Virgin Mobiles final_Bundle pricing mechanism

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1. Prem Prakash Dewani Professor ( Marketing), IIM Lucknow Virgin Mobiles USA: Pricing for the Very First Time Harvard Business School Case

2. Newer Market Market Characteristics are provided( Saturated and Switching Behaviour of the consumer) Disloyal Customers Can I use Pricing as a tool to retain the customer/Gain the customer (Trial rate and the repeat purchase) Pricing pay some role in choice making (is that the role is increasing day Perception of the price fairness. ( Satisfaction is a function of my perception about fairness of the deal) Customer Loyalty and CLV (Customer lifetime value): services Profits = Revenue (Prices) – Cost (rest all the Ps of Marketing 2 Virgin Mobile USA: Pricing for the Very First Time Case Explores Aspect of Pricing

3. What leads to Consumer Satisfaction???. Drivers of Consumer Satisfaction Identify needs/ wants (MR) 3 Virgin Mobile USA: Pricing for the Very First Time Case Explores Aspect of Pricing

4. Newer Market Market Characteristics are provided( Saturated and Switching Behaviour of the consumer) Disloyal Customers Loyal customers are more profitable (6 to 10 times cost is lesser to serve to loyal customer Customer Loyalty and CLV 4 Virgin Mobile USA: Pricing for the Very First Time Case Explores Aspect of Pricing

5. Pricing Levels Pricing Structure 5 Virgin Mobile USA: Pricing for the Very First Time Case Explores Aspect of Pricing

6. Situation Analysis Problem Statement Options Available Criteria for Evaluation Evaluation of Every Option Recommendations Contingency Plan Conclusion 6 Virgin Mobile USA: Pricing for the Very First Time Case Explores Aspect of Pricing

7. Pricing Levels The overall amount a customer pays Pricing levels on both demand and profitability Break-even analysis Estimates of customer acquisition cost Estimates of customer lifetime value 7 Virgin Mobile USA: Pricing for the Very First Time Case Explores Aspect of Pricing

8. Pricing Structure V max = P benefits / P cost Buffet Pricing Structure VS a la carte pricing Pre-paid plans VS post-paid plans Contracts Hidden fees Subsidies Effect of this on purchase decision and post-purchase behaviour 8 Virgin Mobile USA: Pricing for the Very First Time Case Explores Aspect of Pricing

9. Objectives of the CASE? 9

10. To examine the interplay between pricing , target market selection , and a firm’s overall value propositions 10 Virgin Mobile USA: Pricing for the Very First Time Objectives of the CASE

11. To demonstrate the multiple ways firms can create paths to profitability Lowering customer acquisition cost Increasing retention rates Reducing service cost Changing consumption pattern (???) 11 Virgin Mobile USA: Pricing for the Very First Time Objectives of the CASE

12. To illustrate the importance of adopting a long-term strategic perspective in choosing a pricing structure 12 Virgin Mobile USA: Pricing for the Very First Time Objectives of the CASE

13. Pricing Approach Similar to the Major Carriers 13 Virgin Mobile USA: Pricing for the Very First Time Option 1 & 2

14. Pricing Structure from the Customer Perspective 14

15. Contracts 15 Virgin Mobile USA: Pricing for the Very First Time Various Sources of Customer Discontent

16. Buckets 16 Virgin Mobile USA: Pricing for the Very First Time Various Sources of Customer Discontent

17. Hidden Cost 17 Virgin Mobile USA: Pricing for the Very First Time Various Sources of Customer Discontent

18. Off-Peak / On-Peak Differentials 18 Virgin Mobile USA: Pricing for the Very First Time Various Sources of Customer Discontent

19. Credit Checks 19 Virgin Mobile USA: Pricing for the Very First Time Various Sources of Customer Discontent

20. Complex Sales Process 20 Virgin Mobile USA: Pricing for the Very First Time Various Sources of Customer Discontent

21. Privacy Concern 21 Virgin Mobile USA: Pricing for the Very First Time Various Sources of Customer Discontent

22. Poor Services 22 Virgin Mobile USA: Pricing for the Very First Time Various Sources of Customer Discontent

23. Pricing Structure from the Carrier/ Firm’s Perspective 23

24. Most of the sources causing customer dissatisfaction i.e. bucket pricing, contract etc are source of f irm’s Profit 24 Virgin Mobile USA: Pricing for the Very First Time Firm’s Perspective

25. Annual Churn Rate –with Contract = 2 %*12 months (Case P5) = 24 % Annual Churn rate without Contract= 6 %*12 months (Case P8) =72 % The Difference = 72 % - 24 % = 48 % 25 Virgin Mobile USA: Pricing for the Very First Time 1. Contracts

26. AT & T with customer base 20.5 M (Case Exhibit 1) Additional customer lost to churn = 48 % * 20.5 M = 9.84 Million Customers Acquisition cost per customer $ 370 (Case p2) Total cost of offsetting higher churn rate =$ 370 * 9.84 M = $ 3.64 Billion 26 Virgin Mobile USA: Pricing for the Very First Time 1. Contracts

