virgin mobiles usa

8/10/2019 Virgin Mobiles Usa

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Virgin Mobile USA - Pricing

NITIN JAIN

140103116


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PRICING TREND BEFORE

VIRGIN IN USAOver 90% subscribers had contractualagreements for 1-2 years with providers

Customers signed up for buckets of minutes

If usage>bucket amount charged very highrates, approx. 40 cents/minIf usage


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ISSUES WITH CURRENT

TELECOM SERVICESLow penetration among customers aged 15-29

Growth rate predicted to be robust in this segmentin the next 5 years

Target group has been underserved by existingcarriers. Specific needs not met

High cost to serve a customer

Average monthly bill - $52

Cost to serve - $30

Carriers wary of acquiring low value customers,with monthly bills below $30


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OBSERVATIONS MADE BY

VIRGINCustomers were unable to predict their usage,chose wrong plans

They think they use more minutes than theyactually do

Target segment actually used less than 300 minsbut thought they used more

The industry was making money from customer

confusionLower bucket plans were generally picked, but inthe end they paid much more due to extra usage

On peak and off peak time was not in a right mix


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OBJECTIVE

Create value and profitability in the cell phoneservice industry

Target age group of 15-29 High growthopportunity

Goal of building a subscriber base of 1 million byyear 1 and 3 million by year 4

By focusing on the youth market from the

ground up, were putting ourselves in a position toserve these customers in a way they have neverbeen served before

- Dan Schulman, CEO, Virgin Mobile USA


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SEGMENTATION

01020304050

Age 15-19 Age 20-29 Age 30-59

Mobile Phone penetration

Mobile Phonepenetration

Identified the age segment where the Industrypenetration was the lowest, that is, between 15 yearsto 29 years of age.


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VIRGINS GOAL ANDOPTIONS

To make sure their prices are competitive

To make sure they could achieve profit

To not trigger off any competitive reactions

3 ways of achieving these goals :Clone the Industry Prices

Price Below the competition

Develop a New Plan


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OPTION 1 : CLONE INDUSTRY PRICES

Use same price as competitors

Key advantages such as MTV applications and services,superior customer service to differentiate it

Offering better off-peak hours and lesser hidden fees

Easy to promote

Customers areused to bucketsand peak hoursLess expenditureon advertisingSimple packaging

Salesperson costsare saved

Target Youth

market is notstressedNo flexibility incalling plans orpriceNo real pricedistinctionCustomers mightnot switch to Virginbecause of thesefeaturesWill not work withLow incomesegment

P R O S

C ON S


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OPTION 2 : PRICE BELOW COMPETITION

Maintain buckets and volume discounts

Set per minute price below the Industry

Target young market, which uses 100-300 mins

Offering best off-peak hours and

lesser hidden feesConveys a plain,cheaper andsimple imageExpansion ofmarket size andshareGreater sales andprofit

Earnings percustomer will be less

Growth in sales isnot equal to profitsMargins will be lessRisk of beingregarded as a lowquality service,brand dilutionMay triggercompetitivereactions

P R O S

C ON S


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OPTION 3 : DEVELOP A NEW PLANShorten or Eliminate Contracts

Contracts guarantee annuity stream

Allow 18 years or below to purchase the product

Churn rate 2%

Prepaid Service92% subscribers had postpaid

Rate per min in prepaid was high and was used on occasionalbasisHigh churn rates

New mechanism and infrastructure required

Handset subsidiesEliminate hidden fees and off-peak hours

What you see is what you getRolling hidden costs into pricing, but keeping it competitive

Off peak hours must benefit the target group

Minute usage is different from business class


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PROS AND CONS OF NEWPLAN

Eliminating contractsgives a new edge ofcustomersLowering prepaidcosts will result in

greater market shareWhat you see is whatyou getThis will gain the trustof customers andincrease marketshare

Prepaid canskyrocket churn rateTG may not be ableto purchase theproduct if contracts

are eliminatedAccomodatinghidden costs inpricing was a difficulttaskOff peak hours had to

be adjustedConcerns over costrecovery of handset

P R O S

C ON S


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EVALUATION OF OPTION 3Commission for distributor = $30Advertising costs = $ 60 million

Customer base = 1 mill ( expected )

Adv cost/customer = 60/1=$60

Handset cost = $60 to $100 = $100Assuming a subsidy of 10%

Subsidy = 0.1*100=$10

Total Acquisition Cost ( AC ) = $ ( 30+60+10 ) = $100

Suppose Virgin absorbs hidden costs, which is 21 % (increase from $ 29 to $ 35 )

Monthly margin = [ARPU ( $52 ) CCPU ( $30 )]/1.21 = $18.18

Break even time = $370/$18.18 = 20 months


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Calculation of LTV

LTV with contract = 18.18*12/1-0.76+0.05 100 = $652

LTV without contract = $ 183This strategy can be used for market penetration

Pricing

Avg usage per customer per month = (100+300)/2 =200 mins

ARPU = 200 x p where p = price/min

CCPU = 45% of ARPU = 90xp

Margin = ARPU-CCPU = 110xpLTV ( without contract ) = (110xpx12/1-0.28+0.05 ) 100 >0

Hence, p>$0.06


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RECOMMENDATIONChoose price/min > $0.06 or 6 cents, depending on therequired profit margin

Keeping in mind that the average industry price for this usagerange is 10-25 cents

Differentiating elements :

No hidden costs

No contracts

No off peak hours

Flexibility of using prepaid

Benefits for Virgin :Positive LTV

Low handset subsidy

Economical for company and customer

virgin mobiles usa

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