The purpose of this report was to analyze the best possible pricing strategy for the Virgin Mobile venture into the United States. 1.2 Situation
Virgin is a global company that has 200 corporate entities involved in everything from planes and trains to beverages and cosmetics. The newest addition is the Virgin Mobile USA entity, which was created after Virgin was able to successfully penetrate the U.K. cellular market. However, the company was not so successful with the mobile services in other parts of the world. The company has concerns about entering into the over saturated and competitive US cellular market but has decided to pursue entry anyways. In the US, Virgin Mobile has entered into a joint venture with Sprint and has agreed to pay them on an as-used basis. In order to be successful Virgin Mobile has decided to target the younger consumer market from age 15 to 29, which has not been penetrated by any other cellular provider and is expected to have positive growth in the future. 1.3 Problem
Virgin Mobile is facing a problem with the structure they are going to use for pricing, which is the most crucial part in successfully launching their brand within the mobile market. Through consumer research, Virgin has found that their young target audience is extremely price sensitive, bitter toward hidden charges and fees, their usage varies greatly per month and they desire mobile entertainment. The only thing now is that Virgin must differentiate itself by its pricing strategy in order to obtain consumers and loyalty from younger customers. Virgin Mobile is considering three different pricing strategies: cloning the industry prices, pricing below the competition, or creating an entirely new plan.
1.4 Alternative Solutions
We are presented with three possible pricing options. Option one (Exhibit B) consist of completely cloning the mobile industry as it currently exists. With an advertising budget at $60 million, it can be assumed that the target one million consumers are at out of reach in comparison to the industry spending on advertisements. Therefore, with a cloned pricing strategy, it is assumed the Virgin will only acquire only half of its annual target. The life time value at a cost of $.22 a minute is the highest of the three options with sticking with the target audience’s usage of approximately 200 a month. However, Virgin does not have great brand recognition or differentiation to set themselves apart from the competition using this option. The second option is where Virgin would set pricing slightly below competition. This option is slightly more attractive than option one and thus might result in approximately 700,000 consumers in the first year. Using this option would also result in a high life time value (Exhibit C), however, Virgin would also face the same challenges as with option one. In addition, competition might react to the lower pricing causing increasing difficulty for Virgin to enter the market. 2. Findings
My recommendation is for Virgin Mobile to pursue option three (Exhibit D) using a pre-paid plan with its cellular services. This pricing strategy is specifically attractive to the younger segment that they are trying to target, because they don’t have to enter into a long-term contract, they can buy minutes as they need them and there are no hidden fees. In addition, they will also get all the VirginXtras. Even though the Lifetime Value per customer is significantly lower using the pre-paid option, break even analysis shows that using the pre-paid option Virgin will begin to see profit in the seventh month of operations (Exhibit E). In order to target young customers it doesn’t make since to use contractual cellular plans. The amount of young people that will purchase the pre-paid phones will be a lot higher than if they sold the phones with a contract, this will outweigh the higher LTV of contracts and generate more profit for...
Please join StudyMode to read the full document