Virgin mobile final

F. Jallat – CFVG - 2011
Virgin Mobile USA
Pricing for the Very First Time

Questions of the Case
• The cellular industry is notorious for high customer
dissatisfaction -churn roughly is 24% of the
customer each year. How have the various pricing
variables (contracts, pricing buckets, hidden fees,
off-peak hours, etc.) affected the consumer
experience? Why haven’t the big carriers responded
more aggressively to customer dissatisfaction?
• How do the major carriers make money in this
industry?
• Do you agree with Virgin Mobile’s target market
selection (14 to 24 year old)? What are the risks
associated with targeting this segment?

Questions of the Case
4. What do you think of Virgin Mobile’s value
proposition (The Virgin Xtras, etc)? What do you
think of its channel and merchandising strategy?
5. Given Virgin Mobile’s target market, how should it
structure its pricing? Which option would you
choose and why?
6. Provide evidence of the financial viability of your
pricing strategy

Teaching Objectives
1. To cover two main aspects of pricing
• Price levels – i.e., the overall amount a consumer pays
• Price structure – i.e., how a payment is presented to the
consumer
2. To examine the interplay between pricing, target
market selection, and a firm’s overall value
proposition.
3. To demonstrate the multiple ways firms can create
paths to profitability.
4. To illustrate the importance of adopting a long-term
strategic perspective in choosing a pricing structure.

Pricing Structure from the Customer Perspective
• Despite the fact that the mobile communications
industry is mature, over-crowded and fiercely
competitive, a truly consumer-friendly cellular plan has
still not been introduced.
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).

competitive, a truly consumer-friendly cellular plan
has still not been introduced.
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).

competitive, a truly consumer-friendly cellular plan has
still not been introduced.
6. Complex sales process in most of the traditional channels
(proprietary retail outlets, mall kiosks, high-end electronic
stores) requires a face-to-face sales interaction that many
find frustrating and time-consuming (increased sacrifice).
7. Consumers received their bills via mail. These bills typically
include a detailed record of customers’ call history (no
respect for privacing concerns).
8. When consumers experience problems or have questions
about their bill, the service response has been historically
very poor (poor management of moments of truth).

Pricing Structure from the Carrier Perspective
• Many of the sources of customer dissatisfaction are
also sources of carrier profit!
1. Contracts
• customers under contract generate monthly churn rates of
2% while customers without contracts generate a churn
rate of 6%...
• … For a firm like ATT (with a customer base of 20.5 million)
this would mean to acquire an additional 9.84 million
customers a year –at a cost of $3.64 billion- just to offset
customers lost to the higher churn rate!

• Many of the sources of customer dissatisfaction are
also sources of carrier profit!
2. Bucket Pricing
• While consumers using 700 minutes a month, for example,
should be paying about 10 cents a minute, most
consumers are paying more –some to them up to 60 cents
a minute...
• … Pricing buckets allow the carriers to advertise low per-
minute rates but "if all customers actually signed up for the
optimal plan for their usage, the carriers would be making
far less money than they are today"!

Industry Pricing Plans vs. Actual Prices Paid

3. Hidden Fees, Credit Checks, Poor Customer Service
• By using hidden fees, the carriers are able to promote low
per-minute pricing levels but still collect additional
revenues. The industry is also notorious for cutting costs in
areas like customer service and billing to boost operating
margins.
• Besides, the carriers also require a rigorous credit check to
ensure that their uncollectibles and churn rate remain
low...
• … generating a vicious circle through complex sales
process, which in turn drives costly sales commissions
($100 per customer), which in turn keeps acquisition costs
high, etc.

