TEAM 4 Prepared By: Virgin Mobile USA Telecom Services PGPM 2012 Prepared By: Team 4 Pooja Gupta (P122033) Rohit Singh (P122038) Saurabh Singh (P122041) Varun Anand (P122049 GREAT LAKES INSTITUTE OF MANAGEMENT, GURGAON
IntroductionVirgin Mobile is a successful company based in the U.K. Virgin Group Ltd. is aBritish multinational branded venture capital conglomerate company founded by businesstycoon Richard Branson. The company is well known for its brand extension and was the first companyto introduce the Mobile Virtual Network Operator (MVNO) in the U.K., where they leased network spaceform another firm instead of running a network in-house and as a result avoiding infrastructure andlarge fixed cost.The company was well known for its hip and trendy position in the U.K., and catered to the youthmarket. Although they have had a couple failures in the past including launching the MVNO inSingapore, the company decided to venture into the U.S. market because they believed that the marketwas underserved particularly in the 15 to 29 age group. The mobile penetration in the age group of 15-29 years is only 15% and the revenue from this target group was expected to rise from $27billion in 2002to 65 billion in 2005.It ccommenced it’s operations in USA in June, 2002 led by founding CEO Dan Schulman. Virgin enteredUSA as a 50-50 joint venture between Virgin Group and Sprint Corporation. Virgin Mobile USA’s servicewould be hosted on Sprint’s PCS network. At that time, Sprint was in process of updating its networkand increasing its capacity. The idea was to provide telecom services at a low cost which would bepossible as huge fixed costs or the physical infrastructure wasn’t required due to joint venture withSprint. So the company decided to focus on understanding and meeting customer needs.Virgin Group’s Mission Statement“Virgin believes in making a difference. We stand for value for money, quality, innovation, fun and asense of competitive challenge. We strive to achieve this by empowering our employees to continuallydeliver an unbeatable customer experience.”The company believes in delivering quality and value for money services to its customers. They wish toachieve this by empowering employees and deliver unbeatable customer experience.ObjectiveThe aim of the firm is to create value and profitability in cell phone service industry by targeting agegroup of 15-29 years as the company foresees high opportunity for growth with this market segment.The company aims to get 1 million subscribers by year 1 and 3 million by year 4 by focusing on the youthmarket from the ground up and to serve these customers in a way they have never been served before.Understanding Target Group BehaviorThe calling pattern of this target group is different from that of a typical business person. They aregenerally open to new things such as text messaging, downloading information using cell phones, and
use ringtones, faceplates, graphics, etc. This target group considers cell phones as a fashion accessoryand they feel it’s a style statement for them.Service: Virgin ExtrasYouth segment is the most reactive segment and was always considered to be one of those segmentswhich require continuous provision of all benefits to the consumers to sustain and even grow in themarket.The company adapted some of the strategies to provide better value proposition by: • Focus on provision of augmented services delivering content, features, and entertainment to its consumers like “Virgin Extras” on premium but comparatively less rates and other extras in their plans to appeal to the teen and young adult market, such as text messaging (a feature popular in Europe by 2002, but slow to catch on in the U.S.), online real-time billing, ring tones, wake-up calls, and more. • Channel Strategy - contract with retailers like Target, Best Buy, and Sam Goody to sell Virgin phones and plans off the shelf. No expensive sales staff would be employed, contract with Kyocera to produce less-expensive phones with trendy names like “Party Animal", "Super Model" • Pay As You Go and Monthly Plans - The first pay as you go plans offer buckets of minutes, which each provide a different calling rate or offers a pay as you go rate of 20 cents per minute and monthly plans which mimic traditional contract plans, but are on a prepaid basis. • No Contracts, No Credit Checks • Dedicated Customer Service - Virgin Mobiles customer care can be reached via email or through a toll free number. • Multiple Payment Options - To pay your Virgin Mobile prepaid bill per purchase minutes, you can register a credit card, debit card, or PayPal account for automatic bill payment. You can also buy refill cards at thousands of retailers nationwide. • Downloadable content - There are a large selection of ringtones, games, screensavers and wallpapers available for download starting at 1 dollar each and going up from there. • International Calling: Virgin Mobile does offer international calling. International charges include standard airtime and the international rate per minute. Rates start at 15 cents per minute and vary depending upon the destination country. • Roaming Charges: The Virgin Mobile pay as you go phone service has no roaming charges. Your phone will not work outside your coverage area.
