Virgin Mobile Pricing Case Analysis

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Pricing Strategy for U.S. Entry
Kerry Barrett Christopher Gunaseelan Inessa Podvorna Priyam Singh

Company Brand Values
Quality Make a difference.
Value for money Competitive challenge

Virgin Mobile USA
• Strategy: Penetrate US Market
— — — Adhere to core values of company Target under-served market segment Acquire approx. 1million total subscribers by end of year 1; 3 million by end of year 4 Low manufacturing cost cell phones Virtually zero fixed cost Alternative, lower-cost distribution channels Targeted advertising using traditional and non-traditional media Minimized churn (increased switching cost) through introducing value added services like VirginXtras and customer loyalty benefits Partnerships with other vendors catering to target segment



Key Components of Strategy to Achieve Profitability
— — — — —



Context: The US Mobile Market
• Crowded space – considered mature
– Penetration close to 50%, 130MM subscribers – Penetration lower among 15-29 age market segment • Strong expected growth rates • Big players (incumbents) have not targeted the segment

• High customer dissatisfaction despite service contracts
– System exploits customer confusion and lack of information • Lengthy and complex contracts that are hard to decipher • Various pricing variables (buckets, hidden fees, overages, etc) “stick it” to the customer

– These qualities do not fly with the young “empowered” generation

• Dissatisfaction with status quo creates opportunity for Virgin Mobile

Competition
Top six players service 76% of cell phone subscribers
Wireless Subscribers in US
(Q4 2001, in millions)

• Concentrated market dominated by large players • Highly competitive space; top 6 providers price competitively and fight for market share

Leap, 1.1 U.S. Cellular, 3.5 Sprint, 14.5 Alltel, 6.7 VoiceStrea m, 6.5

Other, 26.1

AT&T, 20.5

Cingular, 21.7

• Incumbents have poor reputation in providing customer service • All incumbents offer similar pricing • Large players own their own networks

Verizon, 29.5

Targeted Collaborators
• • Kyocera, handset manufacturer
– Cheaper, compared to competition, handsets with changeable faceplates

MTV Networks
– Deliver music, games and other contents through mobile – Promotional air time on TV – Ability to use phones to vote on shows

• • •

Distributors – Target, Sam Goody, Circuit City
– Provide cheaper yet mass distribution network

Youth magazine editors
– The Complex, Vibe and XXL – Publish “advertotrials”, raising brand awareness

Sprint – providing access to the infrastructure
– Virtually zero Virgin Mobile fixed costs due to utilizing MVNO model

Customer Target
Traditional Mobile Phone Carriers
Age Descriptors Usage/Calling patterns Attitudes Target 30-49 People at work, older, more ‘stable’ Fairly consistent usage – professional use, etc. Traditional, phone used for conversations primarily, low-risk Functional, for calls use, practical Accustomed to contracts; don’t like them but are complacent; switching costs are high Target – 15-29 People in flux (in college, getting first phone, etc.) Inconsistent usage; Varied calling patterns More open to new things (graphics, ring tones, face plates, graphics) Fashion accessory or personal statement Savvy customers – wary of “freebies.” challenge status quo; loathe hidden fees

How they view their phone Attitude toward mobile carriers

Significant opportunity in young adults market with over 23MM prospects Mobile Penetration in US
non-US Avg* US

0% Ages 30-59 Ages 20-29

20%

40%

60%

80% US Target Market
• 20MM people aged 15-19 • 19MM people aged 20-24 • 19MM people aged 25-29

11.7MM untapped prospects**

Ages 15-19
11.9 MM untapped prospects**

• 23.6MM** potential customers not served by incumbents

Target “whitespace” young adult market not served by incumbents *Based on average penetration in UK, Finland and Japan **Based on Census data for year...
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