an Vs US

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

ence
dia more customers are Pre-Paid (non-contract) subscribers as compared to those in USA
ng policy highly differs in Indian context keeping above in mind

com Market Comparison

centric Diversification

rtunity
for
growth,
ting the same youth
umer base with lucrative
ces

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

com Market Comparison

rn Rate Comparison

any period Churn rate of mobile

cribers is higher in India than that in US
rn rate in India is increasing in contrast
at in US
rn rate directly reflects in LTV (Life
Value) and thereby pricing decision

son for High Churn Rate in India

Competition

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

com Market Comparison

an Vs US- Average Revenue Per User (ARPU)

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

rence
PU for India is very less as compared to that of US
eneral it follows a decreasing trend due to market competition

rences

sites

p://www.virginmobile.in/
p://www.virginmobileusa.com/
p://en.wikipedia.org/wiki/Virgin_Mobile

used

crosoft Encarta (Encyclopedia for offline references)

crosoft Excel (for data analysis & graphs)

THANK YOU!