The company tried to distinguish itself from the competitors standpoint by playing on the fact that the targeted segment “did not trust the prevalent pricing points” in the industry that hinged on the credit worthiness. The main practices prevalent were: 1 . 90% of all subscribers had contractual agreement for a period of 1 year to 2 years 2. Required rigorous credit check 3.
Plans established “buckets” of minutes, on extra usage users penalized heavily 4. Charged less for off-peak than on-peak minutes, but the off-peak period had shrunk .
An additional fee was added to monthly bill, including taxes and services charges. From Company’s Standpoint Virgin Mobile USA had to fix all these problems prevalent in the industry while taking a pricing decision. The mall limitation it faced was that the prices should be competitive and portable without triggering of competitive reactions. There are three options available: Option 1: “Clone the Industry Prices” The message would go to customers that they were priced competitively with few advantages Like differentiated applications [MET] and superior customer service
Better off-peak hours and fewer hidden fees would be the selling point but the pricing structure would still depend on off-peak and peak categorization as contacted Easy to promote as this strategy of “buckets” was already prevalent in minutes industry But risks alienating the target base as they already did not make the required cut for the credit worthiness Option 2: “Price below the competition” Salary pricing structure as rest of Industry, with actual prices slightly below those of competently only within the highest frequency range Better off-peak hours and ewer hidden fee could also be given Option 3: “A whole new plan” Entirely Deferent pricing structure Eliminate contracts and going for prepaid pricing structure.
However the nature of the American cellular market with operator dedicated handsets ad prohibitive pricing followed by competitor due to high churn rates. Break even analysis and Life time Value for cellular subscribers:- As already, stated in the current scenario, most mobile companies amass working capital by going for long term contracts. Compared to a LOS$ 100 acquisition cost for a prepaid connection, the equivalent historical cost of acquisition for a post paid consumer Is US $ 370. Hat the average calling rate is around 10-30 cents per minute for a average bucket usage of 100-300 minutes (this is the target usage range that Virgin is aiming to target in the second option) Hence, average cost incurred by the company for a customer = IIS$ (0. 1 x 300) =US$ 60 (The most promising aspect in the relevant range) Acquisition cost = handset subsidy given to hand set manufacturers (IIS$ 60-100) + advertisement costs ( IIS$60 million budget spread over an estimated 1 million bickerers = IIS$60)+ sales overheads (IIS$OHIO-1 50) = IIS$ 290-370 per user per month.
Now, Breakable point in terms of month is calculated as:- Total fixed cost US$ 370 (acquisition cost for a post paid customer) 28. 46 months Revenue – Variable cost IIS$ 57 (bag. Venue per month from a user- ARPA) – IIS$30 Hence it takes around 29 months for the customer to prove profitable for the company even in the most promising scenario of the relevant range. But we will also have to induct the churn rate of around 2% per month into this optimistic consideration and try to calculate the L TV. If the LTV is positive then the company should go ahead.
The option that yields the largest LTV should be chosen. LTV= I – Acquisition cost Here, the margin remains relatively fixed across the periods which can be assumed as a modest 12%, r is the retention rate which comes to around 72% (churn rate of 2% p. M. Compounded monthly over a year = 1. Xx .
Xx….. Ill 12 months ), I becoming interest rate assumed to be around 5% Margin in a month = (Average monthly phone bill =US$52)-(Cash cost per user =US$30) = IIS$22 Now taking this value of we eave :- L TV = M/(l-r+I) Now calculating the Looter every option available will give us a marker of how the pricing strategy should be used for using various options considering the fact that the interest rate remains constant at 5%:- For option 1 :-LTV = US – 360= US 421 For option 2:- Here the retention rate can be assumed to have been bettered by differential pricing in the 100-300 minutes usage category , so we can assume a modest increase to 80%.
But this is more or less offset by the increase in cash cost to user which can be assumes to rise by 5% if the preferential pricing is 5% below the average industry standard. So the margin can be assumed to drop to US$19. Here, LTV= US 360= US 489 Hence we can see that even with modest assumptions, the LTV is maximized for Option 2, hence the company should venture into differential pricing if at all it wants to deviate. But considering the high acquisition turnover time and recovery time of almost 29 months, it is a risky strategy because of very high mobility in the targeted segment.
Hence Virgin should focus on non price factors such as :- If the contracts are done away with, this will ensure more loyalty of the target segment as the majority of them are not credit worthy. The positioning of Virgin Mobile USA and its collaborations with partners like MET will attract more customers which are loyal.
The cost of acquisition of a customer comprises of advertisement, competitors, they can price themselves lower than competitors. They can also be transparent in their cost structure, eliminating hidden costs . Hence, initially it should give non-price advantage to its customers and over a period of time can reduce costs to sustain growth and drive off competition.