This report encapsulate the Harvard Business Review case of First Time Pricing in Virgin Mobile USA and the targeting of youth segment.

1. VIRGIN MOBILE USA – ‘FIRST PRICE’ STRATEGY
(An analysis of the Pricing Decision alternatives that Virgin has to undertake to create
an alternate customer segment and monetize their buying power)
VIRGIN XTRAS – OVERVIEW
The Virgin Mobile USA service involved content, features and entertainment, called “Virgin Xtras”.
Collaboration with MTV networks as it was the most recognized youth brands in the country and unparalleled reach for
the under-30 market segment:
Exclusive, multiyear content and marketing agreement.
MTV network to deliver music, games and other MTV-, VH1-, and Nickelodeon based content to Virgin Mobile
subscribers.
Subscribers would have access to MTV- branded accessories and phones, graphics, ring tones, text alerts and
voice mails.
Promotional airtime on MTV’s channels and website.
Virgin mobile subscribers to vote for their favorite videos on a few MTV shows.
Other Virgin Mobile services that aimed to appeal to the youth market, generate additional usage and create loyalty
were:
Text Messaging
Online Real- Time Billing
Rescue Ring
Wake- Up Call
Ring Tones
Fun Clips
The Hit List
Music Messenger
Movies
Traditional Channel Virgin’s Channel
Services sold at own proprietary retail outlets, kiosks in Services sold where youth shop especially consumer
malls, high-end electronic stores, speciality stores etc. electronic goods in stores like Target, Sam Goody music
stores, Best Buy.
High-touch sales people who were paid high sales Products packaged in consumer electronics packaging, placed
commission to ensure hands-on service. on a bright red clamshell, which gave it visibility and no
salesperson was required.
Cost per handset from Nokia, Motorola, Samsung etc. - Cost per handset from Kyocera- $60-$100. Lesser subsidy
$150-$300. Entailed substantial subsidy from the entailed by the company.
handset makers, a component of acquisition cost.
Distributors’ industry avg. Commission- $100/phone Distributors commission- $30/phone.
The availability of the phones were not as segment Phones available at 3000 retail outlets in USA, and availability
specific as Virgin targeted included at retailers such as Sam Goody, Circuit City, Media
Play, Virgin Megastore
Billing is monthly Billing is to be real-time and with online avenues

2. PRICING DECISIONS:-
CUSTOMER PERSPECTIVES
The company tried to distinguish itself from the competitors standpoint by playing on the fact that the targeted segment
‘did not trust the prevalent pricing points’ in the industry that hinged on the credit worthiness . The main practices
prevalent were:-
 90% of all subscribers had contractual agreements for a period of 1 year-2 years
 Required rigorous credit check
 Plans established “buckets” of minutes, on extra usage users penalized heavily.
 Charged less for off-peak than on-peak minutes, but the off-peak period had shrunk.
 An additional fee was charged to add to the monthly bill, which included taxes, service charges.
Per minute Charge (Y-axis, in cents) for the bucket of
minutes contracted (X-axis)
180
160
140
120
100
80 Per minute Charge for the bucket of
minutes andcontracted (X-axis)
60
40
20
0
0 20 40 60 80 100 120 140
The bold line represents the cost per minute charged for a valid contract (which is shown by the arrows). The higher cost
in the vent of under-utilization of the contract is due to the high fixed cost (like the subsidization of hand sets,, contract
charges etc.)The higher limit in the vent of exceeding the contract is due to penalizing.
PRICING DECISIONS – COMPANY PERSPECTIVES
Virgin Mobile USA had to fix all these problems prevalent in the industry while taking a pricing decision. The main
constraints it faced was that the prices should be competitive and profitable without triggering of competitive reactions.
There were 3 options available:
OPTION 1- ‘Clone the Industry Prices’
The message would go to customers that they were priced competitively with few advantages like differentiated
applications [MTV] and superior customer service.
Better off-peak hours and fewer hidden fees would be the selling point but the total pricing structure would still
depend on off-peak and peak categorization as well as contacted minutes.
Easy to promote as this strategy of “buckets” was already prevalent in industry.
But risks alienating the target base as they already did not make the required cut for the credit worthiness.

