Case Analysis for Virgin Mobile Essay

satu postd MOBILE the States FIRST PRICE STRATEGY (An analysis of the Pricing Decision alternatives that stark(a) has to abridge to create an alternate customer segment and monetize their buying power)VIRGIN XTRAS OVERVIEWThe consummate(a) proposeetary USA religious assistant involved subject matter, features and entertainment, called perfect(a) Xtras.Collaboration with MTV networks as it was the most recognized y turn uph brands in the country and unparalleled deliberate forthe under-30 mart segment Exclusive, multiyear content and marketing agreement. MTV network to have got music, games and other MTV-, VH1-, and Nickelodeon based content to Virgin smooth subscribers. Subscribers would welcome access to MTV- branded accessories and phones, fine art, ring tones, text alerts and voice mails. Promotional air meter on MTVs channels and website. Virgin mobile subscribers to vote for their favorite videos on a few MTV shows.Other Virgin Mobile operate that aimed to app eal to the youth market, generate additional practice session and create loyaltywere Text pass along Online Real- period Billing Rescue Ring Wake- Up foreshadow Ring Tones Fun Clips The Hit number Music Messenger MoviesTraditional Channel Virgins ChannelServices sold at own proprietary sell outlets, kiosks in Services sold where youth shop especially consumermalls, elevated-end electronic stores, speciality stores etc. electronic goods in stores like buttocks, Sam Goody music stores, Best Buy.High-touch gross sales people who were paid soaring sales Products packaged in consumer electronics packaging, placedcommission to ensure affords-on service. on a bright red clamshell, which gave it visibleness and no salesperson was mandatory.Cost per handset from Nokia, Motorola, Samsung etc. Cost per handset from Kyocera- $60-$100. Lesser indemnity$150-$300. Entailed substantial subsidy from the entailed by the familiarity.handset pass waterrs, a component of acquisition com prise.Distributors industry avg. Commission- $100/phone Distributors commission- $30/phone.The availability of the phones were non as segment Phones available at 3000 retail outlets in USA, and availability particularised as Virgin tar bunked included at retailers such as Sam Goody, Circuit City, Media Play, Virgin MegastoreBilling is periodic Billing is to be real time and with online avenues price DECISIONS-CUSTOMER PERSPECTIVESThe company tried to distinguish itself from the competitors standpoint by playing on the fact that the targeted segmentdid not trustthe prevalent set points in the industry that hinged on the credit worthiness .The main practicesprevalent were- 90% of all subscribers had weight-liftual agreements for a limit of 1 year-2 geezerhood Required rigorous credit memorise syllabuss established pailfuls of transactions, on extra system users penalized heavily. Charged less for hit-peak than on-peak proceedings, but the off-peak period had shrunk. An additional requital was aerated to add to the periodic apex, which included taxes, service charges. Per slender Charge (Y-axis, in cents) for the bucket of transactions contracted (X-axis) 180 160 140 great hundred 100 80 Per minute Charge for the bucket of minutes andcontracted (X-axis) 60 40 20 0 0 20 40 60 80 100 one hundred twenty 140The bold line represents the constitute per minute aerated for a valid contract (which is shown by the arrows). The higher followin the vent of under-utilization of the contract is due to the high strict 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 pricing decision.The mainconstraints it face was that the prices should be competitive and fat without triggering of competitive reactions.There were 3 options availableOPT ION 1- re-create the Industry expenses The kernel would go to customers that they were priced competitively with few advantages like diverseiated applications MTV and superior customer service. check off-peak hours and fewer unavowed fees would be the selling point but the total pricing social structure would still depend on off-peak and peak categorization as well as contacted minutes. Easy to promote as this strategy of 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 Ameri raft cell ular market with operator dedicated handsets ad prohibitive pricing followed by the competitors due to high grind rank Cost of Acquisition Subsidization of Advertisement Sales handsets . Break even analysis and flavortime Value for cellular subscribers- As already, stated in the current scenario, most mobile companies amass running(a) capital by going for long term contracts. Comp atomic number 18d 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 occupational group 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 germane(predicate) range) Acquisition cos t = 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 set(p) 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 drudge 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 gliding Here, the margin remains comparatively 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 periodical over a year = 1.021.02x..till 12months ), i adequate interest rate assumed to be around 5%Margin in a month = (Average monthly phone bill ,=US$52)-(Cash cost per user =US$30) = US$22Now taking this take to be of n we have - LTV = M/(1-r+i)Now calculating the LTV for e really option available will give us a marker of how the pricing strategy should be used forusing various options considering the fact that the interest rate remains constant at 5%-For option 1-LTV = US$ (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(prenominal) or less offset by the increase incash cost to user whichcan 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 entrance 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 ar make away with, this will ensure more loyalty of the target segment as the majority of them atomic number 18 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 gossamer 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 introduction TranscriptWe Answer To A high Calling 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 backbone 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 update its network and increasing its capacity. View slide Virgin Mobile USA Schulamn- The nice thi ng intimately this model is that we dont have to worry about huge fixed costs or the physical infrastructure.We can focus on what we do best-understanding and meeting customer needs. We Answer To A Higher Calling Providing extra-ordinary services and experiences at a low price as $35 View slide Objective Create value and profitability in cellphone service industry localise market ages 15-29, opportunity for growth with this market segment 1 million subscribers by year 1, 3 million by year 4 By focusing on the youth market from the globe up, were putting ourselves in a position to serve these customers in a way they have never been served before -Dan Schulman, CEO, Virgin Mobile USA 4Ps of Virgin Mobile USAWhy?Problem with authoritative 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 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 pattern is different from typical business person commit to new things Text messaging Downloading information using cell phones More likely to use ringtones, faceplates and graphics Its a fashion accessory and a personal style statement Mobile penetration by Age GroupRevenue from Mobile Entertainment ServicesPricing shorten 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 PricesPri ce per minute push Commitment winks 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 600 PM to 700, 800 and then finally 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 call in 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 paying a lot more than that due to usage of minutes above the bucket On-peak and off-peak minutes werent 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 request subsist Text messaging No. of text msgs tends to skyrocket during instill hours. Reason Parents dont 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 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 Vi rginXtras 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 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 Party Animal and Super Model came with interchangeable 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 Competition Whole New Plan Clone the Industry Prices Use same 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 Superior Customer service offer 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 MinutesClone the Industry PricesPrice Below the Competition Maintain buckets and volume discounts Set price per minute below the industry average for certain(a) 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 stop up annuity stream Contract allows 18 years or below to purchase the product toil 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 i ts 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 ringlet 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 entire future race with a customer Simplified Model LTV = (M/(1-r+i)) AC Factors influencing LTV ARPU Avg Revenue Per exploiter 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)) 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 confidential informations 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 + te xt) 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 actually low handset subsidies No credit checks No Monthly bills Price 25 cents per minute for the original 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 Virgin Mobile USA Pricing for the Very First Time Wikipedia.com