Virgin Atlantic

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Problem Statement Virgin will enter the US mobile market in July 2002 and needs to define a pricing strategy that would attract and retain one million subscribers by the end of year one and three million subscribers by the end of year four without triggering off competitive reactions. Situation Analysis Virgin is one of the most recognized brands in the UK with over 200 brand extensions that stand for fun, honesty and value for money. Despite a recent failure in Singapore, the company wanted to enter the US mobile market in 2001, which had six national carriers and several regional and affiliate providers1. This was considered a mature market with a penetration rate of 50% and a total of 130 million subscribers. However, a specific customer segment aged 15 to 29 had a lower penetration2 rate of approximately 15% and had the highest projected growth. Other companies decided not to target this specific market because the consumers had a poor credit quality. Additionally, since the average customer acquisition cost was $370 and their consumption was low when compared to business users, they were not seen as a business opportunity. Contrary to other companies, Virgin concluded that this underserved segment was indeed a good opportunity. The calling patterns of the youth segment were significantly different from the business users and followed new trends such as text messaging, ringtones and wake-up call among others3. Rather than a device, a mobile phone represented a fashion accessory and a personal statement to them. To develop a value proposition for this niche market, Virgin signed a multiyear agreement with MTV to include music, games and new mobile content. They called these services “VirginXtras” and they believed that these new features would increase brand loyalty and usage. Regarding Virgin’s initial costs, the company would be charged on an as-used basis for the lease of Sprint’s network space, creating a flexible cost structure without the need of huge investments on physical infrastructure. The main distribution channels consisted of 3,000 retail outlets frequently visited by the youth (Target, Sam Goody and Best Buy). Mobile phones would be packaged in a see-through package on large point-of-sales displays provided by Virgin. This allowed the customers to select the product without the help of a salesperson, thus reducing the commission from an industry average of $100 to $30. Virgin’s advertising campaign was relatively small compared to Verizon’s, one of the biggest players in the industry. The former had a cost of $22 per user, while the latter had a cost of $60 mainly due to the efficiency achieved through economies of scale.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 See
 HBR
 Case
 9-­‐504-­‐028,
 Rev.
 June
 11,
 2007.
 Exhibit
 1.
 Wireless
 Subscribers
 in
 the
 United
 States,
 by
 Carrier.
  See
 HBR
 Case
 9-­‐504-­‐028,
 Rev.
 June
 11,
 2007.
 Exhibit
 2.
 Mobile
 Penetration
 by
 Age
 Group.
  3
 See
 HBR
 Case
 9-­‐504-­‐028,
 Rev.
 June
 11,
 2007.
 Page
 4
 for
 a
 complete
 list
 of
 features.
 
1 2
 

In addition to the plans, the mobile industry was making money from customer confusion. As of 2001, 92% of customers in the industry had post-paid plans with an average bill of $52 and an average cost per minute of $0.124. Minutes used outside of the monthly bucket carried very high rates. Since customers could not accurately predict their usage they signed contracts for plans above or below their actual consumption, increasing their actual price per minute. On top of these costs, most carriers...
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