Multiple Target Customers
Business, Consumer, Heavy/Light Users, etc.
Multiple Target Customers
Business, Consumer, Heavy/Light Users, etc.
Complex Sales
Process
Complex Pricing Plans:
-Multiple options
-Multiple buckets
-Hidden Fees
Poor serviceCredit Checks
A Cycle of Consumer Dissatisfaction
Sources of Consumer Dissatisfaction
Forced
Contracts
Customer
Dissatis-
faction
Continuous Industry churn
High churn rates mean that carriers must re-
acquire 24% of their customer base each year,
just to stay even
High Customer Acquisition Costs
Because of high customer dissatisfaction
rates, acquiring new customers is a tough sell
Financial pressure to …
Lock-in customers using contracts,
Cut corners in customer service to reduce costs,
Aggressively promote low prices to attract cutomers
Use hidden fees and pricing buckets to increase margins
Sources of Industry Dissatisfaction

Behind Prices and Pricing Levels:
Looking at the Economics of a Business Model
1. Acquisition Costs
. Advertising per gross add (p.5): $75 - $100
. Sales commission paid per suscriber: $100
. Handset subsidy: $100 - $200
. Total: $275 - $400
. Acquisition cost is roughly (p.2) $370

2. Break-Even Analysis
. Monthly ARPU (average revenue per user): $52
. Monthly cost-to-serve: $30
. Monthly margin: $22
. Time to break-even on the acquisition cost:
$370 / $22 = 17 months

3. Lifetime Value (LTV) Analysis
• From transactional to relationship marketing

From Transactional to Relationship Marketing
Time
Sales Volume
Natural growth of customers and market size
Growth only possible at competitors’ expenses

3. Lifetime Value (LTV) Analysis
• From transactional to relationship marketing
• Why should a company take into consideration the long-
term value of its customers?

Reducing Defections 5% Boosts Profits 25% to 85%
30%
85%
75%
25%
50%
45% 45% 40%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Auto-service
chain
Branch
depositsC
reditcard
C
reditInsurance
Insurance
B
ockerage
Industrialdistribution
Industria
Laundry
O
ffice-bidg
m
anagem
entSoftw
are
* Calculated by comparing the net present values of the profit streams for the average customer life at current defection
rates with the net present values of the profit streams for the average customer life at 5% lower defection rates.

Relationship Marketing and Profitability
• Savings in advertising, costs of promotion and costs of
finding new clients
• Favourable interpersonal communication
• Increase in “client’s share”
• Reduction in price sensitivity and increase in markets’
“opacity”
• Service bundling & “global solutions”

LIFE TIME VALUE CALCULATIONS
Visits/month (Ex.9)
Visits/year
$ per transaction (Ex.9)
revs/year
Unsatisfied
3.9
46.8
$3.88
$182
Satisfied
4.3
51.6
$4.06
$210
Highly Satisfied
7.2
86.4
$4.42
$382
Avg life (Ex.9)
Revs/life
Unsatisfied
1.1 years
$200
Satisfied
4.4 years
$922
Highly Satisfied
8.3 years
$3170
Difference = $28/yr Difference = $172/yr
Difference = $722 Difference = $2248

Customer Life Time Value - LTV Calculation
( )
( )
ACLTV(1)
i1
)(M
a
1-a
aN
1a
−=
+
∑=
r
( )
ACLTV(2)
ir-1
M −=
+

3a. Lifetime Value (LTV) Analysis – Current Business
Model
. r (annual retention rate): 1 - (0.02 * 12) = 0.76
. M (yearly margin): $22 * 12 = $264
. i (interest rate – assuming 5%): 0.05
. AC (acquisition costs): $370
. LTV: [(264) / (1 – 0.76 + 0.05)] – 370 = $540

3b. LTV Analysis – Eliminating Contracts
. LTV: [(264) / (1 – 0.28 + 0.05)] – 370 = - $27.14
The resulting LTV would become negative, i.e. the
industry would lose money on the average customer!

3c. LTV Analysis – Eliminating Hidden Costs
. A $29 bill becomes $35 due to hidden costs (p.7)
which translates into a 21% decrease.
. If the costs were eliminated, then M would be
reduced to: (22 / 1.21) * 12 = $218.16
. Break-even would then become: 370/18.18 = 20
months
. LTV: [(218.16) / (1 – 0.76 + 0.05)] – 370 = $382
. And LTV (without contract): [(218.16) / (1 – 0.28 +
0.05)] – 370 = - $86.68

Virgin Mobile – A Different Approach
1. Entering a crowded industry with yet another undifferentiated
offer could make the goal of acquiring 1 million customers by
the end of the first year (p. 1) extremely difficult…
2. … Furthermore, the youth market is a segment that is
particularly loathe to enter into contracts and very likely to fail
credit checks: young people have limited disposable income,
uneven usage patterns, and weak credit histories.
3. But this market segment is underserved and there may be an
opportunity for Virgin to offer these consumers a product
with highly-differentiated features (e.g., VirginXtras) designed
to meet their specific needs…
4. … and still be able to compete "below the radar screens" of
the big players.