27. Case Exhibit 9 a and 9 b Customers are not always adept at estimating their future calling patterns Pricing buckets allow the carriers to advertise low per minute rates 27 Virgin Mobile USA: Pricing for the Very First Time 2. Bucket Pricing

28. ‘If all customers actually signed up for the optimal plan for their usage, the carriers would be ,making far less money than they are today’ Schulman 28 Virgin Mobile USA: Pricing for the Very First Time 2. Bucket Pricing

29. ‘By hidden fees Firms are able to promote low per minute pricing levels and collect extra revenues Rigorous Credit Checks Poor Customer Services 29 Virgin Mobile USA: Pricing for the Very First Time 3. Hidden Fees, Credit Checks, Poor customer services

30. 30 Virgin Mobile USA: Pricing for the Very First Time A Cycle of Customer Dissatisfaction Multiple Target Customers Business Consumers, Heavy/Light Users etc. Complex Sales Process Credit Check Complex Pricing Plans Multiple Options Multiple Buckets Hidde Fees Poor Services Forced Contracts

31. 31 Virgin Mobile USA: Pricing for the Very First Time A Cycle of Customer Dissatisfaction Complex Sales Process Credit Check Complex Pricing Plans Multiple Options Multiple Buckets Hidde Fees Poor Services Forced Contracts Customer Dissatisfaction

32. 32 Virgin Mobile USA: Pricing for the Very First Time A Cycle of Customer Dissatisfaction Customer Dissatisfaction Continuous Industry Churn High churn rates mean that carriers must re-acquire 24 % of their customers base each year just to stay even High Customer Acquisition Cost Because of high customer dissatisfaction rates, acquiring new customers is a tough sell

33. 33 Virgin Mobile USA: Pricing for the Very First Time A Cycle of Customer Dissatisfaction Continuous Industry Churn High churn rates mean that carriers must re-acquire 24 % of their customers base each year just to stay even High Customer Acquisition Cost Because of high customer dissatisfaction rates, acquiring new customers is a tough sell Financial Pressures to *Lock in customers using contracts *Cut corners in customer service to reduce cost *Aggressively promote low prices to attract customers *Use hidden fees and pricing bucket to increase margins

34. 34 Virgin Mobile USA: Pricing for the Very First Time A Cycle of Customer Dissatisfaction Financial Pressures to *Lock in customers using contracts *Cut corners in customer service to reduce cost *Aggressively promote low prices to attract customers *Use hidden fees and pricing bucket to increase margins Complex Sales Process Credit Check Complex Pricing Plans Multiple Options Multiple Buckets Hidde Fees Poor Services Forced Contracts

35. Acquisition Cost = $ 370 (case p 2) Advertising per gross Add = $ 75-$100 (footnote case p-5) Sales commission paid per subscriber = $ 100 (case p5) Handset Subsidy provided to the subscriber = $ 100 to $ 200 (Case p 9) Total = $ 275- $ 405 ( roughly $ 340 ) 35 Virgin Mobile USA: Pricing for the Very First Time Pricing Levels 1

36. Breakeven Analysis Monthly ARPU (average revenue per unit)=$52 (case p-3) Monthly cost to serve = $ 30 (case p3) Monthly Margins = $ 22 36 Virgin Mobile USA: Pricing for the Very First Time Pricing Levels 2

37. Time required to breakeven = $370/$22 = 17 months 37 Virgin Mobile USA: Pricing for the Very First Time Pricing Levels

38. LTV = M/(1-r+i)-AC LTV = (22*12)/(1-0.76+0.05)-370 = $ 540 38 Virgin Mobile USA: Pricing for the Very First Time Lifetime Value (LTV) Analysis

39. LTV = M/(1-r+i)-AC LTV = (22*12)/(1-0.28+0.05)-370 = - $ 27.14 39 Virgin Mobile USA: Pricing for the Very First Time LTV: Eliminating Contracts

40. LTV = M/(1-r+i)-AC Hidden cost = $35-$29 = $ 6 on $ 29 = 21 % Monthly margin reduction = $22/ 1.21 = $18.18 LTV = (22*12)/(1-0.28+0.5)-370 = - $ 27.14 40 Virgin Mobile USA: Pricing for the Very First Time LTV: Eliminating Hidden Cost

41. Breakeven would become 370/ 18.18= 20 Months LTV with contract = (18.18*12)/(1-0.76+0.05)-370 = $ 382 LTV without contract & without hidden fees = (18.18*12)/(1-0.28+0.05)-370 = - $ 86.68 41 Virgin Mobile USA: Pricing for the Very First Time LTV: Eliminating Hidden Cost

42. Option 3: Different Pricing Strategy 42

43. Customer Characteristics: Highly Dissatisfied and Confused Segment Chosen to Serve Fail Credit Check and Week credit History Uneven Usage Pattern Low Credit Limit Limited Disposable Income 43 Virgin Mobile USA: Pricing for the Very First Time Option 3: Different Pricing

