Download - Virgin Mobile Pricing Model
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Virgin Mobile USA:
Pricing for the Very First Time
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2
Introduction
Analysis
Conclusion
Company Background
Case Background
Issue of Concern
All Options
Theory Application
Recommendations
Market Research
Virgin Response
Calculation
Inviting Questions
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Introduction Analysis Conclusion
Company
Background
Case
Background
Issue of
Concern
• Virgin, a leading branded venture capital organization,
is one of the world's most recognized and respected
brands.
• Conceived in 1970 by Sir Richard Branson, the Virgin
Group has gone on to grow very successful business
in sectors ranging from mobile telephony, to
transportation, travel, financial services, leisure,
music, holidays, publishing and retailing.
• Virgin has created more than 200 branded companies
worldwide, employing approximately 50,000 people,
in 29 countries.
[Source: company website -
Available from: http://www.virgin.com/AboutVirgin/WhatWeAreAbout/WhatWeAreAbout.aspx] 3
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Introduction Analysis Conclusion
Company
Background
Case
Background
Issue of
Concern
4
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Introduction Analysis Conclusion
Sir Richard Charles Nicholas Branson (born 18 July
1950), is an English entrepreneur, best known for his Virgin
brand, a banner that encompasses a variety of business
organizations. The name Virgin was chosen because a
female friend involved in setting down the initial record shop
commented that there weren't any virgins left amongst them.
Today, his net worth is estimated at about £4 billion (US$7.8
billion) according to The Sunday Times Rich List 2006, or
US$3.8 billion according to Forbes magazine.
E
[Source: Mediaman Australia
Available from: http://www.mediaman.com.au/profiles/branson3.html]
Company
Background
Case
Background
Issue of
Concern
5
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Introduction Analysis Conclusion
[Source: company website -
Available from: http://www.virgin.com/AboutVirgin/WhatWeAreAbout/WhatWeAreAbout.aspx]
A student magazine, a small mail order record company and a
recording shop were founded/ opened under the Virgin name.
Virgin Atlantic Airways and Virgin Cargo launched.
Virgin Broadcasting, Virgin Hotels, Virgin Megastores, etc.
Virgin Rail, Virgin Games, Virgin Cola, Virgin Travel, etc.
1970s
1984
1988
1990s
2000s Virgin Mobile, Virgin Bikes, Virgin Blue, Virgin Digital, etc.
Vir
gin
Gro
up
Company
Background
Case
Background
Issue of
Concern
6
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Introduction Analysis Conclusion
…
Company
Background
Case
Background
Issue of
Concern
7
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Introduction Analysis Conclusion
Company
Background
Case
Background
Issue of
Concern
8
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Introduction Analysis Conclusion
[Source: Adapted from Virgin Management Ltd.
Available from: https://www.blackwellpublishing.com/grant/docs/15Virgin.pdf]
Internet
Virgin Group
Air Travel
Rail Hotel & Leisure Drinks
Mobile Financial Retail Music
Virgin Atlantic: 51%
Virgin Express: 59.8%
Virgin Blue: 29.1%
Virgin Mobile
(UK): 100%
Virgin Mobile
(Aus):75%
Virgin Mobile
(USA): 50%
Virgin Money: 100% Entertainment: 98.5%
Victory: 89%V2: 52.5%
Virgin Cars: 25%
Virgin Wines: 45%
Virgin Net: 51%
Virgin Student: 85.5%
Virgin Retail Group: 51%
Thetrainline.com: 86%
Virgin Hotel Group: 91%
Virgin Active: 36%
Virgin Active S.A.: 27%
Virgin Drinks: 100%
Internet
Virgin Group
Air Travel
Rail Hotel & Leisure Drinks
Mobile Financial Retail Music
Virgin Atlantic: 51%
Virgin Express: 59.8%
Virgin Blue: 29.1%
Virgin Mobile
(UK): 100%
Virgin Mobile
(Aus):75%
Virgin Mobile
(USA): 50%
Virgin Money: 100% Entertainment: 98.5%
Victory: 89%V2: 52.5%
Virgin Cars: 25%
Virgin Wines: 45%
Virgin Net: 51%
Virgin Student: 85.5%
Virgin Retail Group: 51%
Thetrainline.com: 86%
Virgin Hotel Group: 91%
Virgin Active: 36%
Virgin Active S.A.: 27%
Virgin Drinks: 100%
Note: % indicates percent ownership
Company
Background
Case
Background
Issue of
Concern
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Introduction Analysis Conclusion
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
[Source: http://www.virgin.com]
Company
Background
Case
Background
Issue of
Concern
10
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• 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?