• Nationwide Long Distance: Virgin Mobiles includes nationwide long distance calls in their plans including long distance to all 50 states, Puerto Rico and the Virgin Islands. Long distance calls are treated the same as regular calls. • 411 Calls: Yes, directory assistance is available for $1.75 per call, plus airtime charges.PricingVirgin mobile USA decided to be the lowest cost mobile service provider in the market which becameone of its USP.Virgin had three pricing options.1. Clone the existing industry pricing structureOver 90 percent of cell phone subscribers in the U.S. had contractual agreements with their providerswhereby they agreed to a “bucket” of minutes to use per month. If the customer used more than theirallotted minutes, he or she would be charged extremely high rates for the overages. If they did not useall of their minutes, they still paid the same monthly fee and did not get to recapture the unusedminutes the next month. Substantial taxes and service charges added to the fixed fee and overagecharges in monthly bills.Pros:If chosen, advantage of working within an established framework for pricing.Cons: No differentiation from other cell phone providers Not able to reach target market of teenagers, since children under the age of 18 could not enter into contractual agreements in the U.S No value proposition created by following hidden charges2. Price below the competitionProsIf chosen, it would reach out and attract younger cell phone users and drive salesCons Engaging its competition in a price war Not sustainable solution in the longer term3. A new, prepaid service plan
In order to cater to its specific segment and be profitable and distinct in delivering their valueproposition, a new prepaid plan would be the best the option to choose. A prepaid plan that wouldeliminate contracts, hidden fees, and even monthly billing while still being profitable in which customerswould buy minutes in advance and then, once the minutes were used, “recharge” minutes onto theirphones with their debit cards would be the right pricing decision for Virgin Mobiles USA. Virgin mobilescould afford lower margins of profit in a prepaid plan as it did not have high fixed costs associated withnetwork infrastructure due to MVNO strategy, no expensive sales and distribution plans in high-endretails with expensive salesforce and only targeted effective advertising.ProsDifferentiated positioning catering to target market with flexibilityVirgin hoped that by making its billing more transparent it would create value for its customers with nohassles of hidden charges.Cons High monthly churn rate expected from a prepaid plan lack of contracts might keep customers from being loyal to Virgin MobileAppendix 1AC includes:Advertising costs per customer: from $75 to $100 .Virgin Mobiles proposition = 60M/1M= $60Sales commission paid per subscriber: $100 Virgin mobiles sales commission = $30Current industry handset cost: $150 to $300 (assume $225). Virgin’s handset cost = $60 to $100 (assume$80)Handset subsidy provided to the subscriber: $100 to $200 (assume $150) Virgin’s handset subsidy = $30Total: from $275 to $405. Total avg as assumed from Virgins proposition= $200 Assuming Industry average customers acquisition cost: $370 Industry average monthly cell phone bill/monthly ARPU: $52
Industry average monthly hidden fees (plan price markup): 21% ($ 29 cellular bill becomes $35 due to hidden costs) Industry average monthly cost: $30 Retention rate at 2% churn( with contract): 1- (0.02 * 12) = 0.76 Retention rate at 6% churn( without contract): 1- (0.06 * 12) = 0.28 Assuming Average minutes used by the 15-29 age group: 200 minutes (avg of 100-300mins) Virgin prepaid price/minute: $0.22 Assuming Interest rate: 5%Break-even Analysis - at what per minute price would Virgin break even and achieving profitabilitywith Customer friendly plansRegular Plan Monthly Margin = Average monthly bill(ARPU) – average monthly cost(CCPU) = $52 - $30 = $22 Plan price markup = monthly interest rate = 21% $22/1.21 = $18.18 Breakeven: $370/$18.18 per month = 20.35 monthsPrepaid plan Assume monthly costs = 30% Monthly Margin = Average monthly bill(ARPU) – average monthly cost(CCPU) = ARPU - 45% of ARPU = ARPU(1-.45) = 0.55*ARPU = 0.55*($44) = $24 $24/1.30 = $18.5 Breakeven (total AC assumed): $200/$27.7 per month = 10.8 monthsVirgin’s 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 • Very low handset subsidies • No credit checks • No Monthly bills • Price: 25 cents per minute for the first 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.