Annalysed Case study of Virgin mobiles HARVARD UNIVERSITY CASE

P R I C I N G F O R T H E V E R Y F I R S T T I M E
1 June 2015Consumer Behaviour Case Study -Virgin Mobile
Virgin Mobiles USA
Prepared by-
Mohammad Tariq Stanikzai
Course-
Consumer Behavior
Instructor-
Prof. Mark. Runge

2
Index
 Introduction-Virgin Group
 Introduction-Virgin Mobile
 Virgin Mobile – Ventures
 Virgin Mobile USA
 Mission
 Objective
 Case Questions
 Pricing strategy
 Addressing the Customers’ dissatisfaction
 Telecom Market Comparison – Afghanisatan Vs USA

3
Introduction-Virgin Group
Type Private limited company
Industry Conglomerate
Founded 1970
Founder Richard Branson
Headquarters London, United Kingdom
Area served Global
Revenue £15 billion (2012)
Employees Approximately 50,000
Year Milestones
1960 A seventeen-year-old Richard Branson launches his first two businesses
1970 Virgin opens Britain’s first residential recording studio
1980 Virgin Games is launched
1990 First national radio station hits the airwaves
2000
•Virgin Media becomes the UK's first quadplay company
•Virgin Mobile goes Global
Britain's Flag Carrier
Virgin Group

4 1 June 2015Consumer Behaviour Case Study -Virgin Mobile
Introduction-Virgin Group
Virgin Group Products
Banking
Beverages
Travel
Video games
Consumer
electronics
Financial
Services
Films
Internet
Music
Radio
Books
Cosmetics
Jewellery
Houseware Retail Mobile Phones
Commercial
spaceflight

5
Virgin Mobile
Ansoff Growth Matrix
Market
Product
Foray into new Market with new Product-
“Diversification”

Year Countries Partners
In operation
1999 UK NTL Telewest
2000 Australia Optus network
2002 USA Sprint
2005 Canada Bell Canada
2006 France Carphone Warehouse
2006 South Africa Cell C
2011 India Tata Teleservices
2012 Poland PLAY
Virgin Mobile Launch
Defunct
2001 Singapore Singtel
2010 Qatar Qatar Telecom
Virgin Mobile

7
Virgin Mobile - Ventures
Success
Cellular Operation in UK
2.5 Million customers in 3 years
Country’s 1st MNVO (Mobile Network
Virtual Operator)
United Kingdom Singapore
Failure
Cellular Operation in Singapore
Joint venture with Singapore Telecom
Fewer than 30,000 customers in 5 years
Strategy
Company leased Network space from
Deutsche Telekom
Cause
Saturation of market
Virgin’s hip & trendy positioning

8
Virgin Mobile USA
1 June2015Consumer Behaviour Case Study -Virgin Mobile
Facts:
• Mobile market seems to have 50% penetration with 130
million mobile subscribers
• Age group 15-29 yrs came out to be less penetrated in
terms of Mobile usage
• This young demography was projected to have good
growth in next 5 years
Issue:
• Big players didn’t target this potential customer segment
• This segment had been underserved; their specific needs
had not been met
USA, Year 2011
Not just a ca

9
Search for Leadership
Virgin Mobile USA
2 Apr 2014Consumer Behaviour Case Study -Virgin Mobile
• US Telecommunications holding company
• Providing wireless services
• Major global Internet carrier
• 3rd largest U.S. wireless network operator
Search for Service provider
50-50
Richard Branson & Daniel Schulman
Daniel Schulman, CEO, Virgin Mobile USA
“..We would be entering with a brand that had little US name recognition
except for Airline.. It’s these kind of opportunities where a team can define
itself and if this could be pulled off it would be unbelievable..”

Mission
Mission
 Making a difference in the eyes of the customer in terms of
• Value for Money
• Quality
• Innovation
• Fun
• A sense of competitive challenge

11
Objective
Objective
•Targeting age group of 15-29 years
•The company aims to get 1 million subscribers by year 1
•3 million by year 4
By focusing on the youth market from the ground up and
to serve these customers in a way they have never been
served before.

