Virgin mobile USA Pricing case analysis - Pricing strategy

1. GROUP 2B
Demin Wang
Krishna Rathnam
Sitian Bu
Si Han
Pricing Strategies Analysis

2. Company Objective
1 Million Subscribers
Young Customers

3. Competitors & Market Shares
Current US. Population:
284.97 Millions
Current US. 15-19
20.3 Millions

4. Cost Structures
$370
Acquire a Customer
• Monthly cell phone bill $52, representing about 417
minutes of use. The cost to serve a customer $30 a month
• Commissions fee in traditional industry channels $100
• Handset subsidy provided to the subscriber $100-$200
• Verizon alone spent more than $650 million advertising

5. Marketing Mix (4P)
• VirginXtras – delivery of content and entertainment
• Contract with handset manufacturer Kyocera
• MVNO – Hosted on Sprint’s PCS network
• Youth magazine editors of publications such as
The Complex, Vibe, and XXL to publish advertorials
• Cast of The Full Monty, a Broadway show
• A number of high-profile street marketing events
• Channels where youth shop like Target, Sam
Goody music stores, and Best Buy

6. SWOT Analysis
Strengh
• lower cost
• more functions
• efficient advertising
Weakness
• limited budget
• low-value customers
• low quality
Opportunity
• high growth market
• customers are flux in their lives
• entertainment are prefered
Threat
• the crowded celluar market
• high potential churn rate
• low-credit customers

7. PRICING Objective
• We want to make sure our prices are competitive
• We want to make sure we can make money
• We don’t want to trigger off competitive reactions

8. Life Time Value of Mobile Industry
Total Value (TV) = LTV × D
M = 55% P × U
TV = ( – AC ) × D
55% P × U
1 – r + i
= unit price
= usage
= retention rate
= interest rate
= acquistition cost
= demand
P
U
R
i
AC
D

9. the Acquisition Cost of Virgin is $90 - $190
Industry Virgin
Advertising 120 60
Headset Subsidy 150 0-100
Commission Fee 100 30
AC total $370 $90-$190
120 ~ 650 × 20%
x ~ 60
x = (120 × 60) / (650 × 20%)
x = 60

10. 5 Options to make pricing strategies
D r
Lower Price ↑ –
No Contract ↑ ↓
Pre-Paid ↑ ↓
Lower Handset Subsidy ↓ ↑
No Hidden Fee & Off-peak – –
Using the combinations of options to develop 3 Pricing Strategies

11. 3 pricing strategies below
1# Clone the Industry Prices
2# Price Below the Competition
3# A Whole New Plan
1# 2# 3#
Lower Price × ✓ ?
No Contract × × ?
Pre-Paid × × ?
Lower Handset Subsidy × × ?
No Hidden Fee & Off-peak × × ?

12. Price Bucket Comparison
Industry
1#
2#
100 min 200 min 300 min
Indusry $26 $30 $27
1# $21 $34 $36
2# $15 $22 $21
Bucket Fee per Month

13. Only Deference between 1# and 2# is PRICE
For: r = 98%, i = 5%, AC = 190, Hidden Fee = 5$
100 min 200 min 300 min
LTV 1# 2261 3487 3676
LTV 2# 1696 2356 2261
ΔD/D 33% 48% 63%
ε.critical -0.858 -0.897 -0.905
If |ε| > 0.9, the 2# pricing strategy is more valueble than 1#

14. Combination Options to development New Plan 3#
3#1 3#2 3#3 3#4 3#5
Lower Price × ✓ × × ×
No Contract ✓ ✓ ✓ ✓ ✓
Pre-Paid × × ✓ ✓ ✓
Lower Handset Subsidy × × × ✓ ✓
No Hidden Fee & Off-peak × × × × ✓
P*U / month 34$ 30$ 34$ 34$ 34$
r 0.94 0.94 0.92 0.93 0.93
LTV 2150 1910 1790 2055 2055
ΔD/D(1#) 62.2% 82.6% 94.8% 69.7% 69.7%
1% retention rate decrease will need more than 10% sales increase
New Pricing Plan is the trade-off between Sales and retention rate

15. Explanation of New Plan 3#
100 min 200 min 300 min
Industry Unit Price 26¢ 15¢ 9¢
Unit Price 22¢ 17¢ 9¢
Customer Unit Price 27¢ 19.5¢ 10.5¢
Month Fee 27$ 39$ 31.5$
ΔD/D(1#) 62.1% 69.7% 101.0%
Options
Lower Price ×
No Contract ✓
Pre-Paid ✓
Lower Handset Subsidy ✓
No Hidden Fee & Off-peak ✓
Similar Price Structure with Industry Level
✓ Little price competitive
✓ Won’t trigger price war
✓ Can make money
– Easily keep profit without dramatic increase sales
No Hidden Fee & Lower Off-peak
✓ Won’t trigger price war
– Easily increase sales, especially for teenagers
? Lose price competitive ( IMC & Brand Equity )

16. Explanation of New Plan 3#
100 min 200 min 300 min
Industry Unit Price 26¢ 15¢ 9¢
Unit Price 22¢ 17¢ 9¢
Customer Unit Price 27¢ 19.5¢ 10.5¢
Month Fee 27$ 39$ 31.5$
ΔD/D(1#) 62.1% 69.7% 101.0%
Options
Lower Price ×
No Contract ✓
Pre-Paid ✓
Lower Handset Subsidy ✓
No Hidden Fee & Off-peak ✓
No Contract & Pre-paid
– Easily increase sales, especially for teenagers
? Decrease retention rate ( for teenagers )
Lower Handset Subsidy
✓ Little price competitive
✓ Can make money by decrease AC
– Increase the retention rate
? Decrease sales ( compare with Nokia )

17. Explanation of New Plan 3#
Revenue from Mobile Entertainment Services
TV = (LTVmobile + LTVE ) × D

18. Recommendation for Virgin Mobile
• Investigate the elasticity (ε) of teenagers
• Investigate the retention rate change of teenagers
• Highly recommend New Pricing Plan 3#

19. Thanks