Case Analysis for Virgin Mobile Essay

VIRGIN MOBILE regular army FIRST PRICE scheme (An analysis of the Pricing Decision alternatives that complete(a) has to undertake to become an swop client segment and monetize their buying power)VIRGIN XTRAS OVERVIEWThe sodding(a) nomadic ground forces service involved matter, features and entertainment, called staring(a) Xtras.Collaboration with MTV lucres as it was the to the grittyest degree recognized jejuneness brands in the country and unparalleled reach forthe under-30 market segment Exclusive, multi category study and marketing agreement. MTV network to deliver music, games and other MTV-, VH1-, and jukebox based content to utter(a) Mobile subscribers. Subscribers would consec step access to MTV- branded accessories and phones, artwork, ring tones, textual matter alerts and utterance mails. Promotional air epoch on MTVs channels and website. Virgin prompt subscribers to vote for their favorite videos on a some MTV shows.Other Virgin Mobile run that a imed to appeal to the youth market, generate supernumerary routine and create loyaltywere Text Messaging Online Real- Time Billing Rescue crowd Wake- Up Call Ring Tones Fun Clips The Hit attend Music courier MoviesTraditional Channel Virgins Channel military work sold at own copyrighted sell outlets, kiosks in Services sold where youth shop specially consumermalls, luxuriously-end electronic stores, speciality stores etc. electronic goods in stores like design, surface-to-air missile Goody music stores, Best Buy.High-touch sales people who were paid luxuriously sales Products packaged in consumer electronics packaging, placedcommission to ensure throws-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 accompany.handset droprs, a component of acquisition embody.Distri exclusivelyors industry avg. Commission- $100/phone Distributors commission- $30/phone.The availability of the phones were non as segment Phones availcapable 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 periodical Billing is to be real time and with online avenues PRICING DECISIONS-CUSTOMER PERSPECTIVESThe company tried to distinguish itself from the competitors standpoint by contend on the fact that the targeted segmentdid not trustthe prevalent determine 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 require rigorous credit check objects established sets of split seconds, on extra economic consumption users penalized heavily. Charged less for murder-peak than on-peak twinklings, but the off-peak period h ad shrunk. An additional salary was super hitd to add to the monthly bill, which included taxes, service charges. Per minute Charge (Y-axis, in cents) for the bucket of legal proceeding contracted (X-axis) 180 160 140 one hundred twenty 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 approach 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 ascribable to the high obstinate 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 COMPANY PERSPECTIVESVirgin Mobile USA had to fix all these problems prevalent in the industry while taking a harm decision.The mainconstraints it faced was that the prices should be agonistical and profitable without innovationing of competitive reactions.There were 3 options availableOPTION 1- copy the intentness impairments The inwardness would go to clients that they were priced competitively with few advantages like distinguish applications MTV and superior guest service. Better off-peak hours and few hidden fees would be the selling point but the total price structure would passive cipher on off-peak and peak categorization as well as contacted minutes. golden to promote as this strategy of buckets was already prevalent in industry. exclusively risks alienating the target base as they already did not bother the required cut for the credit worthiness. OPTION 2- Price below the rival Similar pricing structure as rest of industry, with actual prices just astir(predicate) below those of competition only within the highest frequency range. Better off-peak hours and fewer hidden fees could also be come apartn.OPTION 3- A Whole New intention Entirely antithetical pricing structure. choke contracts and going for prepaid pricing s tructure.However the nature of the Ameri potentiometer cellular market with operator intrust handsets ad prohibitive pricing followed by the competitors due to high toil rates Cost of accomplishment Subsidization of Advertisement Sales handsets . reach thus far analysis and Lifetime Value for cellular subscribers- As already, stated in the current scenario, most mobile companies amass works capital by going for long term contracts. Compared to a US$ 100 acquisition cost for a prepaid connection, the equivalent historic 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 father that the second-rate 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 node = US$ (0.1 x 300) =US$ 60 (The most promising aspect in the relev ant range) Acquisition cost = handset subsidy given to hand set manufacturers (US$ 60 -100) + advertisement be ( 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 tax revenue shifting 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. scarcely we leave also sustain to install 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 wad slide Here, the margin remains relatively fixed across the peri ods which spate be assumed as a small 12%, r is the retentionrate which comes to around 72% (churn rate of 2% p.m. compound monthly over a year = 1.021.02x..till 12months ), i becoming wear-to doe with rate assumed to be around 5%Margin in a month = (Average monthly phone bill ,=US$52)-(Cash cost per user =US$30) = US$22Now taking this treasure of n we have - LTV = M/(1-r+i)Now calculating the LTV for ein truth option available will give us a marker of how the pricing strategy should be utilize forusing various options considering the fact that the interest rate remains constant at 5%-For option 1-LTV = US$ (22*12)/(1-0.72+0.05) 360= US$ 421For option 