Virgin Mobile USA : Pricing for the Very First Time

1) Virgin Mobile targets the 14 to 24-year olds market. The case lays out three pricing options.
Which option woul you choose and why ? All three options are very interesting for Virgin Mobile to introduce the American market. Considering Virgin Mobile’s background, goals and strategy, I would have choose the option 3 « A Whole New Plan » There are few reasons that explain this choice : Firstly, Virgin Mobile’s cultural values are to be innovative, fun. It also wants to make things different from its competitors and continuously improve customers’ experience through innovation. Indeed the options 3 offer something very different than competitors. Secondly, regarding the segment target, 14–24 years old, it is known that those categories can not pass the credit check with the current carriers due to their lack of revenue. The result is that this target market has been forgotten. Moreover, it is an age where teenagers are looking for “independence” and like to do things without parents. It is why the option 3 fit well. Thirdly, I believe that the option 3 is the one that fit the best selling model that has been chose by Virgin. In fact, it does not require any salespersons. Customers could choose their mobile as they want on specific display. The two other pricing option are also very interesting but I would not have choose them because:
- Option 1 “Clone The Industry Price”: Even though customer are already used to bucket, off/on--‐-peak hours and so on, there are no big difference, it would always be hard to enrol the 15 – 29 years, also, there is no real interest in switching over only for Extras services. It would be difficult to make the difference with only $60 million on advertising budget when competitors have around $650 millions of advertising budget.

- Option 2 “Price below the Competition”: This possibility could enable Virgin Mobile to quickly gain market share. However this is not without risks. Firstly it could create a strong reaction from competitor and create a price war. According to the case, a price war could have a very negative impact on Sprint or its competitors. Indeed, there is no benefit for both, customers and supplier from a price war in western countries especially when the market arrived to maturity, which is the case for the US mobile.
Secondly, with low prices, customers could see Virgin Mobile as a low quality service provider. Moreover, the third option will fit the best with the young people, and could also attract customers that are annoyed of hidden fees from others major carriers.

Plan: Before the realization of a pricing plan, it is important here to set “boundaries”. In fact there are few things to respect regarding subsidies, acquisition cost, and so on in order to launch prepaid pack successfully. Firstly, industry analysts highlight that the acquisition cost will have to be equal or below $100. Secondly, try to lowered cost per minute, which actually cost from 35 to 75 cents. Thirdly, the subsidies will have to be managed. Fourth, we have to remember that there is fixed cost such as advertising ($60 million) and commission to the distributors per sale which has been negotiated at $30. Finally, consider that the target market is the teenager, they use their cell--‐-phone in a completely opposite way than a businessman. Also in order to facilitated the purchased of minutes, customers could buy recharges on Internet, or at the supermarket.
Prices of the prepaid recharges:
100 minutes = $20 200 minutes = $35
300 minutes = $45 Regarding the subsidies, as Virgin signs a contract with the brand Kyocera, in order to have cheap mobile, it has been decided to delete those subsidies. As off peak hour do not fit with the target market. Today teenagers are sending a lot more messages than businessman. It would be more advantageous for them to have free text. This option will be available only between Virgin Mobile’s pre--‐-paid. This option will attract teenagers. The more teenagers will buy or product, the more Virgin’s market share will growth, and the more we could margin. Virgin Revenue = Minutes purchase + VirginXtra --‐- Hidden fees (including taxes and universal service charges) --‐- Off peak hours --‐- Advertising --‐- Sales commissions

2) The USA cellular industry is notorious for high customer dissatisfaction: despite service contracts, the big carriers churn roughly 24% of their customers each year. Clearly there is very little loyalty in this market.
- What are the sources of all of this dissatisfaction?
- How have the various pricing variables (ex contracts, pricing buckets, hidden fees, offpeak hours) affected the consumer experience?
– Why haven’t the big carriers responded more aggressively to customer dissatisfaction?

The churn rate is definitely showing that there is an important dissatisfaction in the service provide by the carriers. Despite the fact that carriers are promoting many free features and options in there advertisings there are always many hidden fees. Customers are annoyed by: The length of the contract (1 or 2 years), which require rigorous credit check, and customer do not really like that for only a cellphone contract.

