Virgin Usa – Pricing Strategy

Marketing [pic] Virgin USA Francesco Marani Problem Statement Virgin mobile is entering the US mobile market. Low brand recognition in USA and limited financial resources for advertisement represents a constraint because to enter successfully in such a market Virgin needs to swiftly attract its potential target customer, in order to establish a critical mass and financial strength to defend itself from incumbent and/or other potential entrants (price-wars, dumping, etc†¦). The profile of target customers, youth in between 15 and 29 years old with low credit credentials and high income / price elasticity (sensitivity to changes in price and income), is in conflict with the need to retain customers for a minimum period of 17 months as currently in the market ($ 370 / [52-30] = 17), in order to breakeven recovering the Cost per Acquisition (CPA). Situation Analysis Competition – the Mobile Industry in USA: there are 6 national carriers, as well as other small regional providers. The market is overcrowded, mature, highly competitive and concentrated (3 largest carriers covering about 59% of the market – Exhibit 1); requiring large capital expenditure (CAPEX). High churn rate contribute to create uncertainty on the profitability of clients particularly because the carriers are perceived as utility providers rather than service providers. Advertisement expenditure by market leaders is high in order to capture unsatisfied customers. Customer – Market: Most of the new subscribers of mobile services (117 Mln in 2001) opt for a contractual agreement with mobile carriers, which implies hat the bulk of customers are locked into an agreement and potentially dissatisfied. Carriers make money with hidden fees, taxes and unexpected charge (calls during peak time and in excess of monthly allowance). Customer confusion, dissatisfaction and homogenous offer could be some of the reason behind the significant churn rate. We can assume that a significant chunk of the remaining subscribers (13 Mln) are mainly concentrated within the younger part of the population, in many instance unable to sign up for a contract given their lower credit credentials. Virgin aims at attracting 1 Mln of subscriber on the first year and is partnering with MTV, specialized magazines and selected trendy stores consistently with its target customers. Company – Virgin Value Preposition: The Virgin brand in other European market is associated to value for money, innovation, a hip and trendy image, and also ability to shake industry convention and status-quo. Virgin is planning to enter the USA market aggressively, where it has almost no brand recognition, focusing on understanding and meeting customer needs rather than operating the physical infrastructure (MVNO approach). By trying to differentiate its offer and value preposition from the flat and boring offer of established carrier Virgin is trying to change the concept and the perception of such service. Final goal would be reducing dissatisfaction and hence the churn rate, potentially increase the average spending per customers by in other entertainment services. Context: Virgin target customers are the youth between 15 and 29 years old, with less stable economic and consumer behavior, but a higher attitude to spend. On a comparative basis, penetration rate is expected to growth the most on Virgin’s target customer. Additionally revenues generated by entertainment services are expected to grow exponentially (annual growth above 100%) creating an additional revenue stream. Alternatives Clone the industry Prices: Adopting the same price structure available in the market seems to be a strategy consistent with the need of a simple communication, while differentiation will be based on transparency, attention to customer needs and additional services. Such price replicating strategy can be difficulty defendable in the long term. The owners of the network infrastructure, which in some instances is also a provider of mobile services, could easily cross-subsidize their mobile business and reduce its CPA to compete aggressively with Virgin, neutralizing its strategy given their superior rental network cost advantage. Any price war is likely to create an immediate change in customer preferences, in particular Virgin’s target customer (15- 29 years) is likely to be strongly affected given their traditional high sensitivity to prices change (price elasticity typically high). Price below the Competition: The option to adopt a quasi-similar pricing structure, with an exception for the bucket of consumption in between 100 and 300 minutes, has the same pros and cons of the one before mentioned, in addition to increase the probability of triggering an aggressive competitive reaction by incumbent (price wars). Both the above options fail to address three significant aspects: ? The high churn rate, which is one of the main problems in the service industry, is not addressed by any of the mentioned strategy. The limited advertisement