Virgin Mobile USA: Pricing Strategy

Prepared bySection S3 Group 4 Abhishek Sharma FT13300Arjun Choudhry FT13312Garv Sharma FT13325Irene Eltham FT13337Mrityunjay Arya FT13350Ramachandran FT13362Sonali Das FT13374Vijaykumar Bale FT13386

Situation Analysis

• Virgin Mobile is planning to launch its service in the US Market by July 2002 .

• They have done exceedingly well in the U.K (2.5 mil consumers in 3 years.)

• They had however failed in the Singapore Market.• The Telecom industry in USA was saturated and considered to

have reached Maturity• Virgin Mobile’s plan was to capture an unsaturated market

segment: The youth segment between the ages 15-29• In an effort to capture this segment they plan on offering

customers a wide variety of value added services: ‘Virgin Xtras’.

• They are to decide on a good Pricing strategy.

Pricing Strategies

Option 1: Follow IndustryAdvantages:Same Cost with Value added servicesEasy to PromoteDifferentiation through better off-peak hours and fewer hidden costs.Disadvantages:Poor credit quality of the targeted segment, will reduce the target market further.Loss of Competitive advantage in terms of price.Difficult to penetrate the market without lower prices.

Option 2: Price Below the Competition:Advantages:• Fits with the requirement of the target market, i.e lower

prices.• Will enable better penetration

Disadvantages:• Lower Margins.• May cause a price war.

Option 3: A whole new plan:Advantages:• Totally differentiated plan• Specifically customized for the target market• Will significantly aid market penetration

Disadvantages:• May lead to higher churn rate.• Would require mechanisms like web and physical phone

cards (for prepaid).

Option 3: EvaluationIndustry Acquisition Costs: $370 (Given)ARPU:$ 52CCPU:$ 30Monthly Margin:$52-$30 =$ 22Churn rate (with contract) 2% per monthRetention rate(r): 1-0.2*12= 0.76Churn rate (without contract) 6% per monthRetention rate(r): 1-0.6*12= 0.28Interest: 5%

LTV (with contract) = ((22*12)/(1-.76+.05)) – 370 = $540LTV (without contract) = ((22*12)/(1-.28+.05)) – 370 =$ -27.14Hence, it is not feasible for the industry to have a no contract strategy.

Eliminating Hidden Costs

• In Industry , $ 29 cellular bill becomes $35 due to hidden costs which is an increase of 21%.

• If Virgin absorbs the hidden costs :Monthly Margin = $22/1.21 = $18.18

• Break even time without hidden cost =370/18.18 = 20 months

For further analysis we have assumed that consumers are not exposed to any hidden charges.

Option 3: Virgin EvaluationAcquisition cost :Commission to distributors = $30Advertising cost per gross add = $60 mil/1 mil(expected customers) = $60Virgin’s handset cost: $60 to $100 (consider $100)Assume subsidy = 10% (to make virgin handset cost similar to industry handset cost)Hence, Subsidy = $10Total acquisition cost = 30+60+10 = $100

LTV (with contract) = ((18.18*12)/(1-.76+.05)) – 100 = $652.27LTV (without contract) = ((18.18*12)/(1-.28+.05)) – 370 =$ 183.32Since, LTV without contract >0, we can use this option to penetrate the market.

Calculating Price

Virgin’s average customer usage =(100+300)/2 = 200 min/monthLet, price per min = pMonthly ARPU = 200*pCCPU = .45*ARPU = .45*200*p = 90pMonthly Margin = 200p – 90p = 110pLTV = ((110p*12)/(1-.28+.05)) – 100 > 0

p >$ 0.06

Recommendation

Virgin Mobile should chose a price per minute > $0.06 or 6 cents depending on the desired profit margin.Keeping in mind that Industry Price range for consumer usage of 100-300 min is 10 to 25 cents

Virgin Mobile can differentiate its service in the following ways :• No hidden costs• No contracts • No peak off peak hours• Flexibility of prepaid

Virgin will benefit from :• Positive LTV • Low handset subsidy• Economical for company as well as for customers

Thank you!