Q.1) Given Virgin Mobile’s target market (14 to 24-year-olds), how should it structure its pricing?

The group believes Virgin Mobile has two options. The first option is the obvious for their target market
and any new product entering a saturated market, the pricing should be low if not the cheapest product
out in the market. The second pricing structure that would appeal to Virgin Mobile is pricing their
product in the middle or average of the industry standard.
Examining the first pricing structure strategy, it has positive and negative aspects to it. Some of the
positive aspects include taking a great portion of the market share for those customers who value
pricing in choosing their products. This pricing also goes along with Virgin’s target market, 14-24 year
olds. This age group does not have a lot of spending money, if it is their own, or the parents’ do not
want to pay a huge phone bill. The pricing would appeal to their target market and help create a young
and hip image.
While this pricing structure strategy would help gain consumers that value pricing when choosing their
products, it can also work against Virgin Mobile. This pricing can create the image that the phones do
not have as high of a quality if they are priced below the industry low. This structure would accomplish
the goal of attaining a sizable amount of the market share, but it would not be as profitable as the
second pricing structure strategy.
The second pricing strategy looks to gain market share while earning a bigger profit. The pricing
structure strategy would be to conduct research to find out what the industry is pricing. For example,
if the industry low is $49 to a high of $299 then Virgin Mobile should price itself around $179. This
pricing structure strategy would gain a great part of the market share for a couple of reasons. First, it
would send the message that their product has a higher quality than the lower priced products in the
industry, and it would be priced that it is not the most expensive, so more consumers could afford it.
This pricing structure will create the air about the product as being the new hip product to have. Which
is a quality Virgin Mobile’s target market cares about. This generation wants the latest products that
will make them look cool or good. The negative with this type of pricing is that it won’t gain as big of a
portion of the market share as the first pricing strategy, but it would garner more profit. It could also
pose the threat of being too expensive, if the industry range is higher.

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 elements under considerations (e.g.,
contracts, the size of subsidies, hidden fees, average per-minute charges, etc.).
Each one of the three different options provide a unique way Virgin Mobile USA can enter the market
and gain a following. However, one option stands apart from the others and fits with what Virgin
Mobile is trying to convey.
That option is option three. Option three is titled “A Whole New Plan.” The idea behind it is starting
afresh and coming up a different pricing structure that is different from everything out on the market
now. This is the most radical and risky of the three options, but if executed correctly can proved to be
profitable and the right choice.

In designing your pricing plan, be as specific as possible with respect to the various elements under
considerations (e.g., contracts, the size of the subsidies, hidden fees, average per-minute charges, etc.).
Some specifics Dan Schulman discussed that would be incorporated into this option would be: no
contracts, prepaid compared to post-paid, no hidden fees, and off-peak hours. Declaring Virgin Mobile
would not have contracts is huge, but when considering their target market, it fits. When considering
Virgin Mobile’s target market ranges from 14 to 24, it would guarantee the younger teens would be
able to purchase their products. If they had contracts Virgin Mobile’s under 18 target market wouldn’t
be able to sign the contracts, they would have to get a guardian or parent. Another fault with their
younger target market is their bad credit. If Virgin Mobile eliminated contracts then they are creating
that setting for more customers. Those customers would be a mixture of those that wouldn’t be credit
approved at Virgin Mobile’s competitors.
Prepaid vs. post-paid minutes is another important variable when considering option three. This detail
takes into mind the different lifestyles of their target market. The consumers might be occasional users
and this quality would be ideal for them. It also goes along with the group of consumers who do not
have good credit. This group of consumers tends to purchase prepaid plans since they don’t require
credit checks.
When purchasing any item or service, you do not want to be deceived. This is the idea behind no hidden
fees. Most of Virgin Mobile’s competition hits their customers with hidden fees which causes them to
be unhappy and distrust the company and brand. Virgin Mobile’s solution is simple, eliminate all hidden
fees. This will create the image of “what you see is what you get,” which will help attain more of the
youth market and even some unhappy customers of their competitors.
While eliminating hidden fees, Virgin Mobile also looked more closely at their off-peak hours. They
decided to reexamine them. The company recognized that their target market doesn’t live the same
lifestyle as an adult, so Virgin Mobile created the service which made sense to their target market.
All these features that Virgin Mobile would incorporate into their “A Whole New Plan” set them apart
from the competition. Option three provides Virgin Mobile with the ability to stick with the company’s
value proposition of always being innovative and supplying the best products and services to
consumers.