budget may fail to create an impact and convey rapidly a clear message to any potential customers. ? The post-paid contract may be difficult to implement using the planned distribution channel. Lower sales commission could also implies less prepared sales representatives, which may fail to properly complete paperwork related to credit checks. Recommendations Virgin should adopt a brand new approach entering the mobile market to quick ly capture the favor of unhappy customers, as well as people unable to sign a contract given their low credit credentials. No contracts (pre-paid only), no hidden fees & taxes, an aggressive price strategy within the 100 – 300 minutes of consumption as a monthly allowance, with no difference between peak and off-peak charges. The average cost per minute in the industry is at the moment around 12 cents ($ 52 average bill per month / 417 min). By analyzing different possible scenario, including different retention rates and rebates in line with the market (Exhibit 2), Virgin can produce a positive Lifetime Value (LTV) offering a tiered price structure, by charging 0. 19cents for monthly usage below 100 minutes, 0. cents in between 100 and 200 minutes, or 0. 06cents between 200 and 300. This solution has been obtained by resolving the LTV formula, leaving the price as an incognita, and assuming a 6% churn rate, a rebate from client of the mobile cost at $30 (using similar proportion of rebate as other competitors), ? PROs: difficult to be replicated by competitors in the market in the short term. It best suits the need of youth people unable to pass credit checks, as well as teenagers and parents needs because it naturally limit their maximum spending in advance. LTV positive since the beginning and CPA at $160 (refer to the next section for further consideration on the CPA). Virgin can further reduce the cost per minute charges if we increase the upfront cost billed to customer for the phone (Exhibit 3), in case competitors start competing aggressively. ? CONs: pre-paid are typically associated with higher churn rate, which can result in a net loss for the carriers before having recovered the CPA. Pre-paid customer in some instances use the mobile phone less than traditional users. An appropriate (easy to reach and cheap) infrastructure needs to be in place to recharge the phone. Implementation Plan Price: an aggressive tiered price strategy, with price decreasing at increased consumption simple to communicate and sensitively lower than competitors (Exhibit 4). Any minutes in excess of 300 minutes can be charged at the same cost per minute applied for the 200 – 300 minutes of monthly consumption. No difference between peak and off-peak charges. Contract: no contract, no hidden fees and taxes. Every user will be charged only an upfront cost for the phone, which in an aggressive scenario is set at $30, (i. e. half of the minimum amount currently charged by other carriers – Exhibit 5). Communication: Virgin is entering the USA mobile market using selected affiliated partner (MTV, selected magazine, etc) consistent with its target customers. The planned advertisement investment is $60 Mln, lower than competitors, but significant for a new entrant. If we consider such t investment as a cost, the total CPA is around $160 (Exhibit 2). Nevertheless, from a financial perspective we should consider the $60 million initial investment as the only CAPEX required, which need to be remunerated by taking into account the company and market risk. If we assume a 16% rate of return on the CAPEX we would reduce the CPA at 109. 6 (Exhibit 6), close to the condition to make the present plan viable according to Morgan Stanley research. Success implementation of the strategy require Virgin entering and impacting its target customer swiftly, in order to build a critical mass and financial strength before being able to face any price-wars. Breakeven: currently the industry break-even is 17months. If we assume average consumption around 417 minutes per month, we can see that the breakeven will be significantly lower, and around 5 month. In the present calculation we have neither considered any extra revenues generated by VirginXtras, nor a reduction in the churn rate as a likely consequence of the improved customer satisfaction. Redu cing the churn rate is probably one of the most important objectives in the mobile industry sectors, also because gives additional space for price reduction as demonstrated (Exhibit 2, 3, 6). Exhibit 1 [pic] Exhibit 2 [pic] * Assuming 1 Mln of customers. $60 Mln /1 Mln customers = $ 60 per customer Exhibit 3 Intermediate Rebate [pic] Maximum Rebate [pic] * Assuming 1 Mln of customers. $60 Mln /1 Mln customers = $ 60 per customer Exhibit 4 Price Advantage against Market Average Prices [pic] *Mkt Adv = Market price per minute – Virgin price per minute. Exhibit 5 [pic] Exhibit 6 [pic] * Considering the investment on advertisement as a capital expenditure, with a 16% annual rate of return. ($60 Mln /1 Mln customer x 0. 16 = $ 9. 6