Case analysis of virgin mobile in United States. They want to launch a sim card for the young population.

1. Appendix
Industry pricing analysis:
Retention rate for contract = 1 – 0.02*12 = 0.76
Retention rate for non-contract = 1 – 0.06*12 = 0.28
Industry
Contract No contract
Retention rate 0.76 0.28
Price $ 52 $ 52
Variable cost $ 30 $ 30
Contributing margin $ 22 $ 22
Interest rate, i 5% 5%
AC $ 370 $ 370
LTV $ 540.34 $ (27.14)
Option 1:
Acquisition cost for virgin –
Sales commission per person = $ 30
1 year marketing cost = $60 million / 1 million customers = $60
Handset cost = $80 * (225-150)/225 = $27
Total acquisition cost = $117
Price to be charged from customer = $52*(1-6/29) = $41
CCPU = 45% of revenues
Option 1
Contract
Retention rate 0.76
Price $ 41
Variable cost $ 19
Contributing margin $ 23
Interest rate, i 5%
AC $ 117
LTV $ 821.93
Option 2:
Price to be charged from customer = $52*(1-0.125) = $41
Discount in peak hours = 12.5% (Assumed) – It can be lower also and reduce the contributing margin.
Option 2
Contract
Retention rate 0.76
Price $ 46
Variable cost $ 20
Contributing margin $ 25
Interest rate, i 5%
AC $ 117
LTV $ 918.85

2. Option 3:
Option 3
No contract
Retention rate 0.28
Price $ 13
Variable cost $ 6
Contributing margin $ 6.93
Interest rate, i 5%
AC $ 117
LTV $ (8.67)
Sensitivity analysis for option 3:
Option 3
Sensitivity Analysis
No contract
Retention rate 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Price $ 13 $ 18 $ 20 $ 22 $ 24 $ 30 $ 50 $ 63
Variable cost $ 6 $ 8 $ 9 $ 10 $ 11 $ 14 $ 23 $ 28
Margin $ 6.93 $ 9.90 $ 11.00 $ 12.10 $ 13.20 $ 16.50 $ 27.50 $ 34.72
Interest rate, i 5% 5% 5% 5% 5% 5% 5% 5%
AC $ 117 $ 117 $ 117 $ 117 $ 117 $ 117 $ 117 $ 117
LTV $ (8.67) $ 37.62 $ 54.76 $ 71.90 $ 89.05 $ 140.48 $ 311.90 $ 424.46
Price per min $ 0.063 $ 0.09 $ 0.10 $ 0.11 $ 0.12 $ 0.15 $ 0.25 $ 0.32
Breakeven analysis:
AC $ 117
Number of minutes per month (Average) 200
Price charged 200*P
Cost to company 0.45*200*P
Profit 0.55*200*P
Industry BE months = Virgin's BE months 16.8 months
P per min $ 0.063
Contractual price ($52/417) $ 0.12
Perceived price ($52/200) $ 0.26
Breakeven months 16.8 months 3 months 3.36 months* 4 months 6 months 10 months 12 months
P per min $ 0.063 $ 0.35 $ 0.32 $ 0.27 $ 0.18 $ 0.11 $ 0.09
*The churn rate for non-contract plan is 6% and based on this we have assumed that 1 person will use
Virgin’s plan for 3.36 months (12*0.28).
Value based pricing:
Variable cost = 6.4 cents per min
Perceived value = 32 cents per min
Market penetration = 9 cents per min
Market Skimming = 12 cents per min