Q.2) How confident are you that the plan you have designed will be profitable?
Provide evidence of the financial viability of your pricing strategy.

Q.3) The cellular industry is notorious for high customer dissatisfaction. Despite the existence of service
contracts, the big carriers churn roughly 24% of their customers each year. Clearly, there is very little
loyalty in this market. What is the source of all of this dissatisfaction?

The source of all the dissatisfaction stems from many different things. Most consumers do not trust
the industry pricing plans. Companies advertise, “free this” or “free that”, but young people know that
there are many different hidden charges, and they resent this. Consumers these days are savvy, and
they hate feeling like they are being used. Other factors include contracts, pricing, buckets, hidden
fees, and off-peak hours. Over 90% of all subscribers in the U.S. have contractual agreements with their
cellular providers. The contracts are generally for a period of one to two years, and require rigorous
credit checks. This is very unsettling for many consumers. People don’t like being “tied down” to a
cellular provider or the strenuous credit check.
Hidden prices play another factor in this dissatisfaction. These include taxes, universal service charges,
and many one-time costs. Many plans also have established “buckets” of minutes. Customers then
sign-up for a bucket of minutes. However, if the customer exceeds their allotted bucket of minutes
they are penalized with extremely high rates. On and off-peak hours are also concerning. All of these
various pricing strategies have led to the dissatisfaction of the consumer’s experience.

Q.4) How have the various pricing variables (contracts, pricing buckets, hidden fees, off-peak hours,
etc.) affected the consumer experience?

The contracts are for the most part for a time of one to two years, and require thorough credit checks.
This is very disrupting for some buyers. Individuals don't care for being "secured" to a cell supplier or
the strenuous credit check. Hidden costs play another factor in this disappointment. These incorporate
expenses, all-inclusive assistance charges, and numerous one-time costs. Numerous plans additionally
have built up "buckets" of minutes. Clients at that point pursue a basin of minutes. In any case, if the
client surpasses their distributed can of minutes they are punished with amazingly high rates. On and
off-peak hours are additionally concerning. Initially, off-peak hours started at 6:00pm, and afterward
it step by step changed to 9:00pm. These different pricing systems have prompted the disappointment
of the shopper's understanding. These pricing procedures have likewise prohibited a statistic that is
anticipated to be extremely hearty for the following five years; the buyers matured 15 to 29. With the
thorough credit checks expected to achieve a phone this gigantic statistic doesn't qualify. Numerous
more youthful customers either have no credit or awful credit. Another stipulation to get a call
telephone is that you must be 18 years old. This by itself rejects some portion of the statistic.

Why haven’t the big carriers responded more aggressively to customer dissatisfaction?

The big carriers including AT&T, Cingular, and Verizon carry so much of the market share. Out of the
103 million subscribers in the United States all three of these big carriers have of market share of at
least 20 million subscribers. That’s over half of the market. The big carriers have such a monopoly on
the cell phone industry that it is not necessary for them to try to improve their customer dissatisfaction
rates.

Q.5) How do the major carriers make money in this industry? Is there a financial logic underlying their
pricing approach?

The majority carriers make money by rolling their customers into contracts, providing both buckets of
minutes usage and post-paid service. Bucket of minutes meant that individuals had usually 300 minutes
and overage would be charged at 40cents/minute. Post-Paid service allows monthly billing on basis of
the customers’ contract. This contract agreement allows a hedge against churn and a guaranteed
annuity stream.
Under the contract, the U.S cellular phone subscribers had to be in a period of 1-2 years agreement
with the cellular providers, and require the rigorous credit check. The credit check allows eliminating
individuals who don’t have good credit or have a credit card. Most carriers knew that people used more
minutes than they actually use, and the extra overage minutes used by the cellular subscribers made
the phone companies profitable. People assumed that they would use only the minutes bucketed, but
they used more overage on average. Plus, the hidden extra costs of taxes, universal service charges,
and other fees increased the profits to the cellular companies.