Introduction Analysis Conclusion
Company
Background
Case
Background
Issue of
Concern
11
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• Rapidly growing industry.
• Typical market where the customer has been ripped off or under-served, where there is confusion and/or where the competition is complacent.
• Market segment ( 15-29 ages group) being ignored.
• Big players have not capitalized on this segment
• Competitors slow to react to ever-changing customer mindset
Introduction Analysis Conclusion
Company
Background
Case
Background
Issue of
Concern
12
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• Dan Schulman was appointed CEO.
• The company entered into a 50-50 joint venture with
Sprint in which Virgin Mobile USA‟s services would be
hosted on Sprint‟s PCS network.
• Under the agreement, Virgin Mobile would purchase
minutes from Sprint on an as-used basis.
• The goal of Virgin Mobile USA is: to have 1 million
total subscribers by the end of 2002 and 3 million by
year 2006.
Introduction Analysis Conclusion
Company
Background
Case
Background
Issue of
Concern
13
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• Access to MTV-branded accessories and phones
• Text messaging
• Rescue Ring
• Online Real-time Billing
• Wake up Call
• Ring tones
• Fun Clips
• The Hit List
• Music Messenger
• Movies
Introduction Analysis Conclusion
The first to offer m-commerce services to all customers
via VirginXtras, irrespective of their handsets.
Company
Background
Case
Background
Issue of
Concern
14
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Introduction Analysis Conclusion
Company
Background
Case
Background
Issue of
Concern
15
0
20
40
60
80
100
120
140
160
180
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Year
Nu
mb
er
of
Su
bs
cri
be
rs (
in m
illio
ns
)
0%
5%
10%
15%
20%
25%
30%
35%
40%
Ma
rke
t G
row
th R
ate
Number of Subscribers Growth Rate
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Introduction Analysis Conclusion
Carrier
05
101520253035
AT&
T
Cin
ular
Ver
izon
Voi
ceStre
amA
lltel
Sprint
U.S
.Cel
lula
r
Leap
Oth
er C
arrie
rs
Subscribers
Mil
lio
ns
15%
20%
21%5%
5%
11%
3%1%
19%AT&T
Cinular
Verizon
VoiceStream
Alltel
Sprint
U.S.Cellular
Leap
Other Carriers[Source: The Case]
Company
Background
Case
Background
Issue of
Concern
16
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“ If we can figure out a way to create
value so that we can successfully enter a
very competitive and saturated market,
and also create profitability with this target
segment, then we will have truly
accomplished something big.”
17
Company
Background
Case
Background
Issue of
Concern
Introduction Analysis Conclusion
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Introduction Analysis Conclusion
0 ₵
10 ₵
20 ₵
30 ₵
40 ₵
50 ₵
60 ₵
70 ₵
100 200 300 400 500 600 700 800
Contract Commitment - Minutes
[Source: Adapted from company data, Morgan Stanley Research]
Market
Research
All
Options
Theory
Application
Calculation
18
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Introduction Analysis Conclusion
Contract Commitment - Minutes
[Source: Adapted from company data, Morgan Stanley Research]
0 ₵
10 ₵
20 ₵
30 ₵
40 ₵
50 ₵
60 ₵
70 ₵
100 300 500 700
Pri
ce P
er M
inu
te
Market
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Theory
Application
Calculation
19
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Introduction Analysis Conclusion
• Must reach our target
market: Youth!
• Create a positive Lifetime
Value (LTV) for every
customer
– We must be able to
make money!
Need to find a Breakthrough!
Market
Research
All
Options
Theory
Application
Calculation
20
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Introduction Analysis Conclusion
1. Clone the Industry Prices
Options 2. Price Below Competition
3. A Whole New plan
Options 1, 2 ?
Or 3?
