Virgin Mobile USA pricing it for

the first time

Ajay Chandar DM 16103
Shorya Umang Jain DM 16143
Prateek Sharma DM 16160

Situational Analysis
Virgin Mobile USA started its operations in 2002, led by its founder, CEO Dan
Schulman. The company entered the US Market as a 50-50 JV between Virgin
Group and Sprint Corporation and Virgins services would be hosted on Sprints
PCS network. As Sprint was in the process of updating its network and increasing
its capacity, it had ample capacity to allow for additional users.
Schulman quoted The nice thing about this model is that we dont have to worry
about huge fixed cost or the physical infrastructure. We can focus on what we do
best understanding and meeting customer needs.
The objective of the virgin Mobile USA was to create value and profitability in cell
phone service industry. It identified the age group of 15-29 as its target market
as it promised opportunity for growth. Schulman believed that by focusing on the
youth market, it would serve this segment like never before. Also, the big players
havent targeted this segment as yet.
The Problems which the Current Telecom services faced were the low
penetration among consumers aged 15-29, while the projection in this segment
for the next half decade was quite strong. This segment had been underestimated, thereby, the unmet needs. The industry was also wary of acquiring
low-value subscribers as cost to serve a customer was 30$, average monthly cell
phone bill was 52$ with 417 minutes of use and cost to acquire a customer was
about 370$.
Regarding the Target group, calling pattern was different from typical business
person. It was also open to new things like Text Messaging, information download
on cell phones, potential customers of ring tones, faceplates and graphics.
Phones were more than the status quo they were a fashion accessory, personal
style statement.
Regarding Pricing Trend in US before Virgin came, more than 90% of
subscribers had bonds with their service providers for a period of 1-2 years.
Customers used to sign up for buckets of minutes and if they exceeded more,
they would be charged with extremely high rates (like 40 cents a min). While if
the user used less, still he had to pay the agreed upon monthly fee resulting into
higher average price per min.

Carriers charged less for off-peak than on-peak minutes. The industry shrunk the
Off-peak time from 6 pm to 7 pm to 8 pm and then finally 9 pm. Some carriers
customized it by charging about 7$ to move the peak time back to one hour.
Hidden costs were present which further inflated the bill.
Virgin launched VirginXtras where Delivery of content, features and
entertainment was done. It further signed an exclusive and multi-year, content
and marketing agreement with MTV networks to deliver music, games and other
MTV, VH1 and Nickelodean content to its Subscribers. Besides the launch of MTVbranded accessories and phones, contents (like ringtones, text alerts and voice
mails), people could vote for their favorite MTV video shows like Total request
Live. The following features were also offered like Text messaging, Online RealTime Billing, Rescue ring, Wake-up Call, Ring Tones, Fun clips, The Hit List, Music
Messenger and Movies.
It also came with its 2 basic models with interchangeable faceplates decorated
with attractive patterns Party Animal and Super Model.
Virgin had 3 goals Competitive Pricing, earn Profits and not to trigger off
competitive reactions. Thus, to achieve these goals, it had 3 options Clone the
Industry Prices, Price below Competition and Whole New Plan.
Clone the Industry Prices: Use the same prices as the competitors,
Communicate priced competitively with everyone else but with a few key
advantages like differentiated apps (MTV) and superior customer service, offer
better off-peak hours with fewer hidden fees and put on packaging so that
consumer can understand without a salesperson.
The good thing is that it is easy to promote, consumers are used to existing
plans, less expenditure on ads and savings on salesperson. On the contrary,
target youth market is not stressed, no flexibility in calling plans or price and no
real price distinction.
Price Below the Competition: Adopt the status quo by maintaining buckets
and volume discounts, and set the price per min below the industry average for
certain key buckets Target young market 100-300 mins.
The pros for it are that co is offering best off-peak prices and few hidden fees
consumers will come to know that Virgin is cheaper, plain and simple. Through
this, market size will increase resulting into greater sales and profits.
While the cons are that earning per customer will be less, might be termed as a
low-quality service and may trigger competition.
A whole New Plan: Shorten or Eliminate Contracts, Despite high churn rates
and requirement of new mechanism or infrastructure in US, focus on Pre-Paid
services v/s Post-paid. It also planned to subsidize the cost of handsets for its
customers and Eliminate Hidden Fees and Off-peak hours by showing What you
see is what you get.

The pros were customers got an edge with contract elimination, low pre-paid cost
will result in more market share and what you see is what you get will raise the
trust factor and again help raise market share.
The cons were that the pre-paid could sky-rocket churn rate. The target group
may not buy the product if contract is eliminated besides the adjustment of OfPeak hours. Also, showing the hidden costs in pricing structure would be difficult.
The main agenda after review was to lay the foundation for future probability of
growth into other segments too. This can be done only if the acquired customer
has a Positive Life Time Value (LTV) with Virgin.
The Problem:
As a new entrant to an intensely competitive industry, Virgin Mobile USA has to
get its pricing right from the start.
Virgin aims to differentiate itself from its competitors by offering transparency in
its pricing. This is to be achieved by eliminating hidden charges and providing
customers with plans that are optimal for their usages.
Moreover, it is important that the price their offerings competitively and, at the
same time, avoid competitive reactions.
With regard to pricing, Virgin Mobile has the following strategic options:
1. Follow the Industry:
This is easy to launch and promote. Additionally, Virgin might be able to
innovate through better off-peak hours and the elimination of hidden
costs.
However, the credit quality of the target segment is poor. Moreover,
following the competition would deprive Virgin of the opportunity to price
competitively.
2. Set the price lower than that of the competition
This will aid the penetration of Virgin into the market and make it
immensely competitive vis--vis the other mobile service providers.
However, this would potentially spark a price war.

3. An entirely differentiated plan

This could be specially customized for the market, thereby aiding
penetration. However, customers might not adopt it as it might come
across as unfamiliar.

If Virgin were to adopt the third strategy, the pricing would be set by
means of the following calculations:
Average Revenue Per User: $52
Cost of maintenance/User: $30
Total Margin: $22
Churn (contract) : 2%
Churn (without contract) : 6%
Retention rate with contract: 76%
Retention rate without contract: 28%
Interest: 5%
Life Time Value (without contract) = (22*12)/ (1-.76+.05) = $540
Life Time Value (with Contract) = -$27.14
Therefore, enforcing a contract is an infeasible option.
Acquisition costs:
Commissions paid : $30 (A)
Advertising costs: 60/ 1 million expected customers = 60 (B)
Handset cost: $60 - $100
Assumed subsidy: 10%
Value of subsidy:$10
Therefore, acquisition cost: A + B + C = $100
Hidden costs
Monthly margin: $22 (cost of new acquisition)/1.21 (increase in bill amount
due to hidden costs = 21%)
=18.18 (absorbed by Virgin)
Breakeven time: 370 (industry acquisition cost) /18.18 = 20 months
Price calculations
Average usage = (Highest usage + Lowest usage)/2
= (100+300)/2 = 200
Assume price per minute = x
Monthly average revenue/user= 200x
CCPU = 0.45*ARPU
= 90x
Monthly margin = 110x
Applying the LTV formula,

Therefore,

the price should be greater than 6 cents.

Additional recommendations
-

Virgin should steer clear of hidden costs and contracts, and provide
flexible prepaid plans.
This will give Virgin a good LTV