Q.6) What do you think of Virgin Mobile’s value proposition (the VirginXtras, etc.)? What do you think
of its channel and merchandising strategy?

The value proposition made by the Virgin Mobile is very straight-forward, honest and customer-
friendly, which go along with Virgin brand image. Because the young customers are savvy, they
understand the hidden charges. Additionally, the added features allow the young audience to increase
their phone usage and make the phone as a part of necessity. Added Features and the interchangeable
faceplates can increase the attractiveness of the phone usage, as well as customization of the phone.
The channel and merchandising strategy are more affordable to the young audience since they can
purchase the phone on their own or attract middle-age parents with young teenage children. Because
the young parents and children have the option of seeing which phones, they can buy through a starter
packet and avoid speaking with the sales representative, they feel more comfortable and have the
option of purchasing the product more carefully. When people invest more time in purchase thinking,
they feel more empowered and obligated/favoured to using the products. (It’s similar to advertising
effect of seeing the same product over and over, except you can touch and read the content in details
– which is powerful hands-on experience for customers.

Q.7) Do you agree with Virgin Mobile’s target market selection?

The group agrees with Virgin Mobile’s target market selection, which is between the ages of fourteen
and twenty-four. If marketed successfully, this demographic had the greatest potential for growth
because prior to Virgin Mobile’s entrance, it was the least penetrated. Virgin Mobile did decide to go
forth and enter this market, and have now become very successful, not only because they tapped into
the consumer needs of this younger demographic, but offered services not yet offered by national
service providers.

BENEFITS:
Market Size: Growth & Early Opportunity
The relative attractiveness of the mainstream segment is that this is a growing market, which allows
the Virgin mobile to continuously gain market share growth in the next five years. Additionally, the
niche market allows the Virgin mobile to be competitive different from the rest, creating an
extremely powerful brand for teenagers and young adults.
Brand Advantage
By setting the industry standard early and differentiating from the other carriers, Virgin brand can
easily capture the largely young audience and allow them to create “teenagers” phone usage culture.
Added-Features, phone customizations, and lower pricing all fit the teens and increase brand-
association to Virgin Mobile Phone
Increased Usage
Development of cellular culture in texting, messaging and daily phone usage. The phone is no longer
the business-only requirement, but important part of the people’s life – Wakeup Call, Social
connection, Music Device, and monitors phone bills.
Long-term Users (Teens & Young Adults)
Customer satisfaction would increase the less hidden fees and honest pricing. Association of positive
brand recognition among teens and young adults influence them to be much more loyal than other
cellular brands.

What are the risks associated with targeting this segment?

The largest risk Virgin Mobile faced was the chance of failure; consumers’ not accepting their service
plans. With other service providers being already well established, Virgin Mobile took a large risk when
entering the United States. Consumers are often very brand loyal, especially with products or services
that take up a larger part of their income. This meant that Virgin Mobile must promote their own
products and services, and also concentrate on why they differ from the competition.

An issue that arises when marketing towards a younger demographic is that this demographic may not
be employed, which is common for high school students and some college students. The older portion
of this demographic probably has lower salaries than that of the thirty to fifty-nine age demographic,
who many of which have established careers with higher salaries. Multiple risks can come from this
issue of lower income. The first of which is quite obvious in that because an individual does not have
an inflow of money, they have no way of payment to a service provider. Either this is the case, or the
parents of these children do not have enough disposable income to provide a cell phone and service
to their child.

Why the major carriers have been slow to target this segment?

During the time of Virgin Mobile’s entrance into the market, there were six national cell phone carriers,
none of which marketed towards the younger demographic. One of the reasons why these carriers
were reluctant to market towards this demographic was that they required a credit check upon signing
a contract with the service provider. This becomes a problem because a large portion of this
demographic, teenagers in particular, have not yet acquired credit cards, therefore not possessing any
credit at all.

Another reason why other service providers have been slow to target a younger demographic is
because they wanted to be “safe”, in that they wanted to target business men and women (the thirty
to fifty-nine age demographic). This demographic is consistent with their cell phone use; using a higher
number of minutes every month. Because of this high number of minutes used, they pay for a highly
monthly rate plan. It would be a risk for these providers to market to a younger demographic because
of their inconsistent minute usage per month.