7/27/2019 Virgin Mobile Analysis

1/3

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 usagewhen compared to business or working professionals

Remove all other frills like contracts and hidden costs to make the service moretransparent and acceptable to the target segment

Introduce Virgin Xtras, a set of value added services designed for this target segmentwhich could be an additional source of revenue generation for the company

Provide cheaper but quality servicesThe company had 3 options to choose for their pricing strategy:

1. Clone the industry prices2. Price below the competition3. 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 160Advertisement Cost = Ad budget/ No. of consumer = 60million/500thousand

7/27/2019 Virgin Mobile Analysis

2/3

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) 100.00 150.00 200.00 250.00 300.00

Charges/min in cents 15.00 15.00 12.00 12.00 10.00

Rev. from minutes usage 15.00 22.50 24.00 30.00 30.00

Revenue from Xtras 25% 3.75 3.75 3.00 3.00 2.50

ARPU in $ 18.75 26.25 27.00 33.00 32.50

CCPU 8.44 11.81 12.15 14.85 14.63

Margin 10.31 14.44 14.85 18.15 17.88

LTV Prepaid -66.25 -28.75 -25.00 5.00 2.50

LTV Postpaid -12.68 46.25 52.14 99.29 95.36

7/27/2019 Virgin Mobile Analysis

3/3

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 Amount $

Handset

Subsidy 0

Advertisement 60

Commission 30

Other overhead 10

Total 100

The LTV for postpaid and prepaid consumers for various usage patterns would be:

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 12.00Rev. 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 25.00 75.00 68.75 106.25 95.00

LTV Postpaid 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 patternfrom 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.