Session 07 - Pricing – Virgin Case - OVER (24) (1)_7d3b17dc0916a6e85365de7da619e7ea.pptx

1. MARKETING CREATION COMMUNICATION AND DELIVERY OF VALUE Dr. EASWAR KRISHNA IYER PROFESSOR GREAT LAKES INSTITUTE OF MANAGEMENT, CHENNAI A CORE COURSE

2. CREATION COMMUNICATION AND DELIVERY OF VALUE Session No. Duration Topic Which P 1 90 min Recap of STP A SESSION TO ENSURE SEAMLESS CONTINUITY FROM MARKETING 01 TO MARKETING 02 INTRO 2 90 min Introduction to P1 – Product Plus Toyota Prius Case DRIVERS FOR NEW PRODUCT INTRODUCTION [NPD] (TOYOTA PRIUS LAUNCH AS EXAMPLE) P1 3 90 min Flip side of P1 – Introduction to Services + NPD Case let on Services UNDERSTANDING SERVITIZATION VECTORS (WITH MEGA RETAIL & LCC AS EXAMPLES OF SERVICE NPD) 4 90 min Introduction to P2 – Pricing, Pricing Drivers PRICING UNDERSTOOD AS A FUNCTION OF MANY DRIVERS / EXPLANATORS (MULTIPLE INDUSTRIES) P2 5 90 min Pricing Objectives, Pricing Methods OBJECTIVES – A CONCEPTUAL APPROACH; METHODS – A MATHEMATICAL APPROACH 6 90 min Pricing - BARCO Case A DYNAMIC PRICING CASE, A STRATEGY CASE, A PRODUCT POLICY CASE 7 90 min Pricing – Virgin Case A PRICE DISCOVERY CASE, A MARKET ENTRY CASE, A TARGETTED MARKETING CASE 8 90 min Introduction to P3 – Place BRIEF INTRO TO THE WORLD OF SUPPLY CHAINS P3 9 90 min Introduction to P4 – Promotions P1  ENGINEERING; P2  FINANCE; P3  OPERATIONS; P4 – THE GLORIOUS WORLD OF MARKETING P4 10 90 min The world of Advertisements THE SOUL ON INTUITIVE MARKETING – THE WORLD OF ADS A 900 MINUTES JOURNEY WITH EKI

3. VIRGIN MOBILE An HBR Case

4. We stage-gate our understanding … … through three levels VIRGIN MOBILE An HBR Case

5. 1 VIRGIN MOBILE An HBR Case

6. MACROECONOMIC ENVIRONMENT IN US TELECOM MARKET BEFORE VIRGIN MOBILE’S ENTRY Environmental conditions that existed in US Telecom market At the point of transatlantic entry of Virgin Overcrowded Market Mature Market Poor Service Market Price Camouflaged Market Capital Intensive Market Six National Carriers Several Affiliates 50% penetrated market Cow phase in BCG Service cost will undercut margins Non-satiable customer demands Many hidden Costs Complex pricing structure Lacks Transparency High set up costs Slow Capital Recovery because of thin margins VIRGIN MOBILE An HBR Case

7. Actual Usage Credit Worthiness HIGH LOW LOW HIGH Youth Market REALLY LOW IN CREDIT WORTHINESS FAIRLY LOW IN USAGE VIRGIN MOBILE An HBR Case

8. What is the natural sync between Virgin Mobile & its chosen target segment - Youth ? Traditionally stands for Value for Money [VFM] A brand rooted on Fun Seeks a sense of Business Challenge Seeks to serve Under-served Markets Lower earning & hence focused on Value for Money Age of 15-29 & inclined towards Fun Inconsistent usage represents a Business Challenge Low Credit Worthiness makes for an Under-served Market Fundamental traits of the brand Fundamental traits of the T.G. VIRGIN MOBILE An HBR Case

9. What are the of the demographic segment identified by Virgin? UNIQUE WANTS What are the that the industry will face in trying to meet these wants? GENERIC PROBLEMS What are the that Virgin has identified to get around these unique problems? SPECIFIC SOLUTIONS WANTS Of This Segment What are the PROBLEMS For Industry What are the SOLUTIONS By Virgin What are the VIRGIN MOBILE An HBR Case

