Q1.

Given Virgin Mobiles target market (14 to 24-year-olds), how

should it structure its pricing?
The pricing structure for Virgin depends on their objective to penetrate the
market and differentiate themselves from the competition.
Objectives behind pricing for Virgin:

Current industry pricing is not appealing to customers- need for simple

structure

Must cater to the target market: YOUTH!

Create a positive lifetime value (LTV) for every customer and thereby
make money

Consumer wants

Carrier pain point

No contracts

Increased Churn

No Pricing Buckets

No Hidden Fees

Lower
Operating
Margins

No Peak/Off Peak Hrs

No Credit Checks

More Uncollectibles

Simple Sales Process

Consumer Confusion

Great Service

Increased Costs

From a customer perspective, an "ideal" plan would probably include a number of

elements which would have a potentially negative impact of the companys
financial but Virgin can use a number of different managerial tools to counter
these negatives, for example:

Lowering Customer Acquisition Costs

Embracing Additional Pricing Elements
Developing a Highly-Differentiated Competitive Positioning through a new
services package and a new pricing proposition

For this virgin would require to design a new pricing structure which would cover
all the pain points of customers as well as ensure a long term strategic
perspective in choosing a pricing structure. The evaluation of all the alternatives
is explained below in 2nd question.

Q2.The case lays out three pricing options. Which option would you
choose and why? In designing your pricing plan, be as specific as
possible with respect to the various element under considerations (e.g.,
contracts, the size of the subsidies, hidden fees, average per-minute
charges, etc.).
Option 1: Clone the Industry Prices
1. Simple message

Pricing competitively.

MTV applications.

Superior customer service.

2. Better Off-peak hours.

3. Fewer hidden fees.

Pros

Easy to Promote.
Consumers are used to
BUCKETS and peak/offpeak distinctions.
Savings on advertising
budget costs.
Simple packaging

Cons

Hard for a new entrant.

No flexibility in calling habits.
No price distinction hence
consumers are not willing to
switch

Option 2: Price below competition

1. Similar structure
Pricing slightly below the competition.
2. Maintain buckets of minutes.
Price per minute set below industry average in certain key buckets.
Target young market that uses 100 to 300 minutes.

Pros

Cons

Maintain BUCKETS and volume

discounts with price per
minute set below industry
average.
Offer best off-peak hours and
less hide charges so consumer
will know virgin mobile is
cheaper and simple.
Expand size of market that
results in greater sales and
profit.

Earnings from each

consumer will be less

Sales growth doesnt mean

big profit
May trigger competitive
reaction

Option 3: A whole new plan

1. Shorten or eliminate contracts.
Contract provides a hedge against churn.
Estimated churn rises from 2 to 6%.
Advantage: It allows 18 years and younger to purchase the
product.
2. Prepaid service.
Fact: 92% of subscribers have postpaid plan.
Concerns:
Prepaid arrangements have prohibitive pricing.
(35-50 cents per minute to as high as 75 cents)
Phone use was infrequent.
Higher churn rate.
No loyalty to provider.
Recoup acquisition cost.
Morgan stanley research suggest that acquisition cost must be at or
below $100 for prepaid to be viable.
Need a method to add minutes
3. Handset subsidies.
Fact:

 Currently carriers purchase handsets from major manufacturers at a

cost of $150 to $300.
Carriers then subsidize user $100-$200 ---becomes part of
acquisition cost.
Approach
Increasing subsidies so that phones are cheaper than competition.
4. Eliminate all hidden fees and off peak hours.
Hidden fees
Goal: Make pricing very simple.
What you see is what you get
1)Rolling inner prices of taxes and fees into final prices.
2)Make money.
Off Peak Hours
Business person
Price insensitive.
Demand is
inelastic.
Rarely worry about
charges. Call in
office hours.

Student
Make calls
whenever
necessary and can
avoid.
Care about price
Price sensitive.
Elastic demand

It appears that the all new pricing structure is the most suitable from the
customers point of view. The feasibility of the plan needs to be studied before
going with the price structure.
Business Model
Acquisition Cost
Advertising per gross add$75-$100
Sales commission-$100
Handset subsidy-$100-$200
Total- $275-$400
Acquisition cost roughly$370

Breakeven Analysis
Monthly ARPU- $52
Monthly cost to serve- $30
Monthly margin=($52$30)=$22
Time to breakeven on
acquisition cost
= $370/$22= 17 months

Structure

Clone the
industry

Price below
competition

New plan
with
contract
2%
1-(0.02*12)
= 0.76

New Plan
without
contract
6%
1-(0.06*12)
= 0.28

Churn rate
Annual
retention
rate
Yearly
margin

2%
1-(0.02*12)
= 0.76

6%
1-(0.06*12) =
0.28

22* $12=
$264

22* $12=
$264
5%

22/1.21*
$12=
$218.16
5%

22/1.21*
$12=
$218.16
5%

Interest
rate
Acquisitio
n cost
LTV

5%
$370

$370

$370

$370

[264/(10.76+0.05)]370
=$540

[264/(10.28+0.05)]370
= -$27.14

[218.16/(10.76+0.05)]370
=$382

[218.16/(10.28+0.05)]370
=$86.68

The above calculation shows that the option 1 and option 3 with contract is
profitable for virgin mobiles however if virgin manages to reduce the customer
acquisition costs by making contracts with mobile manufacturers then it would
establish virgin as low cost player.