XM Satellite Radio
1. Value proposition of XM to different consumer segments and primary target segment. XM had developed the capability to provide 50+ high quality (near CD quality) digital radio channels to cars and homes via satellite throughout the country. Such a service was not available before and has the ability to deliver uninterrupted service without any retuning needed. The value proposition here is high quality and ubiquitous radio broadcast, in addition to the variety of channels which will be of interest to different age and consumer groups and their disparate preferences. XM radio can also show song titles, artist and can be switched on at an ease of a button on the radio. Another possible value proposition under considerations is commercial free broadcasts, which will allow users to listen to shows and music without the inconvenience of listening to advertisements in traditional radio.
Radio listening has increasingly become part of a car-driving activity with up to 31% of radio listening occurring in the car. XM’s consistent high quality service would be particularly appealing to this segment, which includes young adults, truckers, and commuters in both urban and rural areas. XM also stands to gain from serving advertisers as its various channels, directed towards specific consumer segments may help advertisers better communicate to reach these certain groups with high frequency.
As for the primary target segment, XM radio should target young adults in 18-35 years age group who are forecasted to have a high demand for their service according to Exhibit 10. More specifically, male users in urban areas will have a higher willingness to pay for the product, along with Tech seekers (who have a tendency to adopt new technologies early) as seen in Exhibit 9. Thus, XM radio should primarily target drivers in the 18-35 year age group, with a particular emphasis on males in urban areas and tech enthusiasts. 2. Aspects for consideration in pricing of radio receiver and subscription fee. Several aspects factor into pricing. In this case, XM is looking to partner with aftermarket manufacturers to assess who are best fit to produce and distribute the XM radio receivers. Different manufacturers (such as Sony and Pioneer) and distributors (such as Best Buy) have different costs and margins of around 30%, which need to be considered in assessing a viable price to charge users. Additionally, XM needs to understand the installation costs of these radios to determine the fee of the radio receiver. As for the price of the receiver, it can be observed in exhibit 9 that as its price goes down more there will be more demand at various price points ranging from $100-400. Since this is a one-off cost in 5 years, XM can possibly charge the minimum price i.e. $100 to capture the maximum number of subscribers and make up for any losses through subscription fees. This can also reduce the costs of acquiring these additional customers through other marketing efforts.
Looking at the subscription fee, using the demand projections from exhibit 9 revenue forecasts for 5 years have been generated and presented in table A of the Appendix. Revenues for XM are potentially maximized at subscription price of $10 with the radio price at $100. These revenues can also cover their annual operating costs of $200-300mm and $1bn start-up financing. Assuming, that the radio is priced at $100 as mentioned above, $10 might be the optimal price for XM to charge. Considering that SIRIUS plans to charge $10, XM will be competing for the same customers as SIRIUS and will have to charge the similar price of $10 and may risk losing them if they charge a higher fee. In light of the figures, if lifetime were shorter- higher fees and radio costs may have to charged to earn more revenue and make up for costs. However,...
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