USA: Pricing for the Very First Time Company Background Introduction Case Background Issue of Concern

Market Research All Options Analysis Theory Application Calculation

Virgin Response Conclusion Recommendations Inviting Questions

2 Introduction Analysis Conclusion

• Virgin, a leading branded venture capital organization, Company is one of the world's most recognized and respected Background brands.

Case • Conceived in 1970 by Sir , the Virgin Background Group has gone on to grow very successful business in sectors ranging from mobile telephony, to transportation, travel, financial services, leisure, Issue of Concern music, holidays, publishing and retailing. • Virgin has created more than 200 branded companies worldwide, employing approximately 50,000 people, in 29 countries.

[Source: company website - Available from: http://www.virgin.com/AboutVirgin/WhatWeAreAbout/WhatWeAreAbout.aspx] 3 Introduction Analysis Conclusion

Company Background

Case Background

Issue of Concern

4 Introduction Analysis Conclusion

Sir Richard Charles Nicholas Branson (born 18 July 1950), is an English entrepreneur, best known for his Virgin Company Background brand, a banner that encompasses a variety of business organizations. The name Virgin was chosen because a female friend involved in setting down the initial Case commented that there weren't any virgins left amongst them. Background Today, his net worth is estimated at about £4 billion (US$7.8 billion) according to The Sunday Times Rich List 2006, or US$3.8 billion according to Forbes magazine. Issue of Concern E

[Source: Mediaman Available from: http://www.mediaman.com.au/profiles/branson3.html] 5 Introduction Analysis Conclusion

A student magazine, a small mail order record company and a 1970s Company recording shop were founded/ opened under the Virgin name. Background

1984 Airways and Virgin Cargo launched.

Case Background

1988 Virgin Broadcasting, , , etc. Virgin Issue of 1990s Virgin Rail, , Virgin , Virgin Travel, etc. Concern

2000s Virgin Mobile, Virgin Bikes, Virgin Blue, , etc.

[Source: company website - Available from: http://www.virgin.com/AboutVirgin/WhatWeAreAbout/WhatWeAreAbout.aspx] 6 Introduction Analysis Conclusion

Company Background

Case Background …

Issue of Concern

7 Introduction Analysis Conclusion

Company Background

Case Background

Issue of Concern

8 Introduction Analysis Conclusion

Company Virgin Group Background

Air Travel Mobile Financial Music Internet Case Background : 25% Virgin Atlantic: 51% Virgin Mobile : 100% Entertainment: 98.5% V2: 52.5% : 45% : 59.8% (UK): 100% Victory: 89% Virgin Net: 51% Virgin Blue: 29.1% Virgin Mobile (Aus):75% Virgin Student: 85.5% Virgin Mobile Issue of (USA): 50% Concern Rail Hotel & Leisure Drinks

Virgin Retail Group: 51% Virgin Hotel Group: 91% : 100% Thetrainline.com: 86% : 36% Virgin Active S.A.: 27%

Note: % indicates percent ownership [Source: Adapted from Virgin Management Ltd. Available from: https://www.blackwellpublishing.com/grant/docs/15Virgin.pdf] 9 Introduction Analysis Conclusion

Company We believe in making a difference. In our customers' eyes, Background Virgin stands for value for money, quality, innovation, fun and a sense of competitive challenge. We deliver a quality service Case by empowering our employees and we facilitate and monitor Background customer feedback to continually improve the customer's experience through innovation. Issue of Concern ------Virgin Group Website

[Source: http://www.virgin.com] 10 Introduction Analysis Conclusion

• Is this an opportunity for restructuring a

Company market and creating competitive advantage? Background • What are the competitors doing?

Case • Is the customer confused or badly served? Background • Is this an opportunity for building the Virgin brand? Can we add value? Issue of Concern • Will it interact with our other businesses? • Is there an appropriate trade-off between risk and reward?