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

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

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" (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).

Lowering Customer Acquisition Costs
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
3. Virgin total acquisition costs: $120
• Sales commission: $30
• Advertising per gross ad: $60
• Handset subsidy: $30

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.)

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)

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

How Could Virgin Achieve Profitability?
• Is there a per-minute price that would allow the
company to attract young customers and reach a
financial viability at the same time?
1. Break-Even 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

How Could Virgin Achieve Profitability?
2. LTV Analysis – Eliminating Contracts
. 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
. Virgin should not consider a price point that would generate a
LTV significantly lower than the industry:
1. The other carriers are building a significant war chest (LTV=$540)
and Virgin would be at competitive disadvantage if the company
was obliged to fight against them directly.
2. Virgin could also trigger a price war and defeat their own goal of
competing "under the radar screen" with a new segment but a
low price point.

Virgin Mobile USA : What Happened?
Virgin Mobile USA
« Live Without a plan »
Pre-Paid Plan 3 months to use your minutes
No Contracts (+2 months grace period)
No Hidden Charges
No Peak/Off-Peak House One-button access to current
No Long-Distance Charges balance/remaining minutes
Lower Handset Subsidies Can add more minutes via web
or phone using a credit card or
25 cents/minute/1st
10 min. of day a « Top Up » card purchased
10 cents/every min. thereafter from a retailer
Virgin Mobile USA
« Live Without a Plan »
No Credit Check
→increases the size of the target market
No Billing
→ no monthly bills →lower cost to serve
→ fewer customer service calls → lower cost to serve
→ no uncollectibles
Lots of customer interaction
Virgin Mobile USA
« Live without a Plan »
Simple Pricing
→ No sales complexity → No salesperson needed
– opens up new channels
– lowers sales commissions
– lowers acquisition cost
For consumers, on any given day
→ the more you consume, the lower you rate…
→ the more $$ Virgin makes…
No Lock-In (other than the handset)
The only thing that keeps customers coming back is satisfaction.

Virgin Mobile USA: What Happened?
1. Virgin was able to surpass its goal of acquiring 1 million customers
within a year launch – becoming the fastest cell phone service to
reach the 1 million mark in US history.
2. Virgin ended the year 2003 with a revenue run rate of $500
million.
3. Virgin enjoys the lowest churn rate in the prepaid world.
4. Virgin eliminated the dual problem of having both a high credit
rejection rate and large uncollectibles by requiring payment up-
front.
5. It substituted contracts with lower phone subsidies, thereby
ensuring that customers had "skin in the game" while lowering its
own acquisition costs.
6. Virgin made the pricing structure so easy to understand that it
was able to eliminate the sales complexity, which delighted its
customers and lowered its own sales commission expenses.

Narrow Target Segment
Young people between the ages of 14 and 24
Narrow Target Segment
Young people between the ages of 14 and 24
Simple Sales
Process
Simple Pricing Plans
-Full transparency
-Easy to understand
- No Hidden Fees
Great Service
No Credit
Checks
A Cycle of Consumer Satisfaction
Sources of Consumer Satisfaction
No Contracts
Customer
Satisfaction
Lower-Than-Expected Churn Rates Lower Customers Acquisition Costs
Financial flexibility to …
Eliminate contracts,
Offer great customer service,
Offer competitive per-minute rates

What Lies Behind a Price?
1. Price as a service (fair & transparent pricing structure)
2. Price as a ‘value signal’ (market positioning)
3. Price as the ‘growth engine’ of a business model (ROE)
4. Price as a major differentiation factor (well-
differentiated value proposition on a marketing /
strategic level)
5. Price as a main driver of consumption patterns (Yield
Management)

Virgin mobile final

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (17)

Similar to Virgin mobile final

Similar to Virgin mobile final (20)

Recently uploaded

Recently uploaded (20)

Virgin mobile final