Virgin Mobile USA Case study on pricing strategy
Shradha Devidan
Virgin group in USA wanted to launch their telecom services and wanted to target the younger consumers of age 14-24 years old. The company felt that this section of the consumers was underserved and wanted to launch a service which would cater to this market segment. The differentiations which Virgin wanted to follow with respect to its established competitors were: Serve the younger age group consumers(14-24 years) who had less monthly usage when compared to business or working professionals Remove all other frills like contracts and hidden costs to make the service more transparent and acceptable to the target segment Introduce Virgin Xtras, a set of value added services designed for this target segment which could be an additional source of revenue generation for the company Provide cheaper but quality services
The company had 3 options to choose for their pricing strategy: 1. Clone the industry prices 2. Price below the competition 3. A whole new plan 1. Clone the industry prices: Features of this option: Prices at industry standards Differentiation in terms of no hidden fees and no contracts
This option would be difficult to gain new customers in the target segment as the price is same as the other players in the industry. Assuming that the company is able to get 500 thousand consumers, the acquisition cost of a customer becomes $160: Expense Amount $ Handset Subsidy 0 Advertisement 120 Commission 30 Other overhead 10 Total 160 Advertisement Cost = Ad budget/ No. of consumer = 60million/500thousand
The LTV for prepaid and postpaid customers at various minutes of usage for option 1 is: Average Usage (mins) 100.00 150.00 200.00 250.00 300.00 Charges/min in cents 20.00 20.00 15.00 15.00 12.00 Rev. from minutes usage 20.00 30.00 30.00 37.50 36.00 Revenue from Xtras (25%) 5.00 5.00 3.75 3.75 3.00 ARPU in $ 25.00 35.00 33.75 41.25 39.00 CCPU 11.25 15.75 15.19 18.56 17.55 Margin 13.75 19.25 18.56 22.69 21.45 LTV prepaid -35.00 15.00 8.75 46.25 35.00 LTV Postpaid 36.43 115.00 105.18 164.11 146.43 Assuming 25% extra revenue from Virgin Xtras
2. Price below the competition: Features of this option: Price below the industry prevailing prices specially for the 100 to 300 minutes usage Specifically position it as cheaper option for the target consumer
Based on competitive pricing the company may be able to attract price conscious customers. Assuming that it is able to gain 750 thousand consumer based on this differentiation, the acquisition cost would be: Expense Amount $ Handset Subsidy 0 Advertisement 80 Commission 30 Other overhead 10 Total 120 The LTV for prepaid and postpaid consumers at various levels of usage would be: Average Usage (mins) Charges/min in cents Rev. from minutes usage Revenue from Xtras 25% ARPU in $ CCPU Margin LTV Prepaid LTV Postpaid 100.00 150.00 200.00 250.00 300.00 15.00 15.00 12.00 12.00 10.00 15.00 22.50 24.00 30.00 30.00 3.75 3.75 3.00 3.00 2.50 18.75 26.25 27.00 33.00 32.50 8.44 11.81 12.15 14.85 14.63 10.31 14.44 14.85 18.15 17.88 -66.25 -28.75 -25.00 5.00 2.50 -12.68 46.25 52.14 99.29 95.36
3. A whole new plan: The features of this option are: No contracts therefore larger consumer reach No hidden charges Prices as per industry standards
The acquisition cost in this case would reduce as the number of consumers signing up for this is expected to be 1million. The acquisition would be: Expense Handset Subsidy Advertisement Commission Other overhead Total Amount $ 0 60 30 10 100
The LTV for postpaid and prepaid consumers for various usage patterns would be: Average Usage (mins) Charges/min in cents Rev. from minutes usage Revenue from Xtras 25% ARPU in $ CCPU Margin LTV Prepaid LTV Postpaid 100.00 150.00 200.00 250.00 300.00 20.00 20.00 15.00 15.00 12.00 20.00 30.00 30.00 37.50 36.00 5.00 5.00 3.75 3.75 3.00 25.00 35.00 33.75 41.25 39.00 11.25 15.75 15.19 18.56 17.55 13.75 19.25 18.56 22.69 21.45 25.00 75.00 68.75 106.25 95.00 96.43 175.00 165.18 224.11 206.43
Therefore option 3 is the recommended option. It is profitable for all types of usage pattern from 100 to 300 minutes. Also instead of fixing the bucket size of the customer prior to the usage, the monthly usage at the time of bill generation can be seen and the rate be charged accordingly. This would give the consumers the flexibility to use their cells in any skewed pattern.
