A New Prepaid Pricing Plan to Capture the Youth Market

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Entering into a highly saturated cellular phone industry, Virgin Mobile has decided to target the youth market. This market was underserved by existing carriers because they didn’t make money from those young consumers. Therefore, Virgin Mobile should develop a competitive and profitable pricing strategy for the new cellular phone service. This memo is intended to propose a new prepaid pricing plan to create market share and profit.

1. A radical and appealing pricing plan for the young consumers:

• No contract, no hidden fees, and no difference between off-peak and peak hours. • Pay-as-you-go plan: $99.99 starter pack (400 minutes in 30 days with a free basic handset). • Lower handset subsidies to reduce acquisition cost

No contract, no hidden fees, and no difference between off-peak and peak hours.

What you see is what you get! Eliminating contracts and any hidden costs, Virgin Mobile makes customer communication simple, unique and trendy. Breaking all barriers would attract more target customers. The young consumers aged 15 to 29 have poor credit quality. According to the survey, 30% of prospective customers failed to pass the rigorous credit checks. As a result, no contract and no credit check would cater to this group. It also helps retain customers. Many customers abandoned their carriers because of confusion and hidden charges. By eliminating all hidden fees, Virgin Mobile would build a trustworthy customer relationship and maximize customer satisfaction and loyalty. Accordingly, the estimated 6% of churn rate may be reduced.

Pay-as-you-go plan

It is an attractive deal to the young consumers with poor credit checks. The $99.99 starter pack includes 400 minutes and a free handset. To add minutes, customers can purchase $20 refill card for 200 minutes or $ 35 refill card for 400 minutes. Prepaid plan makes purchasing easy and convenient. Customers can buy this pack in Target, Sam Goody music stores, and Best Buy. They also can refill minutes by buying physical phone cards from retail stores or via the Web. Prepaid plan has been proven successful in Finland and UK. For 15-29 years old group, the mobile penetration in these countries is as two times as current US penetration. However, how to increase the usage is a critical issue for the prepaid market. Virgin mobile would address this issue through the unique VirginXtras to attract the young consumers.

Lower handset subsidies to reduce acquisition cost

Having a partnership with Kyocera, Virgin Mobile can lower subsidy costs on handsets. Since the cost per handset ranged from $60 to $100, Virgin Mobile may charge end users $60. Moreover, the competitive price rate, 10 cents per minute, would allow the company to decrease the subsidy costs and further reduce the acquisition cost.

2. This new pricing plan is profitable.

• Positive Customer lifetime value
The new pricing plan has positive and bearable customer lifetime value. According to the customer lifetime value calculation, the proposed pricing plan creates $246 lifetime value per customer (See exhibit one). Although it is not the highest customer lifetime value, this plan is still a compelling one because it may bring in 30% of additional customers.

• Break-even in the first year
Under this pricing plan, Virgin Mobile would breakeven the first year and gain $107 million gross margin (See exhibit two for the detailed calculation). Specifically, acquiring 359,282 subscribers can cover the $60 million advertising fee. Thereby, the goal of capturing one million subscribers by the end of the first year is achievable. At the same time, Virgin Mobile would generate $107 million gross margin.

3. The new pricing scheme fits with Virgin’s value proposition

Virgin stands for fun, honesty and great value for money. Accordingly, this radical pricing plan differentiates Virgin Mobile from the overcrowded cellular industry through the transparent...
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