Virgin Mobile Case Analysis free essay sample

For instance, customers’ distrust in pricing plans due to confusing usage rates; companies’ inconvenient and inconsistent off-peak hours; service provider’s hidden fees that include taxes and higher rates after minutes are used up, universal service charges, and one-time costs; and binding contracts by the service providers that require good credit history. Major carriers are not addressing these needs because they are complacent among competitors, and they do not view the non-business and/or younger market as a viable option for growth. As a delayed market entrant, Virgin Mobile’s strategy is to target an unsaturated market segment, while still attempting to earn a profit from a limited income segment. The target market consists of trendy consumers from ages 14 to 29. The company sees this market as an opportunity for growth because of their different usage, needs, and spending habits. However, this market’s limited purchasing power and distrust of industry pricing plans has made creating customer lifetime value and achieving profitability difficult. We will write a custom essay sample on Virgin Mobile Case Analysis or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page To reach Schulman’s goal of having 1 million subscribers by the end of the first year, and 3 million by the fourth, the company must determine the most profitable and sustainable pricing plan. Option One Clone the Industry Prices: The proven success of the cell phone industry’s current prices is a viable option for modeling Virgin Mobile’s pricing strategy. Because Virgin Mobile has a limited advertising budget of $60 million, the familiarity of customers with established promotional strategies makes this an attractive option. However, this option would reduce competitive advantage within the market and serve as a challenge in penetrating such a saturated market with a similar offering as competitors. It currently takes a carrier 17 months to break even on customer acquisition costs, with a customer lifetime value of $540. 43 for those that do sign contracts, and a customer lifetime value of -$27. 14 for those that prepay (see Option 1). Furthermore, this largely ignores the demands of the 14-29 year age bracket. Many in this target segment would opt for a prepaid plan, which has a negative LTV, and is thus unsustainable. Option Two Set Prices Below the Competition: Virgin Mobile can market a â€Å"cheaper, plain and simple† strategy to satisfy the limited spending power of the company’s target market by reducing the price per minute to drive sales and market share. Decreasing the cost per minute from the industry average of 20 cents (assuming 200 minutes/unit/month) to 15 cents, decreases the customer lifetime value and raises the break-even period. LTV decreases to $126. 55 for those that sign contracts and -$182. 99 for those that prepay. This option is inconsistent with company goals, as margins and profitability will be driven down. Fundamentally, this is not a long-term solution. Option Three A Whole New Plan: Virgin Mobile has the option of creating an entirely new strategy for the introduction into the market. The use of contracts helps establish customer retention and is a filter to those customers who have bad credit. However, without a signed contract with the customer, Virgin Mobile operates without a safety net and higher churn rate if the customer is unhappy with the service provided. In terms of introducing prepaid pricing, this could serve as a way for the company to differentiate itself from competitors. Specifically, the prepaid option caters to the younger target market by eliminating hidden fees, offering flexibility in choosing contracts, and removing the risk of missed payments. On the other hand, prepaid pricing increases the churn rate by four percent and runs a risk of limited returns and customer loyalty. Hidden fees allow Virgin Mobile to promote low per minute prices, but the company is still able to collect additional revenues. In the proposal for Option 3, we significantly decreased our costs, allowing Virgin to slightly lower the price while maintaining a high margin. Because Virgin can buy its handsets at a cheaper basis than their competitors, they can lower the relative handset subsidy while still offering the handset to customers at $50, which is lower than the industry average. Furthermore, â€Å"other charges† (hidden fees) will be reduced from $12 to $5, eliminating all fees except taxes and those necessary for operation. We will be able to reduce the cost/minute to $0. 8 and will add unlimited text messages for $5 no on-peak, off-peak times or overage costs. This factor will help Verizon tap into the younger markets by offering straightforward plans at a slightly lower cost, flexibility in contracts, with the benefits of hip apps included in the service. Customer lifetime value would reach $926. 90 for those with contracts, $274. 29 for those without contracts; and breakeven would be reduc ed to 5 months. Recommendations After careful consideration and financial analysis, we chose Option 3 for our pricing structure. We felt having a low-cost, straightforward, pick-your-plan service was crucial to reaching the 14-29 age bracket. First, we found it important to have a plan that allows our customers the option of signing contracts or going on a prepaid basis. We felt that the younger segment in this age bracket would be included in their parents’ cell phone plan or supported by their parents, and the stability of contracts would appeal to these parents. However, having the non-contract option helps appeal to the older segment of the age bracket, to the young adults that are now on their own but don’t have the credit quality to sign a contract. This aspect of our product would essentially provide the best of both worlds and give our customers a sense of reliability with the brand. Having two options would also combat potentially high churn rates associated with non-contract agreements. Furthermore, because we were able to cut our costs given our low advertising budget and niche target market, we were able to emerge as a cost leader in the industry and still maintain high margins and high profitability. We will be able to advertise a lower cost per minute as well as lower hidden fees. Positioning Virgin Mobile as a low-cost brand will give us instant traction in the marketplace and differentiate our product from our already congested competitors. In addition, we saw a good opportunity to capitalize on text messaging as a key selling point for youths. By offering an unlimited plan, users might be more inclined to switch to our coverage once text message totals from other service providers begin to pile up. The final key factor we wanted to emphasize might in fact be the most important; making Virgin Mobile a hip brand. By focusing on unique design and packaging Virgin could position themselves as a â€Å"cool† product. Our age bracket values product design, so catering to these needs would go a long way in marketing our product. The idea of VirginXtras plays perfectly to this market position and would allow our company to receive the most â€Å"bang-for-our-buck† considering our low advertising budget. In order to maintain a low cost structure, we must make efficient use of the advertising dollars we do have.