annalysed case study of virgin mobiles harvard university case

Consumer Behaviour Case Study -Virgin Mobile

P R I C I N G F O R T H E V E R Y F I R S T T I M E

1 June 2015

Virgin Mobiles USA

Prepared by-

Mohammad Tariq Stanikzai

Course-Consumer Behavior

Instructor-Prof. Mark. Runge

2Consumer Behaviour Case Study -Virgin Mobile

Index

Introduction-Virgin Group

Introduction-Virgin Mobile

Virgin Mobile – Ventures

Virgin Mobile USA

Mission

Objective

Case Questions

Pricing strategy

Addressing the Customers’ dissatisfaction

Telecom Market Comparison – Afghanisatan Vs USA1 June 2015



1 June 2015

Type Private limited company

Industry Conglomerate

Founded 1970

Founder Richard Branson

Headquarters London, United Kingdom

Area served Global

Revenue £15 billion (2012)

Employees Approximately 50,000

Year Milestones

1960 A seventeen-year-old Richard Branson launches his first two businesses

1970 Virgin opens Britain’s first residential recording studio

1980 Virgin Games is launched

1990 First national radio station hits the airwaves

2000•Virgin Media becomes the UK's first quadplay company•Virgin Mobile goes Global

Britain's Flag Carrier

Virgin Group


1 June 2015


Virgin Group Products

Banking

Beverages

TravelVideo games

Consumer electronics

Financial Services

Films

Internet

Music

Radio

Books

Cosmetics

Jewellery

Houseware Retail Mobile PhonesCommercial spaceflight


Virgin Mobile

1 June 2015

Ansoff Growth Matrix

Mark

et

ProductForay into new Market with new Product- “Diversification”


1 June 2015

Year Countries Partners

In operation

1999 UK NTL Telewest

2000 Australia Optus network

2002 USA Sprint

2005 Canada Bell Canada

2006 France Carphone Warehouse

2006 South Africa Cell C

2011 India Tata Teleservices

2012 Poland PLAY

Virgin Mobile Launch

Defunct

2001 Singapore Singtel

2010 Qatar Qatar Telecom

Virgin Mobile


Virgin Mobile - Ventures

1 June 2015

Success

Cellular Operation in UK

2.5 Million customers in 3 years

Country’s 1st MNVO (Mobile Network Virtual Operator)

United Kingdom Singapore

Failure

Cellular Operation in Singapore

Joint venture with Singapore Telecom

Fewer than 30,000 customers in 5 years

Strategy

Company leased Network space from Deutsche Telekom

Cause

Saturation of market

Virgin’s hip & trendy positioning


Virgin Mobile USA

1 June2015

Facts: • Mobile market seems to have 50% penetration with 130 million mobile subscribers• Age group 15-29 yrs came out to be less penetrated in terms of Mobile usage• This young demography was projected to have good growth in next 5 years

Issue:• Big players didn’t target this potential customer segment • This segment had been underserved; their specific needs had not been met

USA, Year 2011

Not just a call…


Search for Leadership

Virgin Mobile USA

2 Apr 2014

• US Telecommunications holding company • Providing wireless services • Major global Internet carrier• 3rd largest U.S. wireless network operator

Search for Service provider

50-50 Richard Branson & Daniel

Schulman

Daniel Schulman, CEO, Virgin Mobile USA

“..We would be entering with a brand that had little US name recognition except for Airline.. It’s these kind of opportunities where a team can define itself and if this could be pulled off it would be unbelievable..”

10 Consumer Behaviour Case Study -Virgin Mobile

1 June 2015

Mission

Mission Making a difference in the eyes of the customer in terms of

• Value for Money • Quality • Innovation• Fun• A sense of competitive challenge


Objective

1 June 2015

Objective

•Targeting age group of 15-29 years•The company aims to get 1 million subscribers by year 1•3 million by year 4By focusing on the youth market from the ground up and to serve these customers in a way they have never been served before.


Virgin 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”

1 June 2015


GIVEN VIRGIN MOBILE ’S TARGET MARKET (14 TO 24 -YEAR-OLDS) , HOW SHOULD IT STRUCTURE ITS PRICING? THE CASE LAYS OUT THREE PRICING OPTIONS. WHICH OPTIONS WOULD YOU CHOSE AND WHY? IN DESIGNING YOUR PRICING PLAN, BE AS SPECIFIC AS POSSIBLE WITH RESPECT TO THE VARIOUS ELEMENTS UNDER CONSIDERATIONS (E .G. , CONTRACTS, THE S IZE OF THE SUBSIDES, HIDDEN FEE , AVERAGE PER-MINUTE CHARGES, ETC) .

