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CASE ANALSYSIS OF

Virgin Mobile USA: Pricing for the Very First Time


Submitted on July 26, 2016
For requirement of the course
Pricing (PCG-A)
To,
Instructor: Prof. Sanjeev Tripathi
Academic Associate: Javed Shaikh
By: Group 4
Garima Das
Nishant Bhatia
Sajal Jain
Sanjana Sharma
Vivek Busar

1. What are key challenges for Virgin Mobile in the launch of Virgin mobile in the US?
Competitive Landscape: The telecom market in US is dominated by 6 players who among
themselves have around 100 million subscribers which forms 76.5% of the total market. Mobile
penetration in the lucrative 30-59 age segment is above 50% and it is considered to have reached
saturation. Hence to break a ground in such a competitive landscape would be challenge for
Virgin Mobiles.
High Customer Acquisition cost: Due to the highly competitive landscape and mature market,
firms spend huge amount on customer acquisition. The average cost of acquisition was estimated
to be around $370 which makes acquisition of customers with lower usage unaatractive. In such
a landscape, Virgin Mobile plans to enter the market with only $60 million advertisement budget
creating a challenge of finding the right customer to target and to do so through the right
channels.
Predominantly Post Paid Market: 92% of the customers in the US have post paid connections.
There is a stigma associated with prepaid customers that they cant afford a post paid connection
due to poor credit rating. If Virgin is to target the young population with pre paid services, it has
to mitigate this stigma.
Subsidized Handsets & Contracts: Cellular carriers usually subsidized the cost of cell phone in
the US. This cost is later recouped from the contract over a period of time. For Virgin this would
mean that it would have to shell out additional money in the beginning.
High Sales Commission: The retail channels take high fees for selling phones (averaging around
$100). Creating a separate cheaper sales channel would be a challenge for Virgin Mobiles.
Complex price structure: The current buckets offered by cellular carrier were complex with
many hidden cost. This does not go in line with the Virgin value of providing simple innovation.
Educating the customers about a new simple plan would be difficult and would also come with a
cost.

2. Evaluate the targeting and positioning that is being adopted by Virgin.


The telecom market in the US can be segmented on the basis of age.
i)

The working age group of 30-59 which has high mobile penetration. They are the

ii)

primary target segment for the existing players as they have high usage.
The age group from 20-29 includes students and first time workers who dont have

iii)

high usage. The penetration in the age group is moderate at 45%.


The age group 15-19 has low penetration of around 15% as these people are not of the
legal age to get into mobile contracts themselves.

Target Segment: Age group 15-29


Rationale:
1) This segment is not that lucrative for the existing players and hence they wont try to
target these customers. Hence the threat from competitors is reduced.
2) Virgins value of providing value for money, quality, innovation and fun would be
perfectly suitable for this segment. Also, the Hip image of Virgin would be something
this age group would relate to.
3) This customer segment has users with low or moderate usage who have no option but to
opt for high call rates from the existing players. A flexible plan reducing the minimum
usage would increase the penetration and enable Virgin to achieve economies of scale.
4) The services in VirginXtras, which is a POD for Virgin, would attract the youth segment.
Revenue from this channel is expected to increase by 190% in the next year.

Positioning: Virgin provides young individuals aged between 15 and 29, with value for money
cellular services with exciting Mobile Entertainment services as it has no hidden costs. Virgin
understands your needs and values them.

3. What should be the launch price and communication be like? Why?


As far as pricing is concerned, Virgin has 3 broad options:
a) Clone the industry prices:
Advantages

Disadvantages

Current market practice, no cost of educating the

The security check would reject majority of

customer.
Can offer slight differentiation by providing off-

customers due to poor credit background.


Would have to hire sales persons for the above

peak hours and fewer hidden fees.

mentioned checks & sales, additional expenses.


No major Point of Differentiation

b) Price below the competition


Advantages

Disadvantages

Current market practice, no cost of educating the

Wont be able to create simple plan as that would

customer.

leave money on the table

Lower prices would help again market share

Might create a price war

The target segment would get the desired value

Lower margins

c) A whole new plan


Advantages
Innovative and Simple plans, in line with the

Disadvantages
Higher churn rate in case of prepaid customers

values of Virgin
Would create market differentiation.

leading to lower LTV


Have to create mechanisms via Web or phone
cards to make the process coordinated & holistic

Based on the above discussion, it is advised that Virgin Mobiles come up with a new pricing plan
for its cellular services in the US.
Calculations for Price Point

Sales Channel Commission


Advertisment Expenditure/customer (Exhibit 2)
Mobile Subsidy (Exhibit 3)
Total Customer Acquisition cost

Assume breakeven price point


Monthly Usage (100-300 min)
Total Revenue
CCPU @ 45%
Monthly Margin
Churn Rate (Prepaid)
Churn Rate (Post Paid)
Interest Rate
At LTV = 0
P (Prepaid)
P (Postpaid)

$ 30.00
$ 60.00
$ 16.00
$ 106.00

p
200.00 min
200p
90p
110p
6%
2%
5%
$
$

0.080
0.083

Recommendations
1) Virgin mobile should enter US with no contract. Virgin should provide a small subsidy
(around 20%) on its already low cost phones. Also, the prices of Virgin should have no
hidden cost so as to get the attention and trust of the customers.
2) The break up point for Virgin is $ 0.08/min. However, since the national average is $0.12
(Exhibit 1), Virgin should charge $0.12 so as to get all the low and moderate users who
currently pay high amount for the buckets.

Exhibit 1: Average ARPU & CCRU


Monthly Average Revenue
Monthly Average CCPU
Monthly Avg Usage
Average ARPU
Average CCPU

$
$
$
$

52.00
30.00
417
0.12
0.07

min

Exhibit -2: Advertisement Expenses by Virgin


Estimated User by Year 1 end
Advertisement Expenditure
Advertisement Expenditure/customer

1000000
$ 60.00 million
$ 60.00

Exhibit 3: Proposed Mobile subsidy for Virgin


Average Mobile cost ($60-$100)
Subsidy (20% cost)

$80
$16.0