Virgin Mobile Case Study

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Nonetheless, targeting this segment does have its own risks. It is assumed that if someone does not own a phone already is not going to use the phone a lot. The monthly average bill is $52 with a cost of $30 thus, presenting a margin of $22. The customer acquisition cost is $370. It is for this reason that major carriers have been slow in targeting this segment.

Virgin mobile has identified a unique opportunity by targeting the cell phone toward the youth. Virgin mobile seeks to develop a value proposition know as VirginXtras. The data shows that the mobile entertainment services are expected to grow at 55% from 2002-2003, at 13% from 2003-2004 and 27% from 2004-2005. VirginXtras such as text messaging, fun clips, music messenger, movies, the hit list, etc. would attract the youth. Such features would appeal to the youth and create additional revenue and create loyalty. Once such feature become addictive the customers would become loyal to Virgin Mobile. This belief is also reflects in the market research.

Regarding the prices the team believes that there are 3 options.

Option 1 – Clone the Industry prices

Salient features:

- Prices similar to the existing industry price structure

- Advantages would be differentiated application (MTV) and superior customer service

- Relatively simples message because of Virgin’s channel strategy

- Better off-peak hours and few hidden costs.

Pros:

- Less expense on commissions and advertisements

- Easy to promote the idea

Cons:

- No differentiation in terms of pricing

- New entrant will find it difficult to grab a market share in an already crowded market.

Option 2 – Price below the competition

Salient features:

- Pricing structure similar as rest of the industry with actual prices slightly below those of the competition.

- Target customers who us between 100 and 300 minutes by offering lower rates.

- Better off-peak hours and few hidden costs.

Pros:

- Lower prices can attract customers even if Virgin Mobile is a new entrant.

- Create new markets and gain market share from the customers who are currently not being served by other carriers.

Cons:

- Lower revenues and margins

- Competitors may replicate pricing and the competitive advantage may be lost. It may trigger a price war among carriers and thereby bringing the margins of the entire industry and hence benefitting none.

Option 3 – A whole new plan

Salient features:

- Shorten the term of contracts or eliminate contracts altogether.

- Offer Prepaid service

- Offer higher handset subsidies

- Eliminate all hidden fees, including taxes, universal service charges. What customer sees is what he pays.

- Focus on Lifetime value of customer instead of short term profits.

- Define off-peak hours based on youth (target customers) in mind.

Pros:

- No contracts will allow under 18 years old to purchase mobiles. It will be a great boost in terms of customer acquisition.

- Customers with poor credit rating could also subscribe

- Cheaper handsets would be a good way of getting customers to feel more invested and loyal toward Virgin mobile’s service.

- Customer dread hidden charges the most and this new pricing would address source of customer dissatisfaction.

Cons:

- No contract means no hedge against churn. The churn is expected to rise to 6% from the existing 2%.

- Prepaid customers are low usage customers and known to be less loyal. Therefore, offering prepaid means the danger of not being able to recoup its customer acquisition cost. As per industry analyst’s estimate the customer acquisition cost would have to be at or below $100 per gross add for prepaid to be viable.

- Prepaid would also require some mechanism to allow customers to add minutes.

- Higher handset subsidy mean higher customer acquisition cost.

Given the above strategies the third option appears most promising though it presents numerous challenges. Virgin mobile plans to distribute mobiles through agreements with Target and Best buy, the commission charges will be lower than traditional channels - $30 per phone versus an industry average of $100. Virgin mobile is targeting a $1 million customer base by the end of first year. The advertisement budget is $60 million. Hence, advertisement cost per mobile is $60. Virgin plans to buy handsets from Kyocera for anywhere between $60 to $100 depending on features and functions. A subsidy of $10 would take the total acquisition cost to $100 ($30 + $60 + $10), which would make the prepaid service viable according to the industry analysts estimate.

The target customers use somewhere between 100 to 300 mins per month. Lets consider 300 mins of use.

Let price per minute be P

Average revenue per month (ARPU) = 300P

According to analysts Virgin Mobile’s CCPU would be 0.45% of revenue during its first year of operation, since most of Virgin’s costs were variable.

CCPU = 0.45 X 300P

Margin = 300P – 135P = 165P

Break to months = Acquisition cost/Margin

17 = 100/165P → P = $ 0.035 = 3.5 cents