Virgin Usa - Pricing Strategy

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Virgin USA

Francesco Marani

Problem Statement

Virgin mobile is entering the US mobile market. Low brand recognition in USA and limited financial resources for advertisement represents a constraint because to enter successfully in such a market Virgin needs to swiftly attract its potential target customer, in order to establish a critical mass and financial strength to defend itself from incumbent and/or other potential entrants (price-wars, dumping, etc…). The profile of target customers, youth in between 15 and 29 years old with low credit credentials and high income / price elasticity (sensitivity to changes in price and income), is in conflict with the need to retain customers for a minimum period of 17 months as currently in the market ($ 370 / [52-30] = 17), in order to breakeven recovering the Cost per Acquisition (CPA).

Situation Analysis

Competition – the Mobile Industry in USA: there are 6 national carriers, as well as other small regional providers. The market is overcrowded, mature, highly competitive and concentrated (3 largest carriers covering about 59% of the market – Exhibit 1); requiring large capital expenditure (CAPEX). High churn rate contribute to create uncertainty on the profitability of clients particularly because the carriers are perceived as utility providers rather than service providers. Advertisement expenditure by market leaders is high in order to capture unsatisfied customers.

Customer - Market: Most of the new subscribers of mobile services (117 Mln in 2001) opt for a contractual agreement with mobile carriers, which implies that the bulk of customers are locked into an agreement and potentially dissatisfied. Carriers make money with hidden fees, taxes and unexpected charge (calls during peak time and in excess of monthly allowance). Customer confusion, dissatisfaction and homogenous offer could be some of the reason behind the significant churn rate. We can assume that a significant chunk of the remaining subscribers (13 Mln) are mainly concentrated within the younger part of the population, in many instance unable to sign up for a contract given their lower credit credentials. Virgin aims at attracting 1 Mln of subscriber on the first year and is partnering with MTV, specialized magazines and selected trendy stores consistently with its target customers.

Company - Virgin Value Preposition: The Virgin brand in other European market is associated to value for money, innovation, a hip and trendy image, and also ability to shake industry convention and status-quo. Virgin is planning to enter the USA market aggressively, where it has almost no brand recognition, focusing on understanding and meeting customer needs rather than operating the physical infrastructure (MVNO approach). By trying to differentiate its offer and value preposition from the flat and boring offer of established carrier Virgin is trying to change the concept and the perception of such service. Final goal would be reducing dissatisfaction and hence the churn rate, potentially increase the average spending per customers by in other entertainment services.

Context: Virgin target customers are the youth between 15 and 29 years old, with less stable economic and consumer behavior, but a higher attitude to spend. On a comparative basis, penetration rate is expected to growth the most on Virgin’s target customer. Additionally revenues generated by entertainment services are expected to grow exponentially (annual growth above 100%) creating an additional revenue stream.


Clone the industry Prices: Adopting the same price structure available in the market seems to be a strategy consistent with the need of a simple communication, while differentiation will be based on transparency, attention to customer needs and additional services. Such price replicating strategy can be difficulty defendable in the long term. The owners of the network infrastructure, which in some...
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