Virgin mobiles pricing for the very first time

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
2 Apr 2014Marketing Case Study -Virgin Mobile
Virgin Mobiles USA
Prepared by-
Chanpreet Singh
Sachin Sharma
Surabhi Kala
Swapnil Soni
DoMS, IISc
Course-
Marketing Management
Instructor-
Prof. R. Srinivasan

2
Index
 Introduction-Virgin Group
 Introduction-Virgin Mobile
 Virgin Mobile – Ventures
 Virgin Mobile USA
 Case Questions
 Pricing strategy
 Addressing the Customers’ dissatisfaction
 Telecom Market Comparison – India 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 2 Apr 2014Marketing 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
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 call…

9
Search for Leadership
Virgin Mobile USA
• 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..”

10
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 , 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 ? W H I C H O F T H E O P T I O N S G I V E N I N
T H E C A S E W O U L D Y O U C H O O S E A N D W H Y ? D I S C U S S T H E
P R O F I T A B I L I T Y I M P L I C A T I O N S O F T H E P L A N C H O S E N B Y Y O U
U N D E R S U I T A B L E A S S U M P T I O N S .
Question-1

12
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

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 N T H E U S H A S A V E R Y H I G H R A T E
O F D I S S A T I S F A C T I O N R E S U L T I N G I N C U S T O M E R C H U R N . H OW
H A V E T H E V A R I O U S P R I C I N G E L E M E N T S A F F E C T E D T H E
D I S S A T I S F A C T I O N A N D W H A T H A V E T H E B I G P L A Y E R S D O N E
T O R E D U C E T H E C H U R 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

31
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

32
 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
• Sales commission: $30
• Advertising per gross ad: $60
• Handset subsidy: $30

35
 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.)

36
 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)

37
 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 …..

H O W W O U L D Y O U C O M P A R E T H E U S M A R K E T A N D T H E
I N D I A N MA R K E T F O R T H E S A M E C U S T O M E R S E G M E N T IN
T E R M S O F P R I C I N G A N D C U S T O M E R C H U R N ? W H A T S H O U L D
B E T H E S T R A T E G Y F O R P R I C E A N D C H U R N I N I N D I A ?
Question-3

39
Telecom Market Comparison
Characteristic India United States
Urban Population 30.30% 82.20%
Mobile Phone Penetration 96.57% 76.67%
3G/4G Penetration by 2016 16.2% 68.3%
Prepaid Mobile Share of Phones 96.2% 21.3%
Churn Rate/Year (not compounded) 73% 21%
Number of SIM Cards/Phone One to Four One
Minutes of Use/Subscriber/Month 320 650
Average Revenue/User/Month $3.10 $50
Cost to subscriber for calls Per Second Per Minute
Charging Model Outgoing Only Incoming and Outgoing

Inference
• India has great potential in terms of Telecom market i.e. appox 900 mn subscribers
• Although market show increasing trend yet according to the forecast the market is posed
to be saturated in near future
• Urban is the major contributor in Telecom consumer market
Source: Telecom Regulatory Authority of India, Press Release No. 72/2012, April 7, 2012, p. 1
Indian scenario

Inference
• In India more customers are “Pre-Paid” (non-contract) subscribers as compared to those in USA
• Pricing policy highly differs in Indian context keeping above in mind
Source: Business Monitor International, India Telecommunications Report, 2Q 2012
Indian Vs US

Concentric Diversification
Opportunity for growth,
targeting the same youth
consumer base with lucrative
services
Inference
•Comparatively there is a huge gap exists
between US & India in terms of 3G service
penetration
•This helps Virgin to offer diversified
product to the market

Churn Rate Comparison
• At any period Churn rate of mobile
subscribers is higher in India than that in US
• Churn rate in India is increasing in contrast
to that in US
• Churn rate directly reflects in LTV (Life
Time Value) and thereby pricing decision
Source: Business Monitor International, India Telecommunications Report, Q2 2012,
Reason for High Churn Rate in India
Competition MNP

Source: Business Monitor International, India Telecommunications Report, Q2, 2012,
Indian Vs US- Average Revenue Per User (ARPU)
Inference
• ARPU for India is very less as compared to that of US
• In general it follows a decreasing trend due to market competition

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

Thank you!

Virgin mobiles pricing for the very first time

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