Case Analysis for Virgin Mobile Essay

VIRGIN MOBILE USA – ‘FIRST PRICE’ STRATEGY (An analysis of the Pricing Decision alternatives that Virgin has to undertake to create an alternate customer segment and monetize their buying power)VIRGIN XTRAS – OVERVIEWThe Virgin Mobile USA service involved content, features and entertainment, called â€Å"Virgin Xtras†.Collaboration with MTV networks as it was the most recognized youth brands in the country and unparalleled reach forthe under-30 market segment: Exclusive, multiyear content and marketing agreement. MTV network to deliver music, games and other MTV-, VH1-, and Nickelodeon based content to Virgin Mobile subscribers. Subscribers would have access to MTV- branded accessories and phones, graphics, ring tones, text alerts and voice mails. Promotional airtime on MTV’s channels and website. Virgin mobile subscribers to vote for their favorite videos on a few MTV shows.Other Virgin Mobile services that aimed to appeal to the youth market , generate additional usage and create loyaltywere: Text Messaging Online Real- Time Billing Rescue Ring Wake- Up Call Ring Tones Fun Clips The Hit List Music Messenger MoviesTraditional Channel Virgin’s ChannelServices sold at own proprietary retail outlets, kiosks in Services sold where youth shop especially consumermalls, high-end electronic stores, speciality stores etc. electronic goods in stores like Target, Sam Goody music stores, Best Buy. High-touch sales people who were paid high sales Products packaged in consumer electronics packaging, placedcommission to ensure hands-on service. on a bright red clamshell, which gave it visibility and no salesperson was required.Cost per handset from Nokia, Motorola, Samsung etc. – Cost per handset from Kyocera- $60-$100. Lesser subsidy$150-$300. Entailed substantial subsidy from the entailed by the company.handset makers, a component of acquisition cost.Distributors’ industry avg. Commission- $100/phone Distributors commission- $30/phone.The availability of the phones were not as segment Phones available at 3000 retail outlets in USA, and availabilityspecific as Virgin targeted included at retailers such as Sam Goody, Circuit City, Media Play, Virgin MegastoreBilling is monthly Billing is to be real-time and with online avenues PRICING DECISIONS:-CUSTOMER PERSPECTIVESThe company tried to distinguish itself from the competitors standpoint by playing on the fact that t he targeted segment‘did not trust  the prevalent pricing points’ in the industry that hinged on the credit worthiness . The main practicesprevalent were:- 90% of all subscribers had contractual agreements for a period of 1 year-2 years Required rigorous credit check Plans established â€Å"buckets† of minutes, on extra usage users penalized heavily. Charged less for off-peak than on-peak minutes, but the off-peak period had shrunk. An additional fee was charged to add to the monthly bill, which included taxes, service charges. Per minute Charge (Y-axis, in cents) for the bucket of minutes contracted (X-axis) 180 160 140 120 100 80 Per minute Charge for the bucket of minutes andcontracted (X-axis) 60 40 20 0 0 20 40 60 80 100 120 140The bold line represents the cost per minute charged for a valid contract (which is shown by the arrows). The higher costin the vent of under-utilization of the contract is due to the high fixed cost (like the subsidization of hand sets,, contractcharges etc.)The higher limit in the vent of exceeding the contract is due to penalizing.PRICING DECISIONS – COMPAN Y PERSPECTIVESVirgin Mobile USA had to fix all these problems prevalent in the industry while taking a pricing decision. The mainconstraints it faced was that the prices should be competitive and profitable without triggering of competitive reactions.There were 3 options available:OPTION 1- ‘Clone the Industry Prices’ The message would go to customers that they were priced competitively with few advantages like differentiated applications [MTV] and superior customer service. Better off-peak hours and fewer hidden fees would be the selling point but the total pricing structure would still depend on off-peak and peak categorization as well as contacted minutes. Easy to promote as this strategy of â€Å"buckets† was already prevalent in industry. But risks alienating the target base as they already did not make the required cut for the credit worthiness. OPTION 2- ‘Price below the Competition’ Similar pricing structure as rest of industry, with actual prices slightly below those of competition only within the highest frequency range. Better off-peak hours and fewer hidden fees could also be given.OPTION 3- ‘A Whole New Plan’ Entirely different pricing structure. Eliminate contracts and