1 June 2015

Question-1


Pricing strategy

1 June 2015

Overall Goal in choosing pricing structure

Need A Breakthrough

Must reach target market : YOUTH!

Create a positive lifetime value (LTV) for every customer.

- Must be able to make money

Three main options

1. Clone the industry prices.2. Price below competition.3. A whole new plan.

Audience don’t trust industry pricing plan.

Opportunity


1 June 2015

Pricing strategy

Option 1 : Clone the industry prices

1. Simple message Pricing competitively. MTV applications. Superior customer

service.2. Better Off-peak hours.3. Fewer hidden fees.


1 June 2015

Pricing strategy

Minutes

Option 1 : Pricing Structure


1 June 2015

Pricing strategy

Option 1 : Benefits and Shortcomings

ProsAndcons

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


1 June 2015

Pricing strategy

Option 2 : Price below competition

1. Similar structure Pricing slightly below

the competition.2. Maintain “buckets” of

minutes. Price per minute set below

industry average in certain key buckets.

Target young market that uses 100 to 300 minutes.


1 June 2015

Pricing strategy

Option 2 : Pricing Structure

20 1 June 2015Consumer Behaviour Case Study -Virgin Mobile

Pricing strategy

Option 2 : Benefits and Shortcomings

ProsAndcons

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 doesn’t mean big profit May trigger competitive reaction


1 June 2015

Pricing strategy

Option 3 : Radically new plan

1. Shorten or eliminate contracts.

2. Prepaid service.3. Handset subsidies.4. Eliminate all hidden

fees and off peak hours.

5. Concept of LTVAfter evaluating the Pros and Cons of the three plans, we decide to try Option 3 with Optimal Pricing.


Pricing strategy

1 June 2015

Price Elasticity of Demand

Characteristics Demand is elastic Price sensitive A decrease in pricing will

increase in corresponding increase in quantity of demand

P1

P2

Q1 Q2

Price

Quantity

D


1 June 2015

Pricing strategy

Pricing Assumptions

Churn Rate= 6% for Prepaid Rate of Interest (i)= 5% per annum Market price = $ 0.15 for 200 minutes per month A customer uses the service for one year as Expected number of

months a customer will stay with Virgin is 1/ Churn rate = 1/ 0.06 = 16.67 months

Churn rate remains constant for the period a= 1 VirginXtras is not added to revenue


1 June 2015

Pricing strategy

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

1) Contract provides a hedge against churn.2) Estimated churn rises from 2 to 6%.Advantage: 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.


1 June 2015

Pricing 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.

ApproachIncreasing subsidies so that

phones are cheaper than competition.

Getting consumers to feel more invested and loyal.


1 June 2015

Pricing strategy

Hidden Fees Off-peak hours

Goal: Make pricing very simple.“What you see is what you get”1)Rolling inner prices of taxes and fees into final prices.2)Make money.

Target marketYoung people!

Price insensitive. Demand is inelastic. Rarely worry about

charges. Call in office hours.

Make calls whenever necessary and can avoid.

Care about price Price sensitive. Elastic demand

Business person

Student


1 June 2015

Pricing strategy

What is LTV?

ARPU CCPU M AC LTV

Average Revenue per user

Cash cost per user(45% of ARPU)

Monthly Margin(ARPU-CCPU)

Acquisitioncost

LifetimeValue

R: Retention rate= 1- churn ratei= interest rate = 5%

-Sales commission-Advertising per gross add-subsidy cost

Value of customer in terms of how much service or product he will purchase in his lifetime.

Value of keeping customers loyal


1 June 2015

Pricing strategy

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


1 June 2015

Pricing strategy

Lifetime value Analysis

Option 11)r(annual retention rate): 1-(0.02*12) = 0.762)M (yearly margin): 22* $12= $2643)i(interest rate) : 5%4)AC(acquisition cost): $370LTV=[264/(1-0.76+0.05)]-

370 =$540

Option 21)r(annual retention rate): 1-(0.06*12) = 0.282)M (yearly margin): 22* $12= $2643)i(interest rate) : 5%4)AC(acquisition cost): $370LTV=[264/(1-0.28+0.05)]-

370 = -$27.14


1 June 2015

Pricing strategy

Option 3aWith

contract

$29 -- $35 due to hidden cost(21% decrease)1) r(annual retention rate): 1-(0.02*12) = 0.762)M (yearly margin): 22/1.21=$218.163)i(interest rate) : 5%4)AC(acquisition cost): $370