11 Introduction Analysis Conclusion

• Rapidly growing industry. Company Background • Typical market where the customer has been ripped off or under-served, where there is confusion and/or where the competition is Case complacent. Background • Market segment ( 15-29 ages group) being ignored. Issue of Concern • Big players have not capitalized on this segment • Competitors slow to react to ever-changing customer mindset

12 Introduction Analysis Conclusion

• Dan Schulman was appointed CEO. Company Background • The company entered into a 50-50 joint venture with Sprint in which Virgin Mobile USA‟s services would be Case hosted on Sprint‟s PCS network. Background • Under the agreement, Virgin Mobile would purchase minutes from Sprint on an as-used basis. Issue of Concern • The goal of Virgin Mobile USA is: to have 1 million total subscribers by the end of 2002 and 3 million by year 2006.

13 Introduction Analysis Conclusion

The first to offer m-commerce services to all customers via VirginXtras, irrespective of their handsets. Company Background • Access to MTV-branded accessories and phones • • Rescue Ring Case Background • Online Real-time Billing • Wake up Call • Ring tones Issue of Concern • Fun Clips • The Hit List • Music Messenger • Movies

14 Introduction Analysis Conclusion

180 40%

Number of Subscribers Growth Rate

Company 160 35% Background 140 30%

120 25% Case Background 100 20%

80

15% Rate MarketGrowth 60

Issue of millions) Subscribers(in Numberof 10% Concern 40

20 5%

0 0% 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Year

15 Introduction Analysis Conclusion

Carrier

35 30 Company 25 20 Background 15

Millions 10 5 0

Alltel Sprint Leap Case AT&T Cinular

Background VoiceStream U.S.Cellular Other Carriers Subscribers

Issue of AT&T Concern 19% 15% Cinular Verizon 1% 3% VoiceStream 20% 11% Sprint U.S.Cellular 5% Leap 5% [Source: The Case] 21% Other Carriers 16 Introduction Analysis Conclusion

Company “ If we can figure out a way to create Background value so that we can successfully enter a very competitive and saturated market, Case Background and also create profitability with this target segment, then we will have truly

Issue of accomplished something big.” Concern

17 Introduction Analysis Conclusion

70 ₵

60 ₵ Market Research 50 ₵

All 40 ₵ Options 30 ₵

Theory 20 ₵ Application 10 ₵

Calculation 0 ₵

100 200 300 400 500 600 700 800

Contract Commitment - Minutes

[Source: Adapted from company data, Morgan Stanley Research] 18 Introduction Analysis Conclusion

70 ₵

Market 60 ₵ Research 50 ₵ All Options 40 ₵

30 ₵ Theory Application

20 ₵ Price Per Minute Per Price 10 ₵ Calculation 0 ₵ 100 300 500 700

Contract Commitment - Minutes

[Source: Adapted from company data, Morgan Stanley Research] 19 Introduction Analysis Conclusion

Market • Must reach our target Research market: Youth!

All • Create a positive Lifetime Options Need to find a Breakthrough! Value (LTV) for every

Theory customer Application – We must be able to

Calculation make money!

20 Introduction Analysis Conclusion

1. Clone the Industry Prices Market Research Options 2. Price Below Competition All Options 3. A Whole New plan

Theory Application Options 1, 2 ?

Calculation Or 3?

21 Introduction Analysis Conclusion

Market Research • Simple message: - Pricing competitively All Options - MTV applications

Theory - Superior customer service Application • Better off peak hours Calculation • Fewer hidden fees

22 Introduction Analysis Conclusion

70 ₵

60 ₵ Industry and Virgin Market Research 50 ₵

All 40 ₵ Options 30 ₵

Theory 20 ₵ Application 10 ₵ Calculation 0 ₵

100 200 300 400 500 600 700 800

Minutes

[Source: Adapted from company data, Morgan Stanley Research] 23 Introduction Analysis Conclusion

C Easy to promote. Market C Consumers are used to „buckets‟ and Research peak/off-peak distinctions. C Savings on advertising budget costs. All C Simple packaging could save costs on high Options commissioned salespeople.

Theory Pros and Cons Application DThe target youth market is not stressed. D Hard for a new entrant to the market.

Calculation D No flexibility in calling habits; always paying the same high price. D With no real price distinction, consumers are not willing to switch over just for the Virgin Extras features.

