1) What is the value proposition of XM to different consumer segments? Who should be the primary target market for XM?
XM satellite radio’s value proposition for their customers is XM’s ability to provide radio service throughout the entire country regardless of a consumers’ location. Furthermore, terrestrial radio offers limited selection and is becoming increasingly cluttered with commercials. Therefore, XM satellite radio provides a greater selection of radio for the various preferences of consumers, commercial free. Furthermore, as an added bonus subscribers will have the opportunity to listen online from their home or office. Based on XM’s research, I believe their target market should be focused on the Tech-Seekers demographic. This demographic appears to present the best opportunity for market penetration. They are more inclined to purchase the XM service and become lifetime customers because of their desire to be on the cutting edge of technology. Moreover, this demographic is very similar to the second largest market interested in satellite radio, Tech-Friendly consumers. Therefore, there is greater opportunity for these Tech-Friendly consumers to purchase the service as well. Between these two groups, XM satellite radio has the ability to gain quick financial stability to capture more of the market share.
2) What aspects need to be considered in pricing the radio receiver and subscription fee? What is the optimal price for monthly subscription? Assume a five-year lifetime for a customer. How would your answer change if the lifetime was longer or shorter?
There are several factors that XM needs to consider when determining their pricing options. XM’s first choice of distribution was to partner with aftermarket manufacturers and determine the best vendors to produce XM satellite radios. Each manufacturer has different operating costs and desired margins. Therefore, XM needs to determine which manufacturers can provide these radios at the optimal price point for consumers. Moreover, XM needs to factor in the necessary installation costs consumers will incur for these systems will need to be put in via installation specialists like Best Buy and Circuit City. Once these factors are determined XM will be able to better access their subscription fee. The subscription fee is the biggest part of the equation because this will be a reoccurring fee consumers incur on a monthly basis. Since this product will be considered a luxury product, XM needs to consider their targeted demographic. In doing so, XM will have to establish a price that will be in the range of their demographics’ disposable income. This pricing point is so crucial because it could potentially eliminate hundreds of thousands of customers for the company. Therefore, based on XM’s market research I feel the best subscription price is $10 per month. I feel this is the best price because there is not as much of a drop off in potential customers from $2 to $10 based on the radio’s cost. Obviously as with any business one of the main goals is to make every customer a lifelong customer. This is because the cost to acquire a new customer is more expensive than retaining current customers. Therefore, as the lifetime of a customer becomes shorter, prices need to rise to make up for the lost revenue. With that in mind, I would charge a cheaper subscription fee as customers continued to remain with XM satellite radio. However, since XM is entering a new market and they are unsure of how the business will operate. Therefore, I would not change the subscription fee based on the lifetime of a customer. This is because there are too many variables that could happen in the first several years of this business. The only consideration I would let affect my decision to change this fee would be based on Sirius’s subscription fee. Once XM becomes more established I would then be more willing to adjust prices once I obtained a better understanding of the...