Virgin Mobile Pricing Case Analysis
Target under-served market segment Acquire approx. million total subscribers by end of year 1; 3 million by end of year 4 Low manufacturing cost cell phones Virtually zero fixed cost Alternative, lower-cost distribution channels Targeted advertising using traditional and non-traditional media Minimized churn (increased switching cost) through introducing value added services like VirginXtras and customer loyalty benefits Partnerships with other vendors catering to target segment
These qualities do not fly with the young “empowered” generation Dissatisfaction with status quo creates opportunity for Virgin Mobile Competition Top six players service 76% of cell phone subscribers Wireless Subscribers in US (Q4 2001, in millions) • Concentrated market dominated by large players • Highly competitive space; top 6 providers price competitively and fight for market share Leap.
There are other means to reduce churn • Currently area of frustration • Can be avoided with pre-pay • Reduces risk, works well for more transient customer • Little incentive to switch or sign up otherwise Expected Outcome • Fosters customer loyalty • Higher trust, lower turnover • Higher satisfaction • No surprise charges • Attracts target customer • Bypasses credit checks and the need for parental sign-offs • Competitive, simple pricing = high willingness to try.
Getting rid of these fees will not only differentiate Virgin from its competitors, it will give Virgin a huge competitive advantage over its competitors. This also makes sense since most of the Virgin’s costs are variable. Key Components Continued… • Prepaid use – In line with the previous recommendation of not having any contracts, credit checks and hidden (over-usage) fees, we recommend to adopt the Prepaid option. This will not only minimize the risk of default by customers, it will also offer them flexibility to choose the price range they desire. • Increase the switching cost – Based on the recommendation of pre-paid option and having no contracts, high churn rate among customers is expected.
Network effect will help mitigate this risk by building customer loyalty. We recommend considering options such as low rate for in-network calling and text messaging, ability to play games within network, and exclusive content agreement with other networks similar MTV to increase the life time value of each customer. In addition, ability to earn loyalty points across Virgin products and bundling of the auxiliary services with the minute purchases will help retain customers. Appendix Appendix A – Headset Price Ladder Minimize entry costs for price sensitive 15-29 target segment $225 Incumbent Cost $50 subsidy $80 $75 $29. 99 Virgin Mobile Cost Incumbent Price to Customer
Virgin Mobile Price to Customer Appendix B – Rate per Minute Price Ladder Price competitively to attract target segment yet avoid triggering competitive reaction $0. 75 Highest pre-paid $0. 425 $0. 40 $0. 28 Average current pre-paid Overage charge Virgin recommended prepaid $0. 175 $0. 115 $0. 09 $0. 72 Industry clone Lower than industry Virgin cost to serve Sprint cost to serve Appendix C – Pricing Detail See footnote Monthly cost to serve in line with given assumption of cost = 45% of revenue during the first year for Option 1 (17. 986/40 = 45%). Same cost assumed for Option 2 & 3 since cost should not vary based on per minute price charged.