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).
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... [continues]
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