VIRGIN MOBILE USA

Pricing for the very first time

“We believe in making a difference. In our

customers' eyes, Virgin stands for value for
money, quality, innovation, fun and a sense
of competitive challenge. We deliver a
quality service by empowering our
employees and we facilitate and monitor
customer feedback to continually improve
the customer's experience through
innovation.”
-------Virgin Group Website

GROUP-2
Introduction.

Virgin a pound 7.8 billion worth UK based company lead by Sir Richard Branson. It
is one of the top three most recognised brands in Britain. The virgin group has gone on to
grow very successful business in sectors ranging from airlines and trains to beverages and
cosmetics. The company’s portfolio consists of more than 200 different corporate entities
worldwide.

In the year 2001 Sir Richard Branson appointed Dan Schulman as CEO, for Virgin
Mobile USA, to develop the new Virgin Branded Mobile Service, with the launch date of
July 2002. The goal of Virgin Mobile was to have 1 million total subscribers by the end of
the year 2002 and 3 million by the year 2006.

Challenges for Virgin Mobile in the launch of its Mobile Service in USA.

The mobile virtual network operator (MVNO) model that company decided to utilise
in USA had already seen a setback in Singapore. The mobile communication industry is
considered to be over crowded in US, with six national carriers and number of regional
service providers.

Mobile industry penetration at present was 50% with 130 million subscribers. The
market was considered to have reached maturity. The only segment which at a scope of
growth was consumers aged 15 to 29. But these young consumers had poor credit quality.
Also this segment had inconsistent usage and do not have a fixed income.

The company wanted to generate revenues with competitive prices without triggering
a price war.

Targeting and Positioning Strategy.

Team lead by Dan Schulman, CEO, Virgin Mobiles was fully aware that the market in
which they are going to enter is already overcrowded and the existing market players in the
field of mobile telephony have been in the market for over a decade. However, the market
research which was carried out brought out two important facts which attracted the attention
of Virgin Mobiles team, these factors were
o Mobile penetration by age group
o The realization that existing players are making money from customer
confusion and the intended target customers are fully aware of this and they
resent such policies.
Targeting Based on the outcome of the research the company decided to target
consumers aged between 15 to 29, since this was the only section of customers where the
industry penetration was close to 20% compared to 50% in other customer groups and the
projected growth rate amongst this segment of customers in years to come was expected to be
robust.

The targeting strategy adopted by Schluman and his team was the best to be adopted
by a new entrant into the market, where in the market penetration is already 50% and the
market is heading towards maturity. Under these circumstances a new player should and must
focus towards open fences, i.e. segments of consumers which have still not participated in
market penetration and do further research as to find out why the segment of customers did
not participate in the industry penetration. After conclusive outcome of such researches, the
new entrant should carry out a SWAT analysis and evaluate if targeting this group of
consumers is beneficial, i.e. whether the company can address to their needs and
requirements and if the answer is “yes” the company must go ahead with the plan of targeting
the said customer group, and that is what Schluman and his team finally did

Positioning The positioning of the Virgin Mobile Services in the US market is to attract
the customers of aged between 15 – 29 yrs. Knowing that this segment of consumers is more
open to new things such as mobile, text and entertainment services and considered mobile
phone as a fashion accessory, the Virgin Mobiles concentrated on VirginXtras i.e. Mobile
Entertainment Services and promoted sleek trendy handsets at no additional costs in their
advertisements, so that the target customer can associate with the Virgin Brand and develop a
bond once they start using the services.
Advertisement in youth media networks. MTV, WB and Comedy Central and Youth
Magazines (The Complex, Vibe and XXL). The name of the initial products,
“Party Animal” & “Super Model”

Launch Price and Communication to achieve the Target Segment

For every customer the cost per customer to be borne by the customer comprises of
the following
Handset Subsidy Companies are providing handset having price range $150 – 300 with a
subsidy of $100 – 200. Typically end users are charged between 60 - 90 dollars per handset.
Virgin has entered into a contract with handset manufacturer Kyocera where in handsets will
be available in the price range of $ 60 – 100, thus Virgin has effectively brought down the
handset subsidy to around $10 per handset. The distribution agreement with Target and Best
Buy has reduced the distribution cost to $30 per phone against the industry average of $100.

Advertisement The firm has a Advertisement budget of $ 60 million for the first year,
thus the per capita acquisition cost(AC) works aout to be $60 (assuming Advertisement
results in acquitting 1 million customers). Thus per capita
 AC = $10 (handset subsidy) +$30 (distributor) + $ 60 (Advertisement)

AC =$100 ----------- I

Monthly Margin Using the formula given in exhibit 11 and assuming Life Time
Value (LTV) of a subscriber to be 0 (zero).

M /( (1 – r )+i) – AC = LTV , where LTV = 0 ------------II

Monthly churn rate (1-r) has been assumed as 6% based on the data for prepaid customer.
Interest rate (i) = 5%, using the formula

M/((.06+.05) – AC = 0
M = 0.11 AC

From I

M = 0.11 * $100
M = $11

Monthly Margin (M) = Average Revenue / unit / month (ARPU) – Monthly Cost to Serve
(CCPU – Cash Cost Per User)

Average usage in the target segment = 100 – 300 minutes per month.
Assumption: average usage = 200 minutes per month
Presently Prepaid users are paying 35 – 50 cents per unit

As per the industry prices people having gone for contract commitment and having a monthly
usage of 200 minutes per month pay around 14 - 17 cents. The company should charge 15
cents per minute.

ARPU = 200 * 15
ARPU = 3000 cents or $30

Cost, average cost bought from Sprint, from exhibit 9(a), the cost per minute for very large
usage works out to be 5 cents per minute. So cost for 200 minutes at the rate of 5 cents per
minute is

200 * 5 = 1000 cents or $10

From exhibit 10(b) to discount the effect of off peak prices average price per minute gets
reduced by approximately

Therefore loss due to off peak hours = 1.5 * 200

= 300 cent or $3
Monthly Margin (M) = $20 (revenue 30 – cost 10) - $3 (loss)
= $17
For break even, the required monthly margin = $11
Profit = $17 - $11
= $6

HIMANSHU KUMAR SINGH

IIM-A