12
Virgin Mobile- Promotion
VirginXtras
 Text Messaging
 Online Real Time Billing
 Rescue Calling
 Wake Up call
 Ring Tones
 Fun Clips
 The Hit List
 Music Messenger
 Movies
Daniel Schulman
“Our market research
indicates that VirginXtras will
attract and retain the youth
segment”

G I V E N V I R G I N M O B I L E ’ S T A R G E T M A R K E T ( 1 4 T O 2 4 - Y E A R -
O L D S ) , H O W S H O U L D I T S T R U C T U R E I T S P R I C I N G ? T H E C A S E
L A Y S O U T T H R E E P R I C I N G O P T I O N S . W H I C H O P T I O N S W O U L D
Y O U C H O S E A N D W H Y ? I N D E S I G N I N G Y O U R P R I C I N G P L A N , B E
A S S P E C I F I C A S P O S S I B L E W I T H R E S P E C T T O T H E V A R I O U S
E L E M E N T S U N D E R C O N S I D E R A T I O N S ( E . G . , C O N T R A C T S , T H E
S I Z E O F T H E S U B S I D E S , H I D D E N F E E , A V E R A G E P E R - M I N U T E
C H A R G E S , E T C ) .
Question-1

14
Pricing strategy
Overall Goal in choosing pricing structure
Need A Breakthrough
 Must reach target market : YOUTH!
 Create a positive lifetime value
(LTV) for every customer.
- Must be able to make money
Three main options
1. Clone the industry prices.
2. Price below competition.
3. A whole new plan.
Audience don’t trust industry pricing plan.
Opportunity

Pricing strategy
Option 1 : Clone the industry prices
1. Simple message
 Pricing competitively.
 MTV applications.
 Superior customer service.
2. Better Off-peak hours.
3. Fewer hidden fees.

Pricing strategy
Minutes
Option 1 : Pricing Structure

Pricing strategy
Option 1 : Benefits and Shortcomings
Pros
And
cons
 Easy to Promote.
 Consumers are used to “BUCKETS” and
peak/off-peak distinctions.
 Savings on advertising budget costs.
 Simple packaging
 Hard for a new entrant.
 No flexibility in calling habits.
 No price distinction hence consumers are not
willing to switch

Pricing strategy
Option 2 : Price below competition
1. Similar structure
 Pricing slightly below the
competition.
2. Maintain “buckets” of minutes.
 Price per minute set below
industry average in certain key
buckets.
 Target young market that uses
100 to 300 minutes.

Pricing strategy
Option 2 : Pricing Structure

Pricing strategy
Option 2 : Benefits and Shortcomings
Pros
And
cons
 Maintain BUCKETS and volume
discounts with price per minute set below
industry average.
 Offer best off-peak hours and less hide
charges so consumer will know virgin
mobile is cheaper and simple.
 Expand size of market that results in
greater sales and profit
 Earnings from each consumer will be less
 Sales growth doesn’t mean big profit
 May trigger competitive reaction

Pricing strategy
Option 3 : Radically new plan
1. Shorten or eliminate
contracts.
2. Prepaid service.
3. Handset subsidies.
4. Eliminate all hidden fees
and off peak hours.
5. Concept of LTV
After evaluating the Pros and Cons of the three
plans, we decide to try Option 3 with Optimal
Pricing.