The high cost of extra minutes, which is often hidden when customer subscribe a contract. The absence of flexibility of the cost. The shrunk of the off peak hours, indeed through the year thze off peak hour went from 6.00 pm to 9.00 pm. There is an important distrust by the customer toward the carriers. Carriers are playing on customers’ confusion.
For sure those pricing variables have affected customers experience in a wrong way. Nowadays cell-phone is useful, essential, fashionable that is why customers are subscribing contract even though they know that the service quality is wrong. That is why there is an opportunity for Virgin Mobile to launch the market in being honest and transparent regarding the cost that customers have to pay.
Today, no big carriers have responded more aggressively to customer dissatisfaction because from 1999 to 2005 the mobile market has known a very important growth and according to industry analyst, it will continued. Furthermore, according to the industry analyst, there are three majors carriers that share the majority of the market shares. They have more than 20% market shares each (Verizon 29%, Cingular 21,7, and AT&T 20,5), which represent 71,7% of the market shares.
That is why they do not respond to customers’ dissatisfaction for the moment. Those three carriers are more. In this situation no one have seen the importance of customer satisfaction. Carriers are more focused on gain market shares. However, today has the market is becoming more and more overcrowded, carriers will have to consider customer satisfaction)

3) How do the major carriers make money in this industry? (i.e. what are their sources of profits?) Please compute:
- The lifetime value of a cutomer using the basic formula) - Detailed acquisition costs.
- The time requested to breakeven on the acquisition of a new customer.

In this industry, the major carriers have several sources of revenue. In order to show how they make money, we will first calculate the lifetime value (LTV).
LTV = MONTHLY MARGIN / (1 – R + I) – AC Monthly Margin = Avg Revenue / Unit / Month (ARPU) – Monthly Cost to Serve (CCPU) ARPU = $52 CCPU = $30 Monthly Margin = $22
Acquisition Cost (AC) = $370 R = 0,98 I = 0,05 LTV = 22 / (1 – 0,98 + 0,05) – 370 LTV = - $55 Major carriers’ revenues come from long terms contract. Indeed, with contract of two years, it ables carriers to make money on the phone. The more customers have a contract the most interesting it is for carriers.

Acquisition Cost : According to the market analysts, the acquisition cost of a customer is roughly $370. In this cost we find : -

- advertising,
- sales commissions, - handset purchased. Breakeven point: Cost of a customer acquisition Average monthly cell-phone bill Cost to serve a customer Revenue = $370 = $52 = $30 = $22 Breakeven point = 370 / 22 = 17 months. A major carrier need more or less 17 weeks before make benefit on its customer. As those major carriers are selling a majority of 2 years contract, they have 17 months to make benefit)
4) Do you agree with Virgin Mobile’s target market selection?
What are the risks associated with targeting this segment?
Why have the major carriers been slow to target this segment?
I totally agree with Virgin Mobile’s strategy to target people from 14 to 24 years old. Teenagers represent the population that is driving the cell-phone market. They see handset as a toy rather than a work tool such as businessman. Moreover, as show by market analysis, the US mobile market penetration is very low (around 15%) compare to Finland (80%), U.K. (around 68%), and Japan (around 75%), it a good opportunity for Virgin Mobile to gain market shares in this crowded market. They will offer an opportunity that is not available from other carriers yet. Dan Schulman and his team made a good market analysis. Indeed, they succeed in highlighting an unmet social need, which is the possibility for the teenagers to have access to handsets easily. This social need create important market opportunities. Focusing on a narrow segment based on membership offer the advantage to gather highly important information on customer about their needs, which could be used later in order to develop loyalty among customers. Virgin is taking an important risk in launching the US market when targeting teenagers from 14 to 24 years old. First, there is a risk that this kind of selling option (prepaid) does not fit with the target market. Secondly, there a risk that customers do no buy enough minutes recharges, if so, Virgin Mobile will have difficulties to recover from its cost. If carriers have not targeting young from 14 to 24 years old, it is all about money and credit check. Firstly carriers do not see this target market as a “safe” customer due to their lack of revenue. As seen previously, it cost $370 to gain a customer, so carriers do not see any advantages of gaining this kind of customers who will not use their phone a lot. It is much more interesting for carrier to target businessman and woman. Secondly, the average bill per month is $52, so carrier the reason of targeting people who do not pass the credit check.