Virgin Mobile USA:

Pricing for the Very First Time

Pankaj Murudkar (063)

Vinay Nadar (064)
Sachin Bajaj (066)

SYMBIOSIS INSTITUTE OF OPERATIONS MANAGEMENT

Virgin Mobile Idea
 Virgin Mobile USA – Background

• Executive team was formed in 2001

Dan Schulman was CEO

•Launch date was July 2002

Goal was to have 1 million total subscribers by the end of the first
year and 3 million by fourth year

•A natural extension of Britain based Virgin brand

Challenge existing status-quo
Offer better service and opportunities for customers where
competition is complacent with pro-active and quick measures
Focus on understanding and meeting customer needs
 Virgin Product Portfolio

…
 Entry Strategy

 Mobile Virtual Network Operator

o No need of Physical Infrastructure
o Cost Reduction Technique

 Hip & Trendy

 Is this an opportunity for restructuring a market and creating competitive advantage?

 What are the competitors doing?

 Is the customer confused or badly served?

 Is this an opportunity for building the Virgin brand? Can we add value?

 Will it interact with our other businesses?

 Is there an appropriate trade-off between risk and reward?

Identifying US Market

 Overcrowded market with 6 national

carriers and a large number of regional and
affiliate providers

Matured market with 50% industry

penetration

 Penetration among demographic aged

between 15 to 29 was significantly lower

Growth rate projected to be robust for the

next 5 years

Big players ignored this market

due to poor credit rating of target customers
Average cost of acquisition was expensive
compared against the benefits
Low-value customers in terms of long term
financial growth
 Virgin Xtras – Focus On Youth

Revenue for Mobile Entertainment

Service was expected to increase
VIRGIN XTRAS
steadily in next few years
• Access to MTV-branded accessories and phones
• Text messaging
• Rescue Ring
• Online Real-time Billing
• Wake up Call
• Ring tones
• Fun
 Exclusive Contracts
Clipsof branding with Nickelodeon, VHN-1 & MTV.
• The Hit List
 Innovative Handsets design of Kyocera Make at cheap rates.
• Music Messenger
• Movies
 Advertisements on only youth channels.

Availability of Handsets at Target Sam Goody Music Stores, Best Buy.

 Overall Goal in Choosing Pricing Structure
 Must reach our target market: Youth!

 Create a positive Lifetime Value (LTV) for every customer

1. Clone the Industry Prices

Options 2. Price Below Competition

3. A Whole New plan

 Option 1 Clone the Industry prices

 Competitive pricing with greater emphasis on a

key advantages like differentiated applications
[MTV] & superior customer service.

 Differentiated Product offering – better off-peak

hours & fewer hidden fees

 Advantages to Virgin being its lower commission

offering to retailers and “explains it all” product
packaging

 Greater margin on the product offering with lower

advertising costs.
 Option 1: Clone the Industry prices
Pros & Cons

 Easy to promote.
 Consumers are used to ‘buckets’ and
peak/off-peak distinctions.
 Savings on advertising budget costs.
 Simple packaging could save costs on high
commissioned salespeople.

Pros and Cons

The target youth market is not stressed.
 Hard for a new entrant to the market.
 No flexibility in calling habits; always paying
the same high price.
 With no real price distinction, consumers are
not willing to switch over just for the Virgin
Extras features.
 Option 2: Price below the competition

 Similar pricing structure as the rest of

industry but lower actual prices than
competitors

 Maintain buckets & volume discounts

with lower price per minute in certain key
buckets

 Position as a cost effective product

offering, better off-peak hours & fewer
hidden charges

 Problem being too low on margins

 Option 2: Price below the competition
Pros & Cons

 Maintain the buckets and volume discounts

with price per minute set below industry
average.
 Offer best off-peak hours and few hidden fees
so consumers will know Virgin Mobile is
cheaper, plain and simple.
 Expand the size of the market and result in
greater sales and profits.
Pros and Cons

 Earnings from each consumer will be less.

 Sales growth does not necessarily mean big
profits.
 Risk of being regarded as low-quality service,
thus an unfavorable image.
 May trigger off competitive reactions.
 Option 3 : A Whole New Plan

•An entirely new pricing structure which could be significantly different from competitors
 Going in for a shortened subscription contracts or eliminating the contracts
 The cons being the churn rate shooting to 6% each month compared to standard 2%
 The pros being an attractive deal from customer acquisition viewpoint.
 Offering pre-paid plans
 The cons being usually high costs because of prohibitive pricing, the stigma
associated with pre-paid, high churn out rates & non loyal customers.
 Another constraint being some kind of mechanism to add on minutes like a web or
physical phone cards
 The pros being an attractive deal to consumers with no credit card or with poor credit
checks & if acquisition costs are below $100 per new gross add
 Lower subsidy costs to Virgin on handsets because of arrangement with Kyocera
 Eliminating hidden fees and pointing to the total cost of the product offering
 A new definition of off-peak hours as the target consumer falls into a different segment.
 Price & Demand – Business Customer

The Business Customer

• TWO DISTINCTIONS:
– Make calls during office hours
– Rarely worry about the cost of
calls (Finance Dept can deal
with it)
• PRICE INSENSITIVE!
• Demand is INELASTIC
• A percentage decrease in price
will have a smaller percentage
increase in Quantity Demanded
(Calls made)
 Price & Demand – student Customer

The student customer

• TWO DISTINCTIONS
– You make calls whenever
necessary and can seek to avoid
calls that come with a higher
pricetag
– Students CARE about the price
of calls
• PRICE SENSITIVE
• Demand is ELASTIC
• A percentage decrease in price will
result in a larger percentage increase
in quantity demanded (calls made)
 Demand - based Pricing

Mobile phone company revenue:

• The revenue gain from
increased quantity must be
greater than the revenue loss
from dropping the price

• Since our target market is

Youth, whose demand is
relatively elastic, downward
adjustment in price is relevant!

A>B for Revenue Gain!

 Option 3 : A Whole New Plan

•An entirely new pricing structure which could be significantly different from competitors
 Going in for a shortened subscription contracts or eliminating the contracts
 The cons being the churn rate shooting to 6% each month compared to standard 2%
 The pros being an attractive deal from customer acquisition viewpoint.
 Offering pre-paid plans
 The cons being usually high costs because of prohibitive pricing, the stigma
associated with pre-paid, high churn out rates & non loyal customers.
 Another constraint being some kind of mechanism to add on minutes like a web or
physical phone cards
 The pros being an attractive deal to consumers with no credit card or with poor credit
checks & if acquisition costs are below $100 per new gross add
 Lower subsidy costs to Virgin on handsets because of arrangement with Kyocera
 Eliminating hidden fees and pointing to the total cost of the product offering
 A new definition of off-peak hours as the target consumer falls into a different segment.
 Calculating Lifetime Value (LTV)

M
LTV   AC
1 r  i

ARPU CCPU M AC LTV

Average Monthly
Cash Cost per user Margin Acquisition Cost Lifetime
Revenue
= 45% of ARPU = ARPU - CCPU Value
per user

r: retention rate = 1 – churn rate -Sale commission

i : interest rate = 5% -Advertising per
gross add
-Subsidy cost
Thank you