22
Pricing strategy
 Price Elasticity of Demand
 Characteristics
 Demand is elastic
 Price sensitive
 A decrease in pricing will
increase in corresponding
increase in quantity of
demand
P1
P2
Q1 Q2
Price
Quantity
D

Pricing strategy
Pricing
 Assumptions
 Churn Rate= 6% for Prepaid
 Rate of Interest (i)= 5% per annum
 Market price = $ 0.15 for 200 minutes per month
 A customer uses the service for one year as Expected number of months a
customer will stay with Virgin is 1/ Churn rate = 1/ 0.06 = 16.67 months
 Churn rate remains constant for the period
 a= 1
 VirginXtras is not added to revenue

Pricing strategy
Contracts: Does it make sense to shorten subscription terms or eliminate them?
1) Contract provides a hedge against churn.
2) Estimated churn rises from 2 to 6%.
Advantage: It allows 18 years and younger to purchase the product.
Prepaid
Vs
Postpaid
Fact: 92% of subscribers have postpaid plan.
Concerns:
 Prepaid arrangements have prohibitive pricing.
 (35-50 cents per minute to as high as 75 cents)
 Phone use was infrequent.
 Higher churn rate.
 No loyalty to provider.
 Recoup acquisition cost.
 Morgan stanley research suggest that acquisition cost must be
at or below $100 for prepaid to be viable.
 Need a method to add minutes.

Pricing strategy
Handset subsidies
Fact
 Currently carriers purchase
handsets from major
manufacturers at a cost of $150 to
$300.
 Carriers then subsidize user $100-
$200 ---becomes part of
acquisition cost.
Approach
Increasing subsidies so that phones
are cheaper than competition.
Getting consumers to feel more
invested and loyal.

Pricing strategy
Hidden Fees Off-peak hours
Goal: Make pricing very
simple.
“What you see is what
you get”
1)Rolling inner prices of
taxes and fees into final
prices.
2)Make money.
Target market
Young people!
 Price insensitive.
 Demand is inelastic.
 Rarely worry about
charges. Call in office
hours.
 Make calls whenever
necessary and can avoid.
 Care about price
 Price sensitive.
 Elastic demand
Business person
Student

Pricing strategy
What is LTV?
ARPU CCPU M AC LTV
Average
Revenue per
user
Cash cost per
user
(45% of
ARPU)
Monthly
Margin
(ARPU-
CCPU)
Acquisition
cost
Lifeti
me
Value
R: Retention rate= 1- churn rate
i= interest rate = 5%
-Sales commission
-Advertising per
gross add
-subsidy cost
 Value of customer in terms of
how much service or product
he will purchase in his lifetime.
 Value of keeping customers
loyal

Pricing strategy
Acquisition Cost
 Advertising per gross add-
$75-$100
 Sales commission-$100
 Handset subsidy-$100-$200
 Total- $275-$400
 Acquisition cost roughly-
$370
Breakeven Analysis
 Monthly ARPU- $52
 Monthly cost to serve- $30
 Monthly margin=($52-
$30)=$22
Time to breakeven on acquisition cost
= $370/$22= 17 months

Pricing strategy
Lifetime value Analysis
Option 1
1)r(annual retention rate):
1-(0.02*12) = 0.76
2)M (yearly margin): 22* $12= $264
3)i(interest rate) : 5%
4)AC(acquisition cost): $370
LTV=[264/(1-0.76+0.05)]-370
=$540
Option 2
1)r(annual retention rate):
1-(0.06*12) = 0.28
2)M (yearly margin): 22* $12= $264
LTV=[264/(1-0.28+0.05)]-370
= -$27.14

Pricing strategy
Option 3a
With
contract
$29 -- $35 due to hidden cost
(21% decrease)
1) r(annual retention rate):
1-(0.02*12) = 0.76
2)M (yearly margin):
22/1.21=$218.16
LTV=[218.16/(1-0.76+0.05)]-
370
=$382
Option 3b
Without
contract 1)r(annual retention rate):
1-(0.06*12) = 0.28
2)M (yearly margin): $218.16
LTV=[218.16/(1-0.28+0.05)]-
370
= -$86.68

Pricing strategy
Lifetime value Analysis Results
Option 1 2 3a 3b
LTV +$540 -$27.14 +$382 -$86.68
+value
Acceptable
A different approach
1)Lowering customer Acquisition cost
• Sales commission: $30
• Advertising per gross add: $60
• Handset subsidy: $30
Total customer Acquisition cost= $120
2)Embracing additional pricing elements
3)Developing competitive positioning through pricing.