3. OPTION 2- ‘Price below the Competition’
Similar pricing structure as rest of industry, with actual prices slightly below those of competition only within the
highest frequency range.
Better off-peak hours and fewer hidden fees could also be given.
OPTION 3- ‘A Whole New Plan’
Entirely different pricing structure.
Eliminate contracts and going for prepaid pricing structure. However the nature of the American cellular market
with operator dedicated handsets ad prohibitive pricing followed by the competitors due to high churn rates
Cost of
Acquisition
Subsidization of
Advertisement Sales
handsets
.
Break even analysis and Life time Value for cellular subscribers:-
As already, stated in the current scenario, most mobile companies amass working capital by going for long term
contracts. Compared to a US$ 100 acquisition cost for a prepaid connection, the equivalent historical cost of
acquisition for a post paid consumer is US $ 370. Assuming that we stay with the post paid plan due to industry
imperatives, we find that the average calling rate is around 10-30 cents per minute for a average bucket usage of
100-300 minutes (this is the target usage range that Virgin is aiming to target in the second option)
Hence, average cost incurred by the company for a customer = US$ (0.1 x 300) =US$ 60 (The most promising
aspect in the relevant range)
Acquisition cost = handset subsidy given to hand set manufacturers (US$ 60 -100) + advertisement costs ( US$60
million budget spread over an estimated 1 million subscribers = US$60)+ sales overheads (US$100-150) = US$
290-370 per user per month. Now, Breakeven point in terms of month is calculated as:-
Total fixed cost = US$ 370 (acquisition cost for a post paid customer) = 28.46 months
Revenue – Variable cost US$ 57 (avg. revenue per month from a user- ARPU) – US$30
Hence it takes around 29 months for the customer to prove profitable for the company even in the most promising
scenario of the relevant range.
But we will also have to induct the churn rate of around 2% per month into this optimistic consideration and try to
calculate the LTV. If the LTV is positive then the company should go ahead. The option that yields the largest LTV should
be chosen.
LTV = ∑ (Ma).r(a-1) - Acquisition cost
(1+i)a

4. Here, the margin remains relatively fixed across the periods which can be assumed as a modest 12%, r is the retention
rate which comes to around 72% (churn rate of 2% p.m. compounded monthly over a year = 1.02x1.02x…..till 12
months ), i becoming interest rate assumed to be around 5%
Margin in a month = (Average monthly phone bill =US$52)-(Cash cost per user =US$30) = US$22
Now taking this value of n∞, we have :- LTV = M/(1-r+i)
Now calculating the LTV for every option available will give us a marker of how the pricing strategy should be used for
using various options considering the fact that the interest rate remains constant at 5%:-
For option 1:-LTV = US$ {(22*12)/(1-0.72+0.05) } - 360= US$ 421
For option 2:- Here the retention rate can be assumed to have been bettered by differential pricing in the 100-300
minutes usage category , so we can assume a modest increase to 80%. But this is more or less offset by the increase in
cash cost to user which can be assumes to rise by 5% if the differential pricing is 5% below the average industry
standard. So the margin can be assumed to drop to US$19. Here,
LTV = US$ {(19*12)/(1-0.8+0.05) } - 360= US$ 489
Hence we can see that even with modest assumptions, the LTV is maximized for Option 2, henca the company should
venture into differential pricing if at all it wants to deviate. But considering the high acquisition turnover time and
recovery time of almost 29 months, it is a risky strategy because of very high mobility in the targeted segment.
Hence Virgin should focus on non price factors such as :-
If the contracts are done away with, this will ensure more loyalty of the target segment as the majority of them
are not credit worthy.
The positioning of Virgin Mobile USA and its collaborations with partners like MTV will attract more customers
which are loyal.
The cost of acquisition of a customer comprises of advertisement, sales cost and subsidy given. Since these costs
are much lower than the other competitors, they can price themselves lower than competitors.
They can also be transparent in their cost structure, eliminating hidden costs .
Hence, initially it should give non-price advantage to its customers and over a period of time can reduce costs to sustain
growth and drive off competition.
- Ishan Pratik
12FN-059
Section S7