going for prepaid pricing structure. However the nature of the American cellular market with operator dedicated handsets ad prohibitive pricing followed by the competitors due to high churn rates Cost of Acquisition Subsidization of Advertisement Sales handsets . Break even analysis and Life  time Value for cellular subscribers:- As already, stated in the current scenario, most mobile companies amass working capital by going for long term contracts. Compared to a US$ 100 acquisition cost for a prepaid connection, the equivalent historical cost of acquisition for a post paid consumer is US $ 370. Assuming that we stay with the post paid plan due to industry imperatives, we find that the average calling rate is around 10-30 cents per minute for a average bucket usage of 100-300 minutes (this is the target usage range that Virgin is aiming to target in the second option) Hence, average cost incurred by the company for a customer = US$ (0.1 x 300) =US$ 60 (The most promising aspect in the relevant range) Acquisition cost = handset subsidy given to hand set manufacturers (US$ 60 -100) + advertisement costs ( US$60 million budget spread over an estimated 1 million subscribers = US$60)+ sales overheads (US$100-150) = US$ 290-370 per user per month. Now, Breakeven point in terms of month is calculated as:- Total fixed cost = US$ 370 (acquisition cost for a post paid customer) = 28.46 months Revenue – Variable cost US$ 57 (avg. revenue per month from a user- ARPU) – US$30Hence it takes around 29 months for the customer to prove profitable for the company even in the most promisingscenario of the relevant range.But we will also have to induct the churn rate of around 2% per month into this optimistic consideration and try tocalculate the LTV. If the LTV is positive then the company should go ahead. The option that yields the largest LTV shouldbe chosen.LTV = ∑ (Ma).r(a-1) – Acquisition cost (1+i)a View slide Here, the margin remains relatively fixed across the periods which can be assumed as a modest 12%, r is the retentionrate which comes to around 72% (churn rate of 2% p.m. compounded monthly over a year = 1.02Ãâ€"1.02x†¦..till 12months ), i becoming interest rate assumed to be around 5%Margin in a month = (Average monthly phone bill ∞,=US$52)-(Cash cost per user =US$30) = US$22Now taking this value of n we have :- LTV = M/(1-r+i)Now calculating the LTV for every option available will give us a marker of how the pricing strategy should be used forusing various options considering the fact that the interest rate remains constant at 5%:-For option 1:-LTV = US$ {(22*12)/(1-0.72+0.05) } – 360= US$ 421For option 2:- Here the retention rate can be assumed to have been bettered by differential pricing in the 100-300minutes usage category , so we can assume a modest increase to 80%. But this is more or less offset by the increase incash cost to user which  can be assumes to rise by 5% if the differential pricing is 5% below the average industrystandard. So the margin can be assumed to drop to US$19. Here, LTV = US$ {(19*12)/(1-0.8+0.05) } – 360= US$ 489Hence we can see that even with modest assumptions, the LTV is maximized for Option 2, henca the company shouldventure into differential pricing if at all it wants to deviate. But considering the high acquisition turnover time andrecovery time of almost 29 months, it is a risky strategy because of very high mobility in the targeted segment.Hence Virgin should focus on non price factors such as :- If the contracts are done away with, this will ensure more loyalty of the target segment as the majority of them are not credit worthy. The positioning of Virgin Mobile USA and its collaborations with partners like MTV will attract more customers which are loyal. The cost of acquisition of a customer comprises of advertisement, sales cost and subsidy given. Since these costs are much lower than the other competitors, they can price themselves lower than competitors. They can also be transparent in their cost structure, eliminating hidden costs .Hence, initially it should give non-price advantage to its customers and over a period of time can reduce costs to sustaingrowth and drive off competition virgin mobile Presentation Transcript We Answer To A Higher Calling Prepared By – Team 4 Pooja Gupta (P122033) Rohit Singh (P122038) Saurabh Singh (P122041) Varun Anand (P122049 Virgin Groupâ€Å"Virgin believes in making a difference. We stand for value for money, quality, innovation, fun and a sense of competitive challenge. We strive to achieve this by empowering our employees to continually deliver an unbeatable customer experience.