LTV=[218.16/(1-0.76+0.05)]-370 =$382

Option 3bWithoutcontract 1)r(annual retention rate):

1-(0.06*12) = 0.282)M (yearly margin): $218.163)i(interest rate) : 5%4)AC(acquisition cost): $370

LTV=[218.16/(1-0.28+0.05)]-370 = -$86.68


1 June 2015

Pricing strategy

Lifetime value Analysis Results

Option

1 2 3a 3b

LTV +$540 -$27.14 +$382 -$86.68

+valueAcceptabl

e

A different approach1)Lowering customer Acquisition cost

• Sales commission: $30• Advertising per gross add: $60• Handset subsidy: $30Total customer Acquisition cost= $120

2)Embracing additional pricing elements3)Developing competitive positioning through pricing.


1 June 2015

Pricing strategy

Achieving profitability

1. Breakeven Analysis Given the acquisition Virgin’s $120 acquisition cost,

what would the company have to charge on a per-minute basis (P) to equal the industry’s break-even time of 17 months, assuming that Virgin’s 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

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

LTV Analysis: Eliminating contracts


THE CELLULAR INDUSTRY IS NOTORIOUS FOR HIGH CUSTOMER DISSATISFACTION. DESPITE THE EXISTENCE OF SERVICE CONTRACTS, THE BIG CARRIERS CHURN ROUGHLY 24% OF THEIR CUSTOMERS EACH YEAR. CLEARLY, THERE IS VERY LITTLE LOYALTY IN THIS MARKET. WHAT IS THE SOURCE OF ALL OF THIS DISSATISFACTION? HOW HAVE THE VARIOUS PRICING VARIABLES (CONTRACTS, PRICING BUCKETS, HIDDEN FEES, OFF-PEAK HOURS, ETC.) AFFECTED THE CONSUMER EXPERIENCE? WHY HAVEN’T THE BIG CARRIERS RESPONDED MORE AGGRESSIVELY TO CUSTOMER DISSATISFACTION?

1 June 2015

Question-2


1 June 2015


Sources of customer

dissatisfaction

contracts

Peak time differentials

Complex sales process

privacy concerns

Credit checks

Poor customer service

Hidden fees

Bucket pricing


Reasons for dissatisfaction Customer under contract leads to lower churn rate

Hidden charges allows the company to promote at lower per minute pricing levels.

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

Bucket pricing system often lead to confusion with customers and so they are penalized.

Off-Peak/On-Peak differentials add to customer confusion and off-peak period has shrunk over time

1 June 2015



Virgin Mobile – A Different Approach

1. From a customer perspective, an "ideal" plan would probably include a number of elements which would have a potentially negative impact of the company’s financial…

2. … 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

1 June 2015


37 1 June 2015Consumer Behaviour Case Study -Virgin Mobile

No contracts

A Consumer Friendly Plan: Potential Problems

Increased Churn

Consumers want….. But the problem is …..

No Pricing Buckets

No Hidden Fees

Lower Operating Margins

No Peak/Off Peak Hrs

No Credit ChecksMore

Uncollectibles

Simple Sales Process

Sales commission reduction

Great Service Increased Costs



1 June 2015

Lowering Customer Acquisition Costs

1. 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.

2. On advertising costs

• Virgin plans to spend much less than its competitors (approx. $60 million for the year. Given the company’s 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 .

3. 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

4. Virgin total acquisition costs: $120

• Sales commission: $30• Advertising per gross ad: $60• Handset subsidy: $30



Embracing Additional Pricing Elements

1. Pre-paid 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 costs-to-serve (simplified billing, reduced number of service

calls related to pricing disputes)

2. A completely transparent, simple (one-size fits-all) per-minute price – no form of pricing discrimination being practiced by the competition (pricing buckets, on/off-peak policies, hidden fees, etc.)

1 June 2015



Developing a Highly-Differentiated Positioning

1. A highly-differentiated service proposition

• Rescue Rings• Wake-Up Calls• VirginXtras…

2. A highly-differentiated pricing proposition

3. An opportunity to tap into the consumer resentment with a non-cynical, 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)

1 June 2015



A Consumer Friendly Plan: Potential Solutions

1 June 2015

No contracts Increased Churn

Consumers want… But the problem is …..

No Pricing Buckets

No Hidden Fees

Lower Operating Margins

No Peak/Off Peak Hrs

No Credit ChecksMore

Uncollectibles

Simple Sales Process

Consumer Confusion

Great Service Increased Costs

Lower Acquisition

Costs

Simplified Pre-paid Planeliminates

confusion, no uncollectibles, fewer service

calls

Lower Subsidies

A possible solution is …..