2- Here the retention rate erect be assumed to have been bettered by differential gear pricing in the 100-300minutes usage category , so we can assume a modest increase to 80%.But this is more(prenominal) or less offset by the increase incash cost to user whichcan be assumes to rise by 5% if the differential pricing is 5% be low 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 should threaten 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 cost are much visit than the other competitors, they can price themselves lower than competi tors. They can also be transparent in their cost structure, eliminating hidden cost .Hence, initially it should give non-price advantage to its customers and over a period of time can quail costs to sustaingrowth and drive off competition virgin mobile demo TranscriptWe Answer To A Higher concern Prepared By Team 4 Pooja Gupta (P122033) Rohit Singh (P122038) Saurabh Singh (P122041) Varun Anand (P122049 Virgin GroupVirgin 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 USAs service would be hosted on Sprints PCS network Sprint was in process of updating its network and increasing its capacity. View slide Virgin Mob ile USA Schulamn- The nice thing about this model is that we dont have to worry about extensive fixed costs or the physical infrastructure.We can focus on what we do best-understanding and meeting customer needs. We Answer To A Higher name Providing extra-ordinary go and experiences at a low price as $35 View slide Objective Create value and profitability in cellphone service industry channelise market ages 15-29, hazard for growth with this market segment 1 million subscribers by year 1, 3 million by year 4 By concentrate on the youth market from the ground up, were putting ourselves in a position to arrange these customers in a way they have never been served before -Dan Schulman, CEO, Virgin Mobile USA 4Ps of Virgin Mobile USAWhy?Problem with ongoing Telecom Services Low perceptiveness among consumers aged 15-29. Growth rate for this segment was projected to be fat for the next 5 years Target group had been undeserved by existing carriers and specific needs that havent 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 convening is different from typical business person Open to new things Text message Downloading randomness using cell phones More likely to use ringtones, faceplates and graphics Its a fashion accessory and a personal sort statement Mobile Penetration by Age GroupRevenue from Mobile Entertainment ServicesPricing slide 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 utilise 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 shrink Commitment minutes Calling Plans Industry PricesPrice per spot Contract Commitment Minutes Pricing Trend in US before Virgin Carriers charged less for off-peak than on-peak minutes Off-peak time changed from 600 PM to 700, 800 and then eventually 900 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 couldnt predict their usage and ended up choosingwrong 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 paid a lot more than that due to usage of minutes supra the bucket On-peak and off-peak minutes wer ent in right mix 4Ps 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 MTVs 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 MTVs shows like Total pass along Live Text messaging No. of text msgs tends to skyrocket during enlighten hours. Reason Parents dont see who they call, private form of confabulation VirginXtras Online Real-Time Billing No call detail on monthly bills. Website will record individual calls on a real-time flat coat Rescue ring Mobile subscriber will get a call at prearranged time to escape in case a date was not going well. Wake-up Call Chance to catch fire up to original m essages 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 loved it or despised it VirginXtras Music Messenger Tap into 10 songs list & forward it to a friend allowing them to check out a hot new shroud Movies Movie descriptions, show timings, and buy tickets in advance Handset offshoot 2 basic models named Party Animal and Super Model came with mutual faceplates decorated with eye-catching colors and patterns 4Ps of Virgin Mobile USAHow?Virgins Goal To make sure their prices are competitive To make sure they could make profit Dont want to trigger off competitive reactions Options Clone the Industry Prices Price below arguing Whole New Plan Clone the Industry Prices Use comparable prices as other competitors Communicate-priced competitively with everyone else but with a few key advantages like differentiated applications (MTV) and superior customer service MTV Applications and features pucka Customer service Offering better off-peak hours and fewer hidden fees do on packaging so that even without a salesperson, consumers would get the message Price per minute Contract Commitment MinutesClone the Industry PricesPrice 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 MinutesPrice Below the CompetitionA Whole New Plan Shorten or Eliminate Contracts Contracts guarantee annuity stream Contract allows 18 years or below to purchase the product moil 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. family 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 support 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 business class Price Below the CompetitionWhat 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 built-in 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 ad per gross add Subsidy cost LTV Calculation LTV = (M/(1-r+i)) 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 cents)= (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 virginVirgin 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 Virgins 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 right on identified service gaps in telecom industry and what customers needed. Virgin attain 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 Virgin Mobile USA Pricing for the Very First Time Wikipedia.com