1.) Given Virgin Mobile’s target market (14 – 24-year-olds), how should it structure its pricing? The case lays out three pricing options. Which options would you choose and why? Be as specific as possible with respect to the various elements under considerations (e.g., contracts, the size of the subsidies, hidden fees, average per-minute charges, etc.)Given Virgin Mobile’s (VM) target market (14 – 24-year olds), I would recommend the company to structure its pricing based on the model presented in Option 3. This option, although appearing to be quite radical and extreme, would allow VM to create its own pricing structure while fixing some of the problems that are so common in the cell phone industry. The goal of VM’s pricing strategy was to make sure that they were able to offer competitive prices, while at the same time remain profitable and one step ahead of the competition. By going with Option 3, VM would be able to reach out to a broader range of customers and meet their specific cell phone usage needs. By eliminating the long-term contracts altogether, it would be a big advantage for VM from a customer acquisition standpoint.
For example, for those people under the age of 18, they would now be able to purchase their own cell phone through VM without having to ask their parents or guardian to sign a contract on their behalf. This would open up the doors to a huge potential customer base and generate more profits for the company. As seen in Exhibit 2, there was a huge market penetration gap between the U.S. and other countries especially in the “Ages 15 to 19” group. The term “no contracts” does have mass appeal, especially in the cell phone industry. Although contracts do offer a safety net and provided carriers with a hedge against customer turnover (along with with a guaranteed annuity stream), I think it is wise for VM to think out of the box in this case. The risk of an increased churn rate would be minimal, as VM is able to attract more customers and generate more profits due to customer satisfaction resulting from the different pricing options being offered. Customers in the U.S. tended to have a negative view of pre-paid phone plans, with its typical high costs/per minute as well as restricted usage.
I believe that VM should adopt a pre-paid pricing structure similar to that of Finland and the UK. Although there is a risk of higher churn rates among pre-paid consumers, VM could easily maintain its customer acquisition costs if kept below $100 per new gross add. This can be done by allowing its customers to choose the plan that best fits their needs, and give them the option to pay by the minute, month, etc. Without contracts, VM can also provide a lower entry price for monthly offers and give their customers more freedom and flexibility. This “pay as you go” would be a major selling point in terms of its marketing message. VM would then be able to generate a positive brand image among teenagers and the younger age groups. This should result in increased customer loyalty and acquisition based on word-of-mouth, rather than having to spend a lot of money on advertising. VM could then afford to take lower margins on its plans and price prepaid minutes well below the industry average of 35 cents/minute.
Regarding the handset subsidies, most of the major carriers offered a subsidy to their end-users, which resulted in an additional $100 to $200 as part of their customer acquisition cost. This high cost was due to the fact the carriers purchased the handsets from big name manufactures such as Nokia and Motorola. By purchasing cell phones at a lower cost from Kyocera, VM would be able to keep prices less expensive than its competitors’. Even with this, teenagers might still be attracted to the “free phone” offers from other providers. Thus, VM should still try to subsidize some of its phone cost. VM’s pricing structure should be kept simple by eliminating all the hidden fees and taxes that often confuse (and upset) customer’s when they see their bill each month.
With a prepaid plan, teens would not be able to go over their minutes and generate a costly cell phone bill. Minutes can be used at any time that best fit each user’s lifestyle, without the worry of overages and hidden fees.1 With this option, parents could also monitor their child’s cell phone usage each month and help to recharge the minutes on the phone as needed. VM did not have high fixed costs since it rented space on the Sprint PCS network. VM also had a less expensive distribution system compared to its competition, by making its phones easily available in major retail stores as an off-the-shelf item. This type of setup would most likely work well with a pre-paid plan. By having a more clear-cut billing and pricing structure, VM would be able to create better value for its customers.
2.)How confident are you that the pricing strategy you’ve chosen will be profitable? Provide evidence of the financial viability.
I believe that the pricing strategy I’ve chosen will be extremely profitable for VM. By targeting younger customers and providing them with good value, VM could be successful in such a competitive and saturated cell phone market. As seen in Exhibit 3, revenue for mobile entertainment was projected to increase over the next few years. By analyzing the LTV data presented in Exhibit 11 and the market penetration data from Exhibit 2, it is clear that VM has the potential to acquire most (if not all) of its customers with a positive lifetime value. For example, the penetration of the “15-29” age group in the U.S. was way below that of Japan and the U.K. Thus, it is critical for VM to think of creative ways about how it can make its service unique and able to cater to the needs of a younger customer base. Just looking at today’s society in the U.S., you can see how teenagers and the younger generation tend to be highly tech-savvy and willing to adopt new technologies.
Nowadays, teens in the U.S. have greater access to cash (i.e. through their parents, part-time jobs, etc.), and are willing to spend money on the latest gadgets and technology such as the iPod, Playstation, etc. So, if VM offers the flexible pricing plans along with added features such as VirginXtras, text messaging and downloadable content, it should be very appealing to the younger crowd. This would generate a large amount of profits for VM, in addition to its regular usage plans. Also, the trend nowadays is that many parents tend to view cell phones as an easy way to stay in touch with their children and are more willing to spend money on a cell phone as a safety measure.
At the same time, these parents lead busy lifestyles and would appreciate the “no contracts or hidden fees” pricing offered by VM. Parents could easily “recharge” their child’s cell phone minutes by using cash or debit card. Also, VM did not require commissioned sales reps to sell its phones and plans. This would save the company a tremendous amount of money in terms of salary and rental costs. VM would also save money on advertising costs, since its phones are placed in mass merchandisers and major retailers as an off-the-shelf item. Their phones would be easily visible and available for purchase. By offering a simple pricing plan and greater flexibility, VM would be able to acquire customers more easily with lower costs.