Case Debriefing – Virgin Mobile

USA
Synopsis
Objective – To develop a pricing
strategy for a new wireless service
Target Segment – Teens and Twenties
Business Model – MVNO – No fixed cost
or investment in physical
infrastructure
Virgin’s Brand Personality – Innovative,
fun, pro-active and challenging
Identify and enter areas, where
competitors are complacent or
customers taken for a ride by existing
players
Cellular industry analysis
 Market is overcrowded with many national
and regional carriers

 Market is in maturity phase and fiercely
competitive

 Penetration was significantly lower in the
15-29 segment. Growth rate among this
segment is projected to be robust for
the next 5 years.

 Existing players ignored this segment due
Cellular provider sold their
services in their own proprietary
outlets, kiosks in malls high end
electronic stores etc
High sales commission paid to
sales people
Carriers subsidize hand sets and
that is considered as a part of
customer’s acquisition cost
Industry not known for customer
service
Virgin Mobile’s Value
Proposition
Textmessaging
Wake up call
Ring tones
Fun clips
Music messenger
Movies
Rescue ring
The Hit list

Business model
MVNO – was successful in UK not
in Singapore
Ad budget – Approx $ 60 million
Lower commissions - $ 30 per
phone as against industry
average of $ 100
Different channel strategy where
youth shop


Facts given In the case
 Industry cost to acquire a customer is $370
 Average monthly cell phone bill for national
carriers is $ 52
 Cost to serve a customer was roughly $ 30 a
month
 Cost of hand sets priced between $150 to $
300
 Ad spending by national carriers ranged from
$ 75 to 105 per customer acquired ( refer
page 5, foot note)
 90 % of all subscribers in the US had
contractual agreements with their cellular
providers

Annual churn rate with contracts
is 2 %
Annual churn rate without
contracts is 6 %
Sales commission paid per
subscriber is $ 100
Hand set subsidy provided to
subscriber is $ 100 to $ 200
Monthly ARPU is $ 52
Monthly cost to serve is $ 30
Options – Which one and
why?
Pricing approach similar to
competitors
Pricing below competitor
Differential plan


Discuss the pros and cons of each
plans?
 Contracts – From a firm’s perspective it leads
to lower churn rate also boosts retention
rates. However from a customer’s
perspective it leaves them trapped in their
plans
 Buckets – Customers are penalized heavily
for shortfalls or overages
 Hidden costs – Taxes, universal service
charges, various one time costs etc.
 Credit checks – Industry eliminates 30 % of
the applicants due to poor credit ratings
 Complex sales process – Requires lot of face
to face interaction
Pricing approach similar to
competitors
 Message – Priced competitively with
everyone else but with few advantages like
apps and superior customer service.

 Rationale


 Easy to promote since customers are already

used to it
 Given the limited ad budget, it may be a
better thing to do
Pricing below competitor

Actual prices slightly below those

of competition
Price per minute would be set
slightly below the competition
for some key buckets ( $100-
300)


Question is, will it be profitable

considering the usage pattern of
the youth?

A whole new plan
 Shorten the contract or even eliminate them
altogether? What are the risks?
 Pre paid Vs post paid – Attracts only low
usage customers – Poor credit customers-
no credit checks required – Stigma attached
 Pre paid customers - High churn rate, exhibit
no loyalty and there is a danger of not
being able to recoup company’s acquisition
cost because of the above factors
 Eliminating all hidden fees and off peak hours
 Lowering or increasing the subsidy

Why contracts?
 Annual churn rate with contracts: 2 % * 12
months = 24%
 Annual churn rate without contract : 6 % *
12 = 72 %

 The difference is 48%

 For AT & T with a customer base of approx
20.5 million, this would mean that it would
have to acquire an additional of 9.84 million
customers at the cost of 3.64 billion to
offset customers lost to the higher churn
rate.