Pricing strategy
Achieving profitability
1. Breakeven Analysis
 Given the acquisition Virgin’s $120 acquisition cost, what would
the company have to charge on a per-minute basis (P) to equal
the industry’s break-even time of 17 months, assuming that
Virgin’s customers use 200 minutes per month (a midpoint of
estimate p. 7)?
 Monthly ARPU: 200(P)
 Monthly cost-to-serve (45% - Ex. 11): (0.45)*[200(P)]
 Monthly margin: [200(P)] - [90(P)] = 110(P)
 Virgin Acquisition Cost: $120
 Price to Break-Even: 120 / 110(P) = 17
 P = 6.4 cents
 r (annual retention rate): 1 - (0.06 * 12) = 0.28
 LTV (6.4): [(0.064 * 110 * 12) / (1 – 0.28 + 0.05)] – 120= - $10.29
 LTV (10): [(0.10 * 110 * 12) / (1 – 0.28 + 0.05)] – 120 = $51
 LTV (25): [(0.25 * 110 * 12) / (1 – 0.28 + 0.05)] – 120 = $ 309
LTV Analysis: Eliminating contracts

T H E C E L L U L A R I N D U S T R Y I S N O T O R I O U S F O R H I G H
C U S T O M E R D I S S A T I S F A C T I O N . D E S P I T E T H E E X I S T E N C E O F
S E R V I C E C O N T R A C T S , T H E B I G C A R R I E R S C H U R N R O U G H L Y
2 4 % O F T H E I R C U S T O M E R S E A C H Y E A R . C L E A R L Y , T H E R E I S
V E R Y L I T T L E L O Y A L T Y I N T H I S M A R K E T . W H A T I S T H E
S O U R C E O F A L L O F T H I S D I S S A T I S F A C T I O N ? H O W H A V E T H E
V A R I O U S P R I C I N G V A R I A B L E S ( C O N T R A C T S , P R I C I N G
B U C K E T S , H I D D E N F E E S , O F F - P E A K H O U R S , E T C . ) A F F E C T E D
T H E C O N S U M E R E X P E R I E N C E ? W H Y H A V E N ’ T T H E B I G
C A R R I E R S R E S P O N D E D M O R E A G G R E S S I V E L Y T O C U S T O M E R
D I S S A T I S F A C T I O N ?
Question-2

Addressing the Customers’ dissatisfaction
Sources of
customer
dissatisfaction
contracts
Peak time
differentials
Complex
sales process
privacy
concerns
Credit
checks
Poor
customer
service
Hidden fees
Bucket
pricing

35
Reasons for dissatisfaction
 Customer under contract leads to lower churn rate
 Hidden charges allows the company to promote at lower per minute
pricing levels.
 A complex sales process, which in turn drives costly sales commissions.
 Bucket pricing system often lead to confusion with customers and so they
are penalized.
 Off-Peak/On-Peak differentials add to customer confusion and off-peak
period has shrunk over time

36
 Virgin Mobile – A Different Approach
1. From a customer perspective, an "ideal" plan would probably
include a number of elements which would have a potentially
negative impact of the company’s financial…
2. … but Virgin can use a number of different managerial tools to
counter these negatives, for example:
• Lowering Customer Acquisition Costs
• Embracing Additional Pricing Elements
• Developing a Highly-Differentiated Competitive
Positioning through a new services package and a new pricing
proposition

No contracts
A Consumer Friendly Plan: Potential Problems
Increased Churn
Consumers want….. But the problem is …..
No Pricing Buckets
No Hidden Fees
Lower
Operating
Margins
No Peak/Off Peak
Hrs
No Credit Checks More Uncollectibles
Simple Sales Process
Sales commission
reduction
Great Service Increased Costs

