Virgin Mobile USA: Pricing For The Very First Time: International Master in Business Administration (IMB) 2014/2015

International Master in Business Administration (IMB)
2014/2015
Virgin Mobile USA:
Pricing for the Very First Time
Author: Anja Bavčar
Mentor: Lakshman Krishnamurthi
Subject: Marketing for Managers
Ljubljana, January 2015

1.) WHAT ARE THE OBJECTIVES OF VIRGIN MOBILE USA
The Virgin Company is known by the large set of products and services they offer,
among them is also a successful telecommunication provider Virgin Mobile. At the
turn of the century they decided to try their abilities in the saturated and already
mature United States’ market of telecommunication and achieve 1 million subscribers
in the first year and another three million in the fourth year with correct pricing and
differentiation.
2.) CONDUCT A SITUATION ANALYSIS
There were six national and many regional providers. 130 million users represented
around 50% market penetration.
There used to be the belief that people, who do not use the cell phone for business or
already have the contract, will not use the cell phones so much, that they will be able
to cover the costs of acquirement and service, so the profitability was not quite high.
The costs of acquiring people to sign a contract were around $370. Besides the
advertising, these costs included some kind of subsidy, that companies offered
handset between $60 and $90 to the end users instead of $150 to $300.
When the customer signed the contract, and almost 90% mobile users did it, the
company had additional costs of service around $30 per month. Because the average
user monthly spent only $52, the companies were not keen of new users with low
usage.
Also, they offered the products in own or specialized stores, which claimed high
provisions.
The advertising of the main carriers was underlining all the free elements and other
benefits, but there were many hidden costs, sometimes for almost 20%.
Because of the competition, most of the companies had similar pricing strategies
The basic pricing offered lower costs for more minutes (especially after 100 min),
popular offer were also attractive buckles with certain amount of minutes, but the
costs for customers were enormous if the went beyond the limit and they rarely picked
the suitable for them. They charged less for the off-peak period, but also offer an extra
pay option to move the period for an hour.
Users never knew, how much would they need to pay at the end of the month, so they
became frustrated and unsatisfied and the companies managed to cover their costs and
make money.
Life-time Value (LTV)
M
LTV¿ – AC
1−r +i
Annual retention rate (r): 1 – 12 x monthly churn (2% under contract, 6% prepaid)
Interest rates (i): 5%
INDUSTRY
Annual average revenue per unit (ARPU): $52 x 12 = $624

Annual cost to serve (CCPU): $30 x 12 = $360
Annual margin (M): ($52-$30) x 12 = $264
 Under contract
r = 1- 12 x 0.02 = 0.76
264
LTV¿ – 370 = $540
1−0.76+0.05
 Prepaid
r = 1- 12 x 0.06 = 0.28
264
LTV¿ – 370 = - $27.14
1−0.28+0.05
From this data can be seen, that companies have much more profit from the contract
users, so they prefer this segment of customers.
Parent company, Virgin, led by Sir Richard Branson, is an extremely successful

British company. It extended with more than 200 different sub companies. They offer
a fresh and quality approach. They are really brave, but sometimes they also fail due
to they diversity, cultural differences and market saturation. One of the problems
could be also a name, which is provocative and targets young people, but at that time,
it was not widely known in the USA.
3.) CONDUCT A DEEP CUSTOMER ANALYSIS
The company realized, that there is an untouched niche of young people, which is,
because of higher cost and lower gains, not interesting to existing mobile companies.
Consequently, the market penetration is low.
Aged between 15 and 29, with low credit quality and inconstant usage of cell phones,
approximately between 100 and 300 minutes per month, group was not appealing to
the main carriers.
Virgin saw a great opportunity. The demographic growth seemed to be vigorous in the
next five years.
The group faces the life changes; they are leaving their domestic ground, go to
college, so they will probably thinking about the first cell phone. Young people are
also open to new experiences, and cell phone represents more than just calling device.
They prefer text messaging, downloading information and like to customize the
device by ring tones, faceplates and graphics.
Virgin Mobile recognized the needs of younger people and composed the set with
content, features and entertainment, interesting to this group, called VirginXtras.
They offered many interesting applications with additional usage, such as Text
Messaging, because younger prefer to text and it is also more discreet. To protect the
privacy even more, they prepared Online Real-Time Billing, where the information
about the callings can be only seen on the internet.
To avoid unpleasant situations on the dates, they develop Rescue Ring, which help to
escape the bad situation. Wake-Up Call helped sleepy people out of bed.
To further customize the phone, there was a lot of music at Ring Tones and Fun Clips.
They were able to download The Hit List, Music Manager and Movies.
The company also signed an exclusive multiyear contract with MTV, which also
included marketing.
The company believed, that with all these extensions would be able to create a loyal
and satisfied group of customers.
4.) GO-TO-MARKET
Virgin Mobile was on the right place at the right time and with right vision. Even if
they were not the first in the market, they were the first, which recognized the
growing potential of the market.
With fresh approach, they reconsider every detail. The product was appealing to
young people, with the look and applications.
These consumers want to be different, unique and have fun.
The price is more kind to their pockets, so they may really start to think whether to get
one.
Virgin could offer a better payment conditions because they managed to lower the
costs. Firstly, they engaged the agreement with Sprint, USA company, which already
had needed infrastructure. They chose different retailers, mainly stores for younger
people.
They also did a great step with collaboration with MTV. The gains were both sided:
Virgin got marketing and applications and MTV the promotion and another channel to
young.
The advertising strategy was carefully concentrated to the target group through the
magazines and events, which are close to the group. They combined the adds with
tutorial readings, what is two benefits in one.
According to LTV calculations, lower costs and differentiation, I would select the
second option, since is customized to the average consumption of minutes and in so
saturated market, even small difference in the price would lead to higher profits.
Besides, Virgin also guarantees itself the loyalty of the customers in the case of new
entrants with similar products.

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International Master in Business Administration (IMB)

Virgin Mobile USA:

Pricing for the Very First Time

Author: Anja Bavčar

Mentor: Lakshman Krishnamurthi

Subject: Marketing for Managers

Ljubljana, January 2015

2.) CONDUCT A SITUATION ANALYSIS

Life-time Value (LTV)

Annual average revenue per unit (ARPU): $52 x 12 = $624

Parent company, Virgin, led by Sir Richard Branson, is an extremely successful

3.) CONDUCT A DEEP CUSTOMER ANALYSIS

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