24 Introduction Analysis Conclusion

• Similar structure Market Research – Pricing slightly below the competition All Options • Maintain „buckets‟ of

Theory minutes Application – Price per minute set below industry average in certain Calculation key buckets – Target young market that uses 100 to 300 minutes

25 Introduction Analysis Conclusion

70 ₵

Market 60 ₵ Research 50 ₵

All 40 ₵ Options Industry 30 ₵ Theory Application 20 ₵

10 ₵ Calculation 0 ₵

100 200 300 400 500 600 700 800

[Source: Adapted from company data, Morgan Stanley Research] 26 Introduction Analysis Conclusion

C Maintain the buckets and volume discounts with price per minute set below industry Market average. Research C Offer best off-peak hours and few hidden fees so consumers will know Virgin Mobile is All cheaper, plain and simple. Options C Expand the size of the market and result in greater sales and profits. Theory Pros and Cons Application D Earnings from each consumer will be less. D Sales growth does not necessarily mean big Calculation profits. D Risk of being regarded as low-quality service, thus an unfavorable image. D May trigger off competitive reactions.

27 Introduction Analysis Conclusion

Radically New Plan! Market • Shorten or eliminate Research Contracts All Options • Prepaid service

Theory • Handset subsidies Application • Eliminate all hidden

Calculation fees and off-peak hours • Concept of LTV

28 Introduction Analysis Conclusion

Market • Does it make sense to shorten Research subscription terms or eliminate them All altogether? Options – Contract provide a hedge against churn Theory Application – Estimated churn rises from 2% to 6%

Calculation • Allows 18yrs and younger to purchase the product

29 Introduction Analysis Conclusion

Currently 92% of subscribers have post-paid plans Market Research Concerns: • Prepaid now have prohibitive pricing All - 35 – 50 cents per minute up to 75 cents Options - Phone use that is very infrequent Theory • Higher churn rate Application • Recoup Acquisition Costs (AC) • Morgan Stanley research suggests AC must be at or Calculation below $100 for prepaid to be viable • Need a method to add minutes (such as Website)

30 Introduction Analysis Conclusion

• Currently carriers purchase Market Research handsets from major manufacturers at a cost of All $150-$300. Options • Carriers then subsidize the end Theory Application user $100-$200 (becomes part of AC). Calculation • How do we minimize the AC? • Does this matter to our target market?

31 Introduction Analysis Conclusion

Hidden Fees Market Research • Goal: Make the pricing very simple – “What you see is what you get!” All Options • Rolling all these normally hidden costs that

Theory include taxes and fees into the final price Application Off-Peak Hours Calculation • Consider the target market: Young People! - Minute usage is very different

32 Introduction Analysis Conclusion

The Business Customer Market Research • TWO DISTINCTIONS: – Make calls during office All hours Options – Rarely worry about the cost of calls (Finance Dept can Theory Application deal with it) • PRICE INSENSITIVE! Calculation • Demand is INELASTIC • A percentage decrease in price will have a smaller percentage increase in Quantity Demanded (Calls made)

33 Introduction Analysis Conclusion

The student customer Market • TWO DISTINCTIONS Research – You make calls whenever necessary and can seek to All avoid calls that come with a Options higher pricetag – Students CARE about the price of calls Theory Application • PRICE SENSITIVE • Demand is ELASTIC • A percentage decrease in price Calculation will result in a larger percentage increase in quantity demanded (calls made)

34 Introduction Analysis Conclusion

Market Mobile phone company Research revenue: • The revenue gain from All increased quantity must be Options greater than the revenue loss from dropping the price Theory Application • Since our target market is Youth, whose demand is relatively elastic, downward Calculation adjustment in price is relevant! A>B for Revenue Gain!

35 Introduction Analysis Conclusion

Option 1 : Clone industry

Industry pricing Xtras Market Research -Same price of handset offered Hidden Fee -Same churn rate of 2% All Off-peak hour Options

Theory Option 2 : Price below Application Industry pricing Xtras

Calculation -Same price of handset offered Hidden Fee -Same churn rate of 2% Off-peak (1) hour

Priced (5c) below

36 Introduction Analysis Conclusion

Option 3 : New pricing structure: prepaid

Market Research Xtras All Average monthly revenue Options from minute usage Hidden Fee = Avg. min + avg. minute charge

Theory Off-peak (1) hour Application -Same price of handset offered -Churn rate of 6%

