Virgin Mobile Group 8 Rev2

INDIAN INSTITUTE OF MANAGEMENT CALCUTTA
POST GRADUATE PROGRAMME FOR EXECUTIVES

2017 2018
COURSE : MARKETING MANAGEMENT

STRATEGIC ISSUES
ASSIGNMENT : VIRGIN MOBILE USA: PRICING FOR THE

VERY FIRST TIME
Prepared & Submitted by:

Group No : 08
Komal Ved PGPEX 28/11
Pralabh Agrawal PGPEX 37/11
Rohit Seth PGPEX 48/11
Shankar A K M PGPEX 55/11
-1-
1a. What is/are the source(s) of customer dissatisfaction in the cellular industry? 1b. Are
customers loyal? Explain your reasoning.
1a Answer:
At the end of 2001, United States had six national carriers and a number of regional and affiliate
providers. Though the industry penetration was close to 50%, most of the customers were
dissatisfied with its pricing strategies as explained below.
Over 90% of all subscribers had contractual agreements with their cellular providers.
The customers had to bear with the contracts which generally lasted for a period of one
or two years, and they required a rigorous credit check.
As per the existing pricing plan, Customers had to sign up for bucket of minutes (for
example 300 minutes) for a fixed monthly fee. This was one of the major source of
dissatisfaction because if the customer used more than 300 minutes, they were penalized
with extremely high rates (e.g.,40 cents/minute) for the overage. And if they used fewer
than 300 minutes, they were still charged the fixed monthly fee, which drove up their
price per minute.
Though the carriers charged less for off-peak than on-peak minutes, they reduced the
off-peak period over time. Originally, off-peak had begun at 06:00 pm, but then it was
shifted to 7:00p.m., then 8:00p.m. and finally 9:00p.m. Some carriers even charged a
monthly fee (about $7) to move the peak time back one hour. These kind of pricing
strategies created lot of confusion for the customers and above that the carriers were
even making money from customer confusion.
Customers also resented the fact that most carriers levied additional fees over and above
the fixed monthly bill. The carries never informed customers about the taxes, universal
service charge and a bunch of one-time costs that they have to pay. All these costs drove
up their monthly bill by approximately 20%.
1b Answer:
Customers were forced loyal to the existing carriers because of the contracts (post-paid plans) as
evident from the comparatively lower churn rate of about 2%. However most of the prepaid
customers used phone occasionally and were not loyal to any particular brand.
Partial loyalty in case of post-paid customers can be attributed to the contract that usually lasted
for one or two years and to the high switching cost. And vast majority (92%) of the cellular
subscribers in the US had post-paid plans.
Pre-paid arrangements did not require any credit checks and provided for some specific number
of paid minutes and the prices were also comparatively high. Customers used pre-paid as a
back-up device and hence were not loyal to the brand.
-2-
2. The case lays out three pricing options. Which one would you choose and why? Explain
how the sources of dissatisfaction identified in Q1 will be addressed by your approach?
Based on our understanding of the case, we choose Option-3 A Whole New plan.
We suggest introducing a completely transparent, simple per minute price contact less plan with
no form of price discrimination.
Source of Solution
dissatisfaction
The proposed pricing plan will do away with any form of contractual
agreement with the customers. The possible increase in the churn rate
Contracts
may be limited with the attractive mobile entertainment offered by the
Virgin mobile.
As the proposed plan is a pre-paid plan with call price depending on

Post-paid plans with
