Virgin Mobile

Problem Statement

Virgin Mobile is planning to enter the U.S. market in July 2002. Their objective is to reach 1 million total subscribers by the end of the first year, and 3 million by year four. This represents 0.8% and 2.3% of the current market size. Their biggest concern is how to price their service. Virgin Mobile wants their prices to be competitive, allowing them to make money without triggering off competitive reactions.

Situation Analysis

At the end of 2001, the U.S. had six national carriers and a number of regional providers. The market was considered to have reached maturity with 130 million subscribers. However, among consumers aged 15 to 19 penetration was around 17%. Consumers aged 15 to 29 had poor credit quality and they were considered to be low users, therefore they were not as attractive to current players. The cost to acquire a customer was roughly $370 and the average monthly bill was $52. The average cost to serve one customer was $32.

Virgin Mobile was able to identify this niche, its needs and where they usually bought for electronics. The company knew that these customers’ usage was inconsistent and that they did not like the confusion current rates created. Customers wanted clear, flexible plans. They were unable to predict their own usage so they usually ended up paying more than they wanted to. Peak hour’s rates, extra minutes and one-time costs increased monthly bills unexpectedly. Pre paid plans were unusual because of prohibitive pricing (starting at 35 and as high as 75 cents)

In 2001 mobile entertainment represented $10 billion and was projected to increase steadily over the next few years. Alliances with MTV, VH1 and Nickelodeon were going to be Virgin Mobile’s main communication strategies to position the brand with potential customers.

Alternatives

Virgin was considering three pricing options to introduce the brand. The first one was basically “Cloning the Industry Prices” with a few differences, so that they could easily communicate their proposal to customers. The second option was to price the service slightly below those of the competition. The third option considered staying away from contracts with pre-paid plans and to be as simple as possible, even though pre-paid plans meant a 6% monthly churn rate. The three options are analyzed in exhibit 1 from Virgin Mobile’s point of view and in exhibit 2 from the customer’s point of view.

From the company’s point of view the three options have positive lifetime values of customers. From the customer’s point of view options 2 and 3 were less expensive than the ones available at that time. Option 1 would depend on peak hour’s rates to be perceived as more or less expensive.

Recommendations

Based on exhibit 1 the alternative that best fits the company’s objectives is the third one. This meant introducing the product with pre-paid plans with a price that could go as high as 25 cents per minute, although ¢25 is not the optimal price from the customer’s point of view (discussed later). The third option does not have the highest lifetime value and therefore would achieve their goal of not triggering competitive reactions. The other two options would compete directly with the current big players in the industry. The lifetime value of each customer would stay positive as long as they remained paying low commission fees and did not subsidize handsets. This option would also allow the company to rely on

...