Calculation

37 Introduction Analysis Conclusion

M Market LTV = - AC Research 1- r + i

All Options ARPU CCPU M AC LTV Average Monthly Cash Cost per user Lifetime Theory Revenue Margin Acquisition Cost = 45% of ARPU = ARPU - CCPU Value Application per user

r: retention rate = 1 – churn rate Calculation -Sale commission i : interest rate = 5% -Advertising per gross add -Subsidy cost

38 Introduction Analysis Conclusion

Assumptions

Market - Year 1 is the immediate target Research - Customer with us 1 year for prepaid - Target average minute per month is 200 All - Target average charge per minute is 15 cent Options - Level of subscribers Option 1: same industry pricing -> less attractive Theory -> 500,000 out of 1 million subscribers Application Option 2: lower cost -> attractive Calculation -> 750,000 out of 1 million

Option 3: new pricing structure and features -> most attractive -> 1 million out of 1 million

39 Introduction Analysis Conclusion

Item Value Market Research Hidden Fee $ (6.00) Off-peak (1) hour $ (3.00) All Options Priced below (5c) $ (10.00) Option 1 Xtras $ 12.02 Theory Application Option 2 Xtras $ 18.03 Option 3 Xtras $ 24.04 Rev. from minute usage $ 30.00 Calculation

40 Introduction Analysis Conclusion

Xtras Value

Market Research

All % of the Options market share Theory Application

Calculation

# of subscriber x 12 months

41 Introduction Analysis Conclusion

ARPU CCPU M AC LTV Market Industry $52.00 $30.00 $22.00 $270.00 $44.29 Research Avg.

All Option 1 $55.02 $24.76 $30.26 $160.00 $272.29 Options

Option 2 Theory $51.03 $22.96 $28.07 $120.00 $280.94 Application

Calculation Option 3 $45.04 $20.27 $24.77 $100.00 $253.89

M LTV = - AC 1- r + i 42 Introduction Analysis Conclusion

Option 3 - Break Even Point with AC and LTV

Market Let LTV = 0 Research -> 0 = M/(1 - r - i) – AC All -> M = 0.11 AC Options -> AC = 24.77/0.11

Theory Application If LTV = 0 , AC = $225.

That is the max we can go with AC. Calculation Now with AC at $100, -For Ads budget, we can spend more -For the handset, we can lower price or increase quality

43 Introduction Analysis Conclusion

Option 3 - Break Even Per customer

Market Research Revenue = Cost Xtras + minute usage = CCPU + AC Cost All Options Total Net 11.37 0 ~ Break even Theory With Xtras 0.15 0.09 Application Without Xtras 0.21

Calculation

44 Introduction Analysis Conclusion

Market Research

All Options

Theory Application

Calculation

45 Introduction Analysis Conclusion

Pricing Strategy Pricing Objective Sales Maximization Virgin Demand Estimate Response Current market penetration of target market is only 25%1 Create Demand amongst remaining 75% Brand Switch by current users Recommen- dations Capitalize on Highly Elastic Demand of Target Market Cost Estimates Monthly Cost to Serve per Customer Networking Cost Questions Customer Service Cost Overhead Cost Customer Acquisition Cost Subsidy on Cell Phone set Marketing Communication Cost Sales commission Source: http://www.wirelessweek.com/virgin-mobile-details-launch-plans.aspx 46 Introduction Analysis Conclusion

Pricing Strategy (contd…)

Virgin Competitors‟ Prices Response ARPU of $52 with 417 minute of use 60 – 20 c per minute for less than 100 minutes 20 – 12 c per minute for 100 to 300 minutes (Virgin Target Market) Recommen- 35 – 50 c per minute for Pre-paid Costumers (Virgin Target dations Market) Pricing Method Penetration Pricing Questions Costs per Unit is inversely related to Number of Subscribers Reduce CCPU by increase in Number of Subscribers Increase in Margin will follow

47 Introduction Analysis Conclusion

Virgin Response

Recommen- dations

Questions

48 Introduction Analysis Conclusion

Final Price !!!! Virgin Response 15c per minute with Revenue of $30 per unit (average use of 200 mins) Recommen- Target Virgin Xtras Revenue of 15.04 dations Total Estimated ARPU of $45.04

Questions

49