Market
Research
All
Options
Theory
Application
Calculation
21
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• Simple message:
- Pricing competitively
- MTV applications
- Superior customer service
• Better off peak hours
• Fewer hidden fees
Introduction Analysis Conclusion
Market
Research
All
Options
Theory
Application
Calculation
22
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Introduction Analysis Conclusion
[Source: Adapted from company data, Morgan Stanley Research]
0 ₵
10 ₵
20 ₵
30 ₵
40 ₵
50 ₵
60 ₵
70 ₵
Minutes
100 200 300 400 500 600 700 800
Industry and VirginMarket
Research
All
Options
Theory
Application
Calculation
23
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Introduction Analysis Conclusion
Pros and Cons
C Easy to promote.
C Consumers are used to „buckets‟ and
peak/off-peak distinctions.
C Savings on advertising budget costs.
C Simple packaging could save costs on high
commissioned salespeople.
DThe target youth market is not stressed.
D Hard for a new entrant to the market.
D No flexibility in calling habits; always paying
the same high price.
DWith no real price distinction, consumers are
not willing to switch over just for the Virgin
Extras features.
Market
Research
All
Options
Theory
Application
Calculation
24
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Introduction Analysis Conclusion
• 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
Market
Research
All
Options
Theory
Application
Calculation
25
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Introduction Analysis Conclusion
[Source: Adapted from company data, Morgan Stanley Research]
Industry
0 ₵
10 ₵
20 ₵
30 ₵
40 ₵
50 ₵
60 ₵
70 ₵
100 200 300 400 500 600 700 800
Market
Research
All
Options
Theory
Application
Calculation
26
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Introduction Analysis Conclusion
Pros and Cons
C Maintain the buckets and volume discounts
with price per minute set below industry
average.
C Offer best off-peak hours and few hidden fees
so consumers will know Virgin Mobile is
cheaper, plain and simple.
C Expand the size of the market and result in
greater sales and profits.
D Earnings from each consumer will be less.
D Sales growth does not necessarily mean big
profits.
D Risk of being regarded as low-quality service,
thus an unfavorable image.
D May trigger off competitive reactions.
Market
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All
Options
Theory
Application
Calculation
27
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Introduction Analysis Conclusion
Radically New Plan!
• Shorten or eliminate
Contracts
• Prepaid service
• Handset subsidies
• Eliminate all hidden
fees and off-peak hours
• Concept of LTV
Market
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All
Options
Theory
Application
Calculation
28
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• Does it make sense to shorten
subscription terms or eliminate them
altogether?
– Contract provide a hedge against churn
– Estimated churn rises from 2% to 6%
• Allows 18yrs and younger to purchase
the product
Market
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Options
Theory
Application
Calculation
Introduction Analysis Conclusion
29
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Currently 92% of subscribers have post-paid plans
Concerns:• Prepaid arrangements now have prohibitive pricing
- 35 – 50 cents per minute up to 75 cents
- Phone use that is very infrequent
• Higher churn rate
• Recoup Acquisition Costs (AC)
• Morgan Stanley research suggests AC must be at or
below $100 for prepaid to be viable
• Need a method to add minutes (such as Website)
Market
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Options
Theory
Application
Calculation
Introduction Analysis Conclusion
30
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• Currently carriers purchase
handsets from major
manufacturers at a cost of
$150-$300.
• Carriers then subsidize the end
user $100-$200 (becomes part
of AC).
• How do we minimize the AC?
• Does this matter to our target
market?
Market
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All
Options
Theory
Application
Calculation
Introduction Analysis Conclusion
31
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Hidden Fees
• Goal: Make the pricing very simple– “What you see is what you get!”
• Rolling all these normally hidden costs that
include taxes and fees into the final price
Off-Peak Hours
• Consider the target market: Young People!
- Minute usage is very different
Market
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Options
Theory
Application
Calculation
Introduction Analysis Conclusion
32
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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)
Market
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Options
Theory
Application
Calculation
Introduction Analysis Conclusion
33
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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)
Market
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Options
Theory
Application
Calculation
Introduction Analysis Conclusion
34
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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!