Lowering Customer Acquisition Costs
1. On sales commissions
• Because of a different channel and merchandising strategy where "consumers can pick up the
phone without a salesperson helping them" , Virgin expect its sales commissions to be $30 per
phone, as opposed to $100 for the industry average.
2. On advertising costs
• Virgin plans to spend much less than its competitors (approx. $60 million for the year. Given
the company’s target to acquire 1 million customers during this period, the advertising cost will
be $60 per gross ad, compared to the industry average of $75 to $100 .
3. On handset subsidies
• Virgin handsets cost the firm between $60 to $100 compared to an industry average of $150 to
$300 because the company plans to stay away from selling high-end phones to young
customers.
• If Virgin is decided to offer subsides at half the rate of the industry average (current industry
handset cost / subsidy = 67%), then this subsidy would be roughly ($80 * 35%) = $30
4. Virgin total acquisition costs: $120
• Advertising per gross ad: $60

39
 Embracing Additional Pricing Elements
1. Pre-paid requirement – no contract
• Eliminate the problem of uncollectible
• Eliminate the need for credit check
• Simplify the selling process
• Encourage trial (and therefore potentially lower customer acquisition
costs)
• Lower costs-to-serve (simplified billing, reduced number of service
calls related to pricing disputes)
2. A completely transparent, simple (one-size fits-all) per-minute
price – no form of pricing discrimination being practiced by the
competition (pricing buckets, on/off-peak policies, hidden fees,
etc.)

40
 Developing a Highly-Differentiated Positioning
1. A highly-differentiated service proposition
• Rescue Rings
• Wake-Up Calls
• VirginXtras…
2. A highly-differentiated pricing proposition
3. An opportunity to tap into the consumer resentment with a non-
cynical, non-manipulative and radically different pricing approach, one
that promises full transparency, no traps and no (bad) surprises, all at
a fair price (customer rage management)

41
 A Consumer Friendly Plan: Potential Solutions
No contracts Increased Churn
Consumers want… But the problem is …..
No Pricing Buckets
No Hidden Fees
Lower
Operating
Margins
No Peak/Off Peak
Hrs
No Credit Checks More Uncollectibles
Simple Sales Process
Consumer
Confusion
Great Service Increased Costs
Lower
Acquisition
Costs
Simplified Pre-
paid Plan
eliminates
confusion, no
uncollectibles,
fewer service calls
Lower Subsidies
A possible solution is …..

W H A T D O Y O U T H I N K O F V I R G I N M O B I L E ’ S V A L U E
P R O P O S I T I O N ( T H E V I R G I N X T R A S , E T C . ) ? W H A T D O Y O U
T H I N K O F I T S C H A N N E L A N D M E R C H A N D I S I N G S T R A T E G Y ?
Question-3

43
Value Proposition
 Basic intent to appeal to the youth, market, generate additional usage, and create
loyalty
 virginExtra – Integrate entertainment with basic telephony
 Text Messaging, Online Real-Time Billing, Rescue Ring, Wake-Up Call, Ring Tones,
Fun Clips, The Hit List, Music Messenger, Movies.
 Packaging – colorful and vibrant, Hassle free sale
 Availability – At places frequented by the youth
 Holistic marketing approach takes pricing decision based on various factors – 3Cs and
marketing environment.
 Company – Pricing should conform to the company’s marketing strategy and its
target markets and brand positioning.
 Customer – Uniform and hassle free pricing which will enhance Customer’s
satisfaction.
 Competition – A pricing strategy which will provide the company a distinct
competitive advantage

D O Y O U A G R E E W I T H V I R G I N M O B I L E ’ S T A R G E T M A R K E T
S E L E C T I O N ? W H A T A R E T H E R I S K S A S S O C I A T E D W I T H
T A R G E T I N G T H I S S E G M E N T ? W H Y H A V E T H E M A J O R
C A R R I E R S B E E N S L O W T O T A R G E T T H I S S E G M E N T ?
Question-4