WHAT DO YOU THINK OF VIRGIN MOBILE’S VALUE PROPOSITION (THE VIRGINXTRAS, ETC.)? WHAT DO YOU THINK OF ITS CHANNEL AND MERCHANDISING STRATEGY?

1 June 2015

Question-3


Value Proposition

1 June 2015

Basic intent to appeal to the youth, market, generate additional usage, and create loyalty

virginExtra – Integrate entertainment with basic telephony Text Messaging, Online Real-Time Billing, Rescue Ring, Wake-Up Call,

Ring Tones, Fun Clips, The Hit List, Music Messenger, Movies. Packaging – colorful and vibrant, Hassle free sale Availability – At places frequented by the youth Holistic marketing approach takes pricing decision based on various factors –

3Cs and marketing environment. Company – Pricing should conform to the company’s marketing strategy

and its target markets and brand positioning. Customer – Uniform and hassle free pricing which will enhance

Customer’s satisfaction. Competition – A pricing strategy which will provide the company a

distinct competitive advantage


DO YOU AGREE WITH VIRGIN MOBILE’S TARGET MARKET SELECTION? WHAT ARE THE RISKS ASSOCIATED WITH TARGETING THIS SEGMENT? WHY HAVE THE MAJOR CARRIERS BEEN SLOW TO TARGET THIS SEGMENT?

1 June 2015

Question-4


1 June 2015

Target Market Selection

Identified the age segment where the Industry penetration was the lowest, that is, between 15 years to 29 years of age.

Age 15-19 Age 20-29 Age 30-590

10

20

30

40

50

Mobile Phone penetration

Mobile Phone penetration


Target Market Selection

1 June 2015

Identified the income segment with a low disposable income and high aspiration for trendiness.

115

32

32

USA Demography by Income

Upper ClassUpper Middle ClassLower Middle ClassWorking ClassLower Class


HOW DO THE MAJOR CARRIERS MAKE MONEY IN THIS INDUSTRY? IS THERE A FINANCIAL LOGIC UNDERLYING THEIR PRICING APPROACH?

1 June 2015

Question-5


Make Money

1 June 2015

1. Major carriers continue to hold customers "hostage" through contracts and leave them feeling trapped in their plans (capture).

2. Customers, being obliged to sign up for pricing buckets, are penalized, often heavily, for shortfalls and overusages (decommoditization and consumption penalties).

3. Due to hidden costs (taxes, extra charges, service costs, etc.), customers often wind up paying 20-25% more than they expected on a per minute basis (lack of transparency).

4. Off-Peak/On-Peak differentials add to customer confusion and off-peak period has shrunk over time (constrained consumer behaviour patterns).

5. Credit checks eliminate roughly 30% of the pool of applicants due to poor credit rating, after consumers spent time and effort dealing with sales people (increased consumer rage).


HOW CONFIDENT ARE YOU THAT THE PLAN YOU HAVE DESIGNED WILL BE PROFITABLE? PROVIDE EVIDENCE OF THE FINANCIAL VIABILITY OF YOUR PRICING STRATEGY

1 June 2015

Question-6


The Designed Plan

1 June 2015

1. From a customer perspective, an "ideal" plan would probably include a number of elements which would have a potentially negative impact of the company’s financial…

2. … 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



1 June2015

1. On sales commissions

• Because of a different channel and merchandising strategy where "consumers can pick up the phone without a salesperson helping them" (p. 5), Virgin expect its sales commissions to be $30 per phone, as opposed to $100 for the industry average.

2. On advertising costs

• Virgin plans to spend much less than its competitors (approx. $60 million for the year (p. 5). Given the company’s 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 (p. 9).



1 June2015

3. On handset subsidies

• Virgin handsets cost the firm between $60 to $100 compared to an industry average of $150 to $300 (p. 5) 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

4. Virgin total acquisition costs: $120

• Sales commission: $30• Advertising per gross ad: $60• Handset subsidy: $30


PLEASE DESCRIBE HOW THE SITUATION AND FINDINGS IN THE CASE AND/OR YOUR CONCLUSIONS COULD BE USED TO BENEFIT YOUR JOB/EMPLOYER AND AFGHANISTAN AS A WHOLE.

1 June2015

Question-7


1 June 2015

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

Tools used Microsoft Encarta (Encyclopedia for offline references) Microsoft Excel (for data analysis & graphs)

References

http://populationcommission.nic.in/




1 June2015

Thank you!

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