Market
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Options
Theory
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Calculation
Introduction Analysis Conclusion
35
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Option 1 : Clone industry
Market
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Introduction Analysis Conclusion
36
Xtras
Off-peak hour
Hidden Fee
Option 2 : Price below
Industry pricing
Industry pricing Xtras
Off-peak (1) hour
Hidden Fee
Priced (5c) below
-Same price of handset offered
-Same churn rate of 2%
-Same price of handset offered
-Same churn rate of 2%
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Market
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Introduction Analysis Conclusion
37
Option 3 : New pricing structure: prepaid
Average monthly revenue
from minute usage= Avg. min + avg. minute charge
Xtras
Off-peak (1) hour
Hidden Fee
-Same price of handset offered
-Churn rate of 6%
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ACir
MLTV -
+-=
1
ARPU CCPU M AC LTV
Average
Revenue
per user
Cash Cost per user= 45% of ARPU
Monthly
Margin= ARPU - CCPU
Acquisition CostLifetime
Value
Introduction Analysis Conclusion
Market
Research
All
Options
Theory
Application
Calculation r: retention rate = 1 – churn rate
i : interest rate = 5%-Sale commission
-Advertising per
gross add
-Subsidy cost
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- Year 1 is the immediate target
- Customer with us 1 year for prepaid
- Target average minute per month is 200
- Target average charge per minute is 15 cent
Market
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Introduction Analysis Conclusion
39
- Level of subscribers
Option 1: same industry pricing -> less attractive
-> 500,000 out of 1 million subscribers
Option 2: lower cost -> attractive
-> 750,000 out of 1 million
Option 3: new pricing structure and features -> most attractive
-> 1 million out of 1 million
Assumptions
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Item Value
Hidden Fee $ (6.00)
Off-peak (1) hour $ (3.00)
Priced below (5c) $ (10.00)
Option 1 Xtras $ 12.02
Option 2 Xtras $ 18.03
Option 3 Xtras $ 24.04
Rev. from minute usage $ 30.00
Market
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Introduction Analysis Conclusion
40
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Market
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41
Xtras Value
# of subscriber x 12 months
% of the
market
share
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ARPU CCPU M AC LTV
Industry
Avg.$52.00 $30.00 $22.00 $270.00 $44.29
Option 1 $55.02 $24.76 $30.26 $160.00 $272.29
Option 2$51.03 $22.96 $28.07 $120.00 $280.94
Option 3 $45.04 $20.27 $24.77 $100.00 $253.89
Market
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Calculation
ACir
MLTV -
+-=
1
Introduction Analysis Conclusion
42
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Option 3 - Break Even Point with AC and LTV
Let LTV = 0 Market
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Introduction Analysis Conclusion
43
-> 0 = M/(1 - r - i) – AC
-> M = 0.11 AC
-> AC = 24.77/0.11
If LTV = 0 , AC = $225.
That is the max we can go with AC.
Now with AC at $100,
-For Ads budget, we can spend more
-For the handset, we can lower price or increase quality
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Option 3 - Break Even Per customer
Revenue = Cost
Xtras + minute usage = CCPU + AC Cost
Total Net 11.37 0 ~ Break even
With Xtras 0.15 0.09
Without Xtras 0.21
Market
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Theory
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Introduction Analysis Conclusion
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Introduction Analysis Conclusion
Market
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Virgin
Response
Recommen-
dations
Questions
Pricing Strategy
Pricing Objective
Sales Maximization
Demand Estimate
Current market penetration of target market is only 25%1
Create Demand amongst remaining 75%
Brand Switch by current users
Capitalize on Highly Elastic Demand of Target Market
Cost Estimates
Monthly Cost to Serve per Customer
Networking Cost
Customer Service Cost
Overhead Cost
Customer Acquisition Cost
Subsidy on Cell Phone set
Marketing Communication Cost
Sales commission
Source: http://www.wirelessweek.com/virgin-mobile-details-launch-plans.aspx
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Virgin
Response
Recommen-
dations
Questions
Pricing Strategy (contd…)
Competitors‟ Prices
ARPU of $52 with 417 minute of use
60 – 20 c per minute for less than 100 minutes
20 – 12 c per minute for 100 to 300 minutes (Virgin Target Market)
35 – 50 c per minute for Pre-paid Costumers (Virgin Target
Market)
Pricing Method
Penetration Pricing
Costs per Unit is inversely related to Number of Subscribers
Reduce CCPU by increase in Number of Subscribers
Increase in Margin will follow
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Virgin
Response
Recommen-
dations
Questions
Introduction Analysis Conclusion
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Virgin
Response
Recommen-
dations
Questions
Introduction Analysis Conclusion
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Final Price !!!!
15c per minute with Revenue of $30 per unit
(average use of 200 mins)
Target Virgin Xtras Revenue of 15.04
Total Estimated ARPU of $45.04