Target Market Selection
 Identified the age segment where the Industry
penetration was the lowest, that is, between 15 years to 29
years of age.
0
10
20
30
40
50
Age 15-19 Age 20-29 Age 30-59
Mobile Phone penetration
Mobile Phone
penetration

46
Target Market Selection
 Identified the income segment with a low disposable
income and high aspiration for trendiness.
1
15
32
32
USA Demography by Income
Upper Class
Upper Middle Class
Lower Middle Class
Working Class
Lower Class

H O W D O T H E M A J O R C A R R I E R S M A K E M O N E Y I N T H I S
I N D U S T R Y ? I S T H E R E A F I N A N C I A L L O G I C U N D E R L Y I N G
T H E I R P R I C I N G A P P R O A C H ?
Question-5

48
Make Money
1. Major carriers continue to hold customers "hostage" through
contracts and leave them feeling trapped in their plans
(capture).
2. Customers, being obliged to sign up for pricing buckets, are
penalized, often heavily, for shortfalls and overusages
(decommoditization and consumption penalties).
3. Due to hidden costs (taxes, extra charges, service costs,
etc.), customers often wind up paying 20-25% more than they
expected on a per minute basis (lack of transparency).
4. Off-Peak/On-Peak differentials add to customer
confusion and off-peak period has shrunk over time
(constrained consumer behaviour patterns).
5. Credit checks eliminate roughly 30% of the pool of
applicants due to poor credit rating, after consumers spent
time and effort dealing with sales people (increased
consumer rage).

H O W C O N F I D E N T A R E Y O U T H A T T H E P L A N Y O U H A V E
D E S I G N E D W I L L B E P R O F I T A B L E ? P R O V I D E E V I D E N C E O F T H E
F I N A N C I A L V I A B I L I T Y O F Y O U R P R I C I N G S T R A T E G Y
Question-6

50
The Designed Plan
1. From a customer perspective, an "ideal" plan would
probably include a number of elements which would have a
potentially negative impact of the company’s financial…
2. … but Virgin can use a number of different managerial tools
to counter these negatives, for example:
• Lowering Customer Acquisition Costs
• Embracing Additional Pricing Elements
• Developing a Highly-Differentiated Competitive
Positioning through a new services package and a new
pricing proposition

51
1. On sales commissions
• Because of a different channel and merchandising strategy
where "consumers can pick up the phone without a
salesperson helping them" (p. 5), Virgin expect its sales
commissions to be $30 per phone, as opposed to $100 for the
industry average.
2. On advertising costs
• Virgin plans to spend much less than its competitors (approx.
$60 million for the year (p. 5). Given the company’s target to
acquire 1 million customers during this period, the advertising
cost will be $60 per gross ad, compared to the industry
average of $75 to $100 (p. 9).

52
3. On handset subsidies
• Virgin handsets cost the firm between $60 to $100 compared
to an industry average of $150 to $300 (p. 5) because the
company plans to stay away from selling high-end phones to
young customers.
• If Virgin is decided to offer subsides at half the rate of the
industry average (current industry handset cost / subsidy =
67%), then this subsidy would be roughly ($80 * 35%) = $30
4. Virgin total acquisition costs: $120
• Advertising per gross ad: $60

P L E A S E D E S C R I B E H O W T H E S I T U A T I O N A N D F I N D I N G S I N
T H E C A S E A N D / O R Y O U R C O N C L U S I O N S C O U L D B E U S E D T O
B E N E F I T Y O U R J O B / E M P L O Y E R A N D A F G H A N I S T A N A S A
W H O L E .
Question-7

Websites
 http://www.virginmobile.in/
 http://www.virginmobileusa.com/
 http://en.wikipedia.org/wiki/Virgin_Mobile
Tools used
 Microsoft Encarta (Encyclopedia for offline references)
 Microsoft Excel (for data analysis & graphs)
References

Thankyou!

Annalysed Case study of Virgin mobiles HARVARD UNIVERSITY CASE

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