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Situation Analysis:
Pricing decision:
! Entering a highly saturated cell phone service industry in the US market
! Targeting an unsaturated market segment and previously ignored segment the youth
! To find a way to be earn from a limited income market
! Target market is:
" Young (15-29)
" Trendy
" Different than traditional cell phone users
o Different spending habits
o Different usage
o Different needs
o Limited purchasing power
The objectives that Virgin seeks to achieve are:
! Create value and profitability in cell phone service industry
! Target market ages 15-29, opportunity for growth with this market segment
! 1 million subscribers by year 1.3 million by year 4
Alternatives being considered by the firm are:
Clone Industry Prices: contracts
Pros:
o More features for the same price
o Feasible considering limited advertising
budget
o Easy to promote using current models

Cons:
o Saturated market
o Reduces competitive advantage
competitors offer same products
o Lower margins - additional features may be
costly
Set prices below competition: contracts
Pros:
o Sales and market share growth
o Favourable choice for the target market that
has limited spending power

Cons:
o Not feasible in the long term
o Margins and profitability may be affected
adversely
o Cannot compete in price wars
A whole new plan: prepaid pricing
Pros:
o Profitable
o Eliminates risk of payments defaults
o Market Differentiation
o Caters to target market needs
o Gives flexibility advantage to users
Cons:
o Possible increase in churn rate
o Risk of limited returns and loyalty


Pricing Structure:

Customer Acquisition Cost:
Advertising per gross addition: $75 to $100
Sales commission paid per subscriber: $100
Handset Subsidy provided: $100 to $200
TOTAL $275 to $400

Lets assume the average customer acquisition cost is somewhere in the middle: $370

Break Even Point:

# Monthly ARPU (average revenue per unit): $52
# Monthly Cost-to-Serve: $30
# Monthly Margin: $22
# Time required to break even on the acquisition cost = $370/ $22= 17 months

Calculating LTV (Lifetime Value):


LTV with Contracts

The annual retention rate in the industry = 1- 12*0.02= 0.76

LTV = $540





LTV without Contracts

The new retention rate = 1- 12*0.06= 0.28

LTV = -27.41

Eliminating Hidden Costs:
As mentioned in the case, hidden costs raise the cellular bill from $29 to $35. This is an
increase of 21%.
If these costs were eliminated, the $22 margin would reduce to $22/1.21= $18.18
New Break Even Point = 370/18.18= 20 months
New LTV (with contracts)= $382
New LTV (without contracts)= -86.68

Virgin Mobiles has three pricing alternatives. We are going with Option 3.

Acquisition costs:

! Advertising costs per customer
o Industry=from $75 to $100
o Virgin planned ad costs = 60 mil/1min= $60
o Virgins handset cost: $60 to $100 (assume $80)
o Assume Virgins subsidy around 30% = $30

! Then Virgins AC would be just $120 vs. industry average $370
o Sales commission: $30
o Advertising per gross add: $60
o Handset Subsidy $30
o Total: $120

# Break Even analysis: at what per minute price would Virgin breakeven:
! Virgins monthly ARPU: (200 minutes)*(p), where p=price per minute
! Monthly cost to serve: .45 * 200 * p
! Monthly margin: 200p - 90p = 110p
p > 0.07 or 7cents/minute
If Virgin charged per minute price comparable to other industry prices, somewhere between 10
and 25 cents:

! At 10 cents:





! At 25 cents:


Conclusion:

Since the target customer is the youth with certain traits and preferences such as:
Loathe contracts
Fail credit checks
The ideal plan should be
A prepaid plan
No contracts
No hidden charges
No peak off hours
Very low handset subsidies
No credit checks
No monthly bills
Price: 25 cents/minute for the first 10 minutes; 10 cents/ minute for the rest of the day.