10. VIRGIN MOBILE An HBR Case

11. Continuing on Strategy … Virgin’s US Move & Porter Generics Controlled Advertisement Budget Lower sales commission structure Lesser subsidies on simpler phones Reduce CAPEX by going asset light Convert fixed cost to variable cost Simplify overheads Prepaid reduces recovery costs Reduce credit verification costs AC OC Be a MVNO (gives agility) Synergy with music brands (MTV) Lower tariff slabs for higher usage Rescue Ring (typically Virgin!) Wake up ring Text focus Clips, movies, hit lists, jokes etc. Single point focus on one Demographic Segment - Youth Other Industry Examples On Asset Light Operations? VIRGIN MOBILE An HBR Case

12. The Math behind Virgin Case Understanding CLV VIRGIN MOBILE An HBR Case

13. If “M” Rupees is put in bank today and interest rate of the bank is “ i “ , Returns at end of the year is … M(1+i) End of 1 st Year M(1+i) 2 End of 2 nd Year M(1+i) 3 End of 3 rd Year M(1+i) n End of n th Year Working backwards, if I have X n as a positive surplus margin in the n th year of operations, then its Present Value is: Aggregate present value of all future net earnings for the next ‘N’ years is: (also called Present Value of Future Cash Flows) We are not yet into Net Present Value … n = 1 N VIRGIN MOBILE An HBR Case

14. NPV = difference between the Present Value Of Future Cash Inflows & Present Value Of Cash Outflows (also called current I nvestment) n = 1 N - I a = 1 N (1+i) a (M a -c a ) r (a-1) - AC CLV = VIRGIN MOBILE An HBR Case

15. VIRGIN MOBILE An HBR Case

16. A Few Examples Criticality of CONTRACTS Customer Lifetime value with contracts M = 22x12 = 264 Monthly churn = 2% Annual churn = 24% Retention rate r = 1-0.24 = 0.76 Interest rate =5% AC = 370 USD LTV = 540 USD Customer Lifetime value without contracts M = 22x12 = 264 Monthly churn = 6% Annual churn = 72% Retention rate r = 1-0.72 = 0.28 Interest rate =5% AC = 370 USD LTV = -27.14 USD Without Contracts LTV becomes -ive 1 5.53% Churn / Month LTV = 0.0 VIRGIN MOBILE An HBR Case

17. CLV with Hidden Costs M = 22x12 = 264 Monthly churn = 2% Annual churn = 24% Retention rate r = 1-0.24 = 0.76 Interest rate =5% AC = 370 USD LTV = 540 USD CLV without Hidden Costs M = (22/1.2) x 12 = 220 Monthly churn = 2% Annual churn = 24% Retention rate r = 1-0.24 = 0.76 Interest rate =5% AC = 370 USD LTV = 388 USD Without Hidden Costs Big Erosion in LTV REMOVING THE 20% PRICE JACK UP VIRGIN MOBILE An HBR Case A Few Examples Criticality of HIDDEN COSTS 2

18. Cost Head Major Carriers Virgin Mobile What did Virgin do? Ad cost 75-100 60 60 million ad spend to acquire 1 million new customers. Hence 60 USD / customer for ads. Sales Commission 100 30 A sales channel where consumers can pick an choose their own handset. So, high touch sales person cost is not involved. Only rental cost for space at merchandizing outlet Handset subsidy 100-200 30 Staying away from high end phones because the TG for Virgin do not have the money to think of these high end phones Total AC 370 120 AC comes down from 370 USD to 120 USD As we will see shortly, cutting Acquisition Cost will be the single biggest step in changing the Pricing Structure Game VIRGIN MOBILE An HBR Case A Few Examples Criticality of ACQ. COST 3

19. 2 VIRGIN MOBILE An HBR Case

20. 3 VIRGIN MOBILE An HBR Case

21. Understanding Virgin CLV from a I Contracts I Pricing I Customer Service I Point of view VIRGIN MOBILE An HBR Case

22. Understanding Virgin CLV from a I Price Zones I Competition I Point of view VIRGIN MOBILE An HBR Case

23. Last Slide of the case … VIRGIN MOBILE An HBR Case

24. END OF SESSION 07 CREATION COMMUNICATION AND DELIVERY OF VALUE Dr. EASWAR KRISHNA IYER PROFESSOR GREAT LAKES INSTITUTE OF MANAGEMENT, CHENNAI