lecture 6 virgin cell solution
TRANSCRIPT
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AEM 4160: STRATEGIC PRICINGPROF.: JURA LIAUKONYTE
VIRGIN CELL CASE: EXCERCISES
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Pricing Structure from the CarrierPerspective
Contracts: Annual churn rate WITH contracts =2% * 12 months = 24% (p.8)
Annual churn rate WITHOUT contracts =6% * 12 months =72% (p.8)
The difference: 72% - 24% = 48%
Take AT&T example: customer base = 20.5 million
If AT&T abandons the contract based plan how many new customers wouldit need to acquire to offset customers from an increased churn rate?
Additional customers lost to churn: 48% * 20.5 mln = 9.84mln
Acquisition cost per customer: $370 (case p.2)
Total cost of offsetting higher churn rate: $370 * 9.84 mln =$3.64 bil.
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Menu pricing: Actual Usage
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Bucket/Menu pricing
In reality most consumers are paying morethan their optimal rate = if they new exactlyhow much they will consume
industry makes money from consumerconfusion
Pricing menus allow carriers to advertise low
per minute rates But most consumers end up choosing the
wrong menu.
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Hidden Fees
Able to promote low per minute prices, but stillcollect additional revenues
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Acquisition costs
Advertising per gross add: from $75 to $100 (p.5)
Sales commission paid per subscriber: $100 (p.5)
Handset subsidy provided to the subscriber: $100 to $200(p.9)
Total: from $275 to $405
(lets assume somewhere in the middle = $370)
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Break Even point
Monthly ARPU (average revenue per unit): $52 (p.3)
Monthly Cost-to-Serve: $30 (p.3)
Monthly Margin: $22
Time required to break even on the acquisition cost= $370/ $22= 17 months
In the cellular industry the monthly margin is relativelyfixed across periods, therefore the traditional LTV can be
simplified (assuming infinite horizon):
M = margin the customer generates in a yearr = annual retention rate = (1-12*monthly churn rate)i = interest rate (assume 5%)
AC = acquisition cost
LTV =M
- AC1-r+i
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LTV with contracts
The annual retention rate in the industry
= 1-12*0.02=0.76
LTV =22 * 12
- 370 = $5401- .76 + .05
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LTV without contracts
Eliminate contracts -> churn rate increases to6%
Calculate the LTV:
LTV =22 * 12
- 370 = -27.14
1- .28 + .05
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Eliminate Hidden Costs
$ 29 cellular bill becomes $35 due to hiddencosts
Increase of 21%
If these costs were eliminated, the $22 marginwould be reduced to $18.18= $22/1.21
Break even would become 20 months =370/18.18
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What happens to LTV?
Without hidden costs, but with contracts
Without hidden costs and without contracts
Elimination of contracts drives LTV below zero
Hidden costs boost the bottom line
LTV =18.18 * 12
- 370 = 3821- .76 + .05
LTV = 18.18 * 12 - 370 = -86.681- .28 + .05
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Option 3: different pricing approach
Target audience: Youth
Loathe contracts
Fail credit checks
Ideal plan: no contracts, no menus, no hiddenfees
How to differentiate itself, and have a positive LTV
Look at the factors that affect LTV
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Options for Lowering AcquisitionCosts
Advertising costs per customer
Industry=from $75 to $100
Virgin planned ad costs = 60 mil/1min= $60 (p.5)
Handset subsidies: Current industry handset cost: $150 to $300 (assume $225)
(p.5)
Current industry handset subsidy: $100 to $200 (assume$150) (p.9)
Current industry handset subsidy as a %: 67%
Virgins handset cost: $60 to $100 (assume $80)
Assume Virgins subsidy around 30% = $30
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Consumer friendly plan: how toachieve profitability
Break Even analysis: at what per minute pricewould Virgin break even: Virgins monthly ARPU: (200 minutes)*(p), where p=price per
minute
Monthly cost to serve: .45 * 200 * p
Monthly margin: 200p - 90p = 110p
p > 0.07
LTV =12*110p
- 120 > 0
1- .28 + .05
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Other price points
What if Virgin charged per minute price comparable to otherindustry prices, somewhere in between 10 and 25 cents:
At 10 cents:
At 25 cents:
LTV =12*110*.1
- 120 = $511- .28 + .05
LTV =12*110*.25
- 120 = $3091- .28 + .05
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Virgins Pricing Plan: What
happened
A 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%