 Additional customers lost o churn : 48 % *
20.5 million = 9.84 m customers


 Acquisition cost per customer $ 370 per
customer


 Totalcost of offsetting higher churn rate: $
370 * 9.84m = 3.64 billion

 Hence a strong reason to hold customers
through contracts regardless of the
Pricing levels
 Break even analysis

 Monthly ARPU $ 52
 Monthly cost to serve is $ 30

 Monthly margin is $ 22 ( 52-30)


 Time required to break even on the
acquisition cost is
 $ 370/22 = 17 months
 Annual retention rate in this
industry is .76


 Calculated as


 1- ( Monthly churn rate * 12

months) = 1 – 0.02 * 12 = .76
LTV of customers
 Assuming an interest rate of 5 % and an
infinite economic life ( N)
 Formula for LTV

 LTV = M / 1- r +1) – AC where

 M - Margin customers generates in year a
 R - Annual retention rate

 I - Interest rate

 AC - Acquisition cost

 N - Number of years over which the

LTV calculation
22 * 12/ 1-.76+.05 minus 370 = $
540

If eliminating contracts, the LTV
would be negative

22 * 12 / 1-.28 + .05 minus 370=
-27.14

The industry would lose money on
the average customer given
 It appears that LTV would be positive, if Virgin
mobile were to enter the industry with a pricing
structure similar to that of the major carriers

 However few questions arise in this strategy

 Target segment - Youth
 Loathe to enter in to contracts
 Fail credit checks
 Limited disposable income and uneven usage
pattern
 Weak credit history
 Segment currently underserved – An opportunity
Is it possible to devise a customer


friendly pricing plan without affecting the

profitability of the company?


 If so, How?
A customer friendly plan –
Potential problems
Consumer want But the Problem is
No contracts Increased Churn
No hidden fee , Pricing Lower operating margins
buckets, Off and on peak hrs
No credit checks More receivables
Great service Increased costs
How to counter the
negatives?
Lowering acquisition cost such as sales
commission, advertising costs and
handset subsidies

Do a math

Current industry hand set cost is 225
( Average taken) 150+300/2 = 225
Current industry subsidy is 150
( 100+200/2)
Subsidy as a % is 67 ( 150 / 225)

Virgin’s acquisition costs
Handset cost is 60-100 ( 80 on an
average)
If virgin were to subsidize handsets
by 40% its subsidy would equal to
$ 30

Salescommission is $ 30
Ad per gross add is $ 60
Hand set subsidy is $ 30

Total acquisition cost is $ 120
Could it achieve
profitability ?
Acquisition costs of virgin is $ 120
versus the industry average of $
370

Given the acquisition costs, what
would virgin have to charge
consumers on a per minute
basis to equal the industry’s
break eve time of 17 months?
Assumptions
 Virgin’s
monthly ARPU 200 minutes ( A mid point
is taken given Virgin’s estimate of 100-300
minutes per month)
 Monthly cost to serve is 45% of revenues ( see
exhibit 11)

 Virgin’s Monthly ARPU = 200 minutes
 Monthly cost to serve = .45 * 200 * p where p is
price per minute
 Virgin’s monthly margin = 200-90 = 110p
 Virgin’s acquisition costs = 120
 To break even in 17 months = 110/17 = 6.4 is the
Price per minute

LTV at 6.4 cents
(1-.45) (200*12*.064) / 1-.28 + .
05 Minus 120 = - 10.29

Customers would not last the 17
months to cover the acquisition
costs. In order to have a positive
LTV, Virgin should charge more
than 6.4.

Try any where between 10 cents
What happened
A pre paid plan
 No contracts, hidden charges, peak or off peak
hours
 Very low hand set subsidies
 No credit checks
 No monthly bills
 Price 25 cents foe the first 10 minutes and 10
cents/minute for the rest of the day
 A 3 month period in which to use pre paid
minutes, plus an additional 2 month grace
period
 Handsets with one button access to view current
balance/remaining minutes
 Customers could purchase additional minutes via
the phone or credit card. Users can also