44. 44 Virgin Mobile USA: Pricing for the Very First Time Customer Wants and problems No Contracts No Pricing Bucket No Hidden Fees No Peak / Off Peak Hrs No Credit Check Increased Churn Lower Operating Margins More Uncollectible Customer Confusion Increased Cost Simple Sales Process Great Service

45. Lower Acquisition Cost? Advertising Subsidies on Handsets 45

46. Current Industry Handset Cost $ 150 to $ 300 (225) Case p 3 Current industry handset subsidy = $ 100 to $ 200 (150) (Case p 9) Current industry handset subsidy as a % = 67 % Virgin handset Cost = $ 60 to $ 100 (80) case p 5 If virgin were to subsidize handsets by 35 % to 40 %, subsidy would equal $ 30 46 Virgin Mobile USA: Pricing for the Very First Time

47. Sales Commission =$ 30 Advertising per gross Add = $ 60 Handset Subsidy = $ 30 Total Acquisition Cost $ 120 47 Virgin Mobile USA: Pricing for the Very First Time Virgin Mobile

48. Offering Pre-Paid Plan? 48 Virgin Mobile USA: Pricing for the Very First Time Embracing Other Pricing Elements

49. Would eliminate uncollectible Eliminate need for credit check Simplify the sales process (entirely new set of channel opportunities) Encourage Trial Rates Lower cost to service (Billing and service calls) 49 Virgin Mobile USA: Pricing for the Very First Time Pre-paid Plan

50. High Differentiated Competitive Positioning Rescue Rings, Wake up Calls 50

51. 51 Virgin Mobile USA: Pricing for the Very First Time Customer problems and Solutions No Contracts No Pricing Bucket No Hidden Fees No Peak / Off Peak Hrs No Credit Check Increased Churn Lower Operating Margins More Uncollectible Customer Confusion Increased Cost Simple Sales Process Great Service Lower Subsidies Lower Acquisition Cost Offset Loss in LTV Simplified Pre-paid Plans

52. A customer Friendly Plan : Could it Achieve Profitability? 52

53. Virgin’s Monthly ARPU = 200 minutes * P (p = price per minute) Monthly cost to Serve = 0.45 * 200 * P Monthly Margins = (200P)- (90 P) = 110 P Acquisition Cost = $ 120 53 Virgin Mobile USA: Pricing for the Very First Time Breakeven Analysis

54. To Breakeven in 17 Months 120/ 110P = 17 =0.064 Dollars = 6.4 Cents 54 Virgin Mobile USA: Pricing for the Very First Time Breakeven Analysis

55. (0.064*200*12)(1-0.45)/(1-0.28+0.05)-120 = -10.29 Pricing Estimates (1-0.45)(200*12*p)/(1-0.28+0.05)-120>0 1320p/0.77> 120 P >0.07 7 Cents 55 Virgin Mobile USA: Pricing for the Very First Time Lifetime Value Analysis (LTV)

56. At 10 cents per minute the LTV would be $ 51 At 25 cents per minute the LTV would be $ 309 56 Virgin Mobile USA: Pricing for the Very First Time Lifetime Value Analysis (LTV)

57. What Happened? 57

58. 58 Harvard Business School Case Virgin Price Plan A pre-paid plan No contracts No Hidden Charges No peak or off peak hours Very Low handset subsidies No credit check No monthly bills Price: 25 cents per minute for the first 10 minutes in a day, 10 cents/ minute for the rest of the day

59. 59 Harvard Business School Case Virgin Price Plan A 3 months period in which to use pre paid minutes plus an additional 2 months grace period Handsets with one button access to view current balance/remaining minutes Customers could purchase additional minutes via the phone or web using a credit card: users could also purchased top off card through Virgin’s retail channel

60. 60 Virgin Mobile USA: Pricing for the Very First Time A Cycle of Customer Satisfaction Narrow Target Segment: Young People between the ages of 14 and 24 years Simple Sales Process No Credit Check Simle Pricing Plans Full Transparency Easy to Understand No Hidden Fees etc Great Services No Contracts

61. 61 Virgin Mobile USA: Pricing for the Very First Time A Cycle of Customer Satisfaction Simple Sales Process No Credit Check Simple Pricing Plans Full Transparency Easy to Understand No Hidden Fees etc Great Services No Contracts Customer Satisfaction

62. 62 Virgin Mobile USA: Pricing for the Very First Time A Cycle of Customer Satisfaction Customer Satisfaction Lower than Expected Churn Rate Lower Customer Acquisition Cost

63. 63 Virgin Mobile USA: Pricing for the Very First Time A Cycle of Customer Satisfaction Lower than Expected Churn Rate Lower Customer Acquisition Cost Financial Flexibility to *Eliminate Contracts Offer Great Customer Service * Offer competitive per-minute rates