† Virgin Mobile USA†¢ Commenced operations in June, 2002†¢ Led by founding CEO Dan Schulman†¢ Entered USA as a 50-50 joint venture between Virgin Group and Sprint Corporation. Virgin Mobile USA’s service would be hosted on Sprint’s PCS network†¢ Sprint was in process of updating its network and increasing its capacity. View slide Virgin Mobile USA†¢ Schulamn- â€Å"The nice thing about this model is that we don’t have to worry about huge fixed costs or the physical infrastructure. We can focus on what we do best-understanding and meeting customer needs.†Ã¢â‚¬ ¢ â€Å"We Answer To A Higher Calling†Ã¢â‚¬ ¢ Providing extra-ordinary services and experiences at a low price as $35 View slide Objective†¢ Create value and profitability in cell  phone service industry†¢ Target market ages 15-29, opportunity for growth with this market segment†¢ 1 million subscribers by year 1, 3 million by year 4†¢ â€Å"By focusing on the youth market from the ground up, we’re putting ourselves in a position to serve these customers in a way they have never been served before† -Dan Schulman, CEO, Virgin Mobile USA 4P’s of Virgin Mobile USAWhy? Problem with Current Telecom Services†¢ Low penetration among consumers aged 15-29. Growth rate for this segment was projected to be robust for the next 5 years†¢ Target group had been undeserved by existing carriers and specific needs that haven’t been met†¢ Average monthly cell phone bill – $52 representing 417 minutes of use. Hence, cost to serve a customer – $30†¢ Carriers tended to be wary of acquiring low- value subscribers Target Group and Behavior†¢ Consumers aged 15-29†¢ Calling pattern is different from typical business person†¢ Open to new things: – Text messaging – Downloading information using cell phones – More likely to use: ringtones, faceplates and graphics †¢ It’s a fashion accessory and a personal style statement Mobile Penetration by Age Group Revenue from Mobile Entertainment Services Pricing Trend in US before Virgin†¢ Over 90% of all subscribers had contractual agreements for a period of 1-2 years with their cellular providers†¢ Customers would sign up for ‘buckets of minutes’†¢ If a user used more than allocated minutes, they would be charged with extremely high rates (eg: 40 cents / minute)†¢ If a user used less than allocated minutes, they were still charged the fixed monthly fee, which drove up their price per minute Calling Plans – Industry PricesPrice per minute Contract Commitment – Minutes Calling Plans – Industry PricesPrice per Minute Contract Commitment – Minutes Pricing Trend in US before Virgin†¢ Carriers charged less for off-peak than on-peak minutes†¢ Off-peak time changed from 6:00 PM to 7:00, 8:00 and then finally 9:00 PM†¢ Some carriers charged a monthly fee (appox. $7) to move the peak time back to one hour†¢ Carriers added additional fees to monthly bill (tax or other additional cost information was not communicated. So a $29 plan ended up being a $35 plan) What Virgin focused on?†¢ Customers couldn’t predict their usage and ended up choosing  wrong plan pattern†¢ Customers think they use more minutes than they actually use†¢ Target segment actually used 100-300 mins/month but target predicted their usage is higher than that†¢ People tried picking up lower bucket plans to avoid high monthly fees but they ended up paying a lot more than that due to usage of minutes above the bucket†¢ On-peak and off-peak minutes weren’t in right mix 4P’s of Virgin Mobile USAWhat? What to provide them? VirginXtras†¢ Delivery of content, features and entertainment†¢ Signed a exclusive and multiyear, content & marketing agreement with MTV networks to deliver music, games and other MTV, VH1 and Nickelodeon based content to Virgin Mobile Subscribers†¢ Deal with MTV also ensured airtime on MTV’s channel and web site VirginXtras†¢ MTV-branded accessories and phones and contents (ringtones, text alerts and voice mails†¢ To vote for their favorite videos on MTV’s shows like â€Å"Total request Live†Ã¢â‚¬ ¢ Text messaging – No. of text msgs tends to skyrocket during school hours. Reason: Parents don’t see who they call, private form of communication VirginXtras†¢ Online Real-Time Billing – No call detail on monthly bills. Website will record individual calls on a real-time basis†¢ Rescue ring – Mobile subscriber will get a call at prearranged time to â€Å"escape† in case a date was not going well .†¢ Wake-up Call – Chance to wake up to original messages from a variety of cheeky celebrity VirginXtras†¢ Ring Tones – Customized ringtones would be available for subscribers to download†¢ Fun clips – News, tidbits, jokes, gossip, sports and more†¢ Hit List – Vote top 10 list of hit songs. Would be able to hear the %age of other subscribers who either â€Å"loved it† or â€Å"hated it† VirginXtras†¢ Music Messenger – Tap into 10 songs list & forward it to a friend allowing them to check out a hot new track†¢ Movies – Movie descriptions, show timings, and buy tickets in advance Handset: First 2 basic models named â€Å"Party Animal† and â€Å"Super Model† came with interchangeable faceplates decorated with eye-catching colors and patterns 4P’s of Virgin Mobile USAHow? Virgin’s Goal†¢ To make sure their prices are competitive†¢ To make sure they could make profit†¢ Don’t want to trigger off competitive reactions Options†¢ Clone the Industry Prices†¢ Price Below Competition†¢ Whole New Plan Clone the Industry Prices†¢ Use same prices as other competitors†¢ Communicate  -â€Å"priced competitively with everyone else but with a few key advantages like differentiated applications (MTV) and superior customer service† – MTV Applications and features – Superior Customer service†¢ Offering better off-peak hours and fewer hidden fees†¢ Put on packaging so that even without a salesperson, consumers would get the message Price per minute Contract Commitment – Minutes Clone the Industry Prices Price Below the Competition†¢ Maintain buckets and volume discounts†¢ Set price per minute below the industry average for certain key buckets – Target young market 100-300 mins Price per minute Contract Commitment – Minutes Price Below the Competition A Whole New Plan†¢ Shorten or Eliminate Contracts – Contracts guarantee annuity stream – Contract allows 18 years or below to purchase the product – Churn rate was 2%, new plan could increase churn rate to 6%†¢ Prepaid service – 92% US subscribers had Post-paid – Pre-paid was used on occasional basis as rates per minute was high and no credit check was required – Has high churn rates. Company would never be able to recoup its customer acquisition costs – New mechanism or infrastructure was required for prepaid services A Whole New Plan†¢ Handset subsidies – Mobile carriers subsidized the cost of handset to end users to acquire customer cost†¢ Eliminate Hidden Fees and off-peak hours – ‘what you see is what you get’ – Rolling out hidden costs into pricing such that pricing feels competitive – off-peak should benefit the target group. Minute usage is very different from busines s class Price Below the Competition What they did?†¢ LTV Model – Life Time Value†¢ In marketing, customer lifetime value (CLV), lifetime customer value (LCV), or user lifetime value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer†¢ Simplified Model†¢ LTV = (M/(1-r+i)) – AC Factors influencing LTV†¢ ARPU: Avg Revenue Per User†¢ CCPU: Cash Cost per User = 45% of ARPU†¢ M: Monthly Margin = ARPU – CCPU†¢ r: Retention rate ( 1 – (12*6%)) = 0.28†¢ AC: Acquisition Cost ( = $120 for Virgin) – Sale commission – Advertising per gross add – Subsidy cost LTV Calculation†¢ LTV = (M/(1-r+i))  Ã¢â‚¬â€œ AC†¢ => M = ARPU – CCPU = (1 – 45)% = 55%M on yearly basis, assuming that a customer talks for 200mins. M = (1-0.45) * 200 * 12 * p p -> can be 5 – 30 cents/min (As competitors are charging more than 30 cents/min LTV @ Different Price Points†¢ LTV(at 5 c ents)= (1-.45) (200*12*.05) /(1-.28 + .05) – 120 = -34.28†¢ LTV(at 7 cents)= (1-.45) (200*12*.07) /(1-.28 + .05) – Break-even120 = 0 point†¢ LTV(at 10 cents)= (1-.45) (200*12*.1) /(1-.28 + .05) – 120 = 51.42†¢ LTV(at 15 cents)= (1-.45) (200*12*.15) /(1-.28 + .05) – 120 = 137.14†¢ At 7 cents, the LTV =0 which tells that minimum of 7 cents should be charged by the virgin†¢ Virgin can charge any amount more than 7 cents LTV @ Different Price Points Price Point LTV5 cents / minute -34.287 cents / minute 010 cents / minute 51.4215 cents / minute 137.14 Break-even point Current Plans in Market Company Plan ValueAT&T Starting at $40/monthVirgin Mobile USA $35T-Mobile $34.99 (Only talk + text) other plans starting at $59.99 Providing a plan with music and other added features Virgin’s Service Offering†¢ Extra features: Music, Wallpapers, Videos, Live Video Request, Rescue ring, wake-up call facility†¢ New improved billing pattern and online real-time monthly bills†¢ Prepaid plan†¢ No contracts†¢ No hidden charges†¢ No peak off peak hours†¢ Very low handset subsidies†¢ No credit checks†¢ No Monthly bills†¢ Price: 25 cents per minute for the first 10 minutes; 10 cents/minute for the rest of the day†¢ No exact numbers, but churn rate lower than 6% Conclusion†¢ Virgin correctly identified service gaps in telecom industry and what customers needed.†¢ Virgin identify inflexibility in calling plans and in other plans.†¢ Provided extra services than current mobile carriers.†¢ Provided a medium of entertainment on go.†¢ Offered customized services at a relatively low cost. References†¢ HBR case study â€Å"Virgin Mobile USA: Pricing for the Very First Time†Ã¢â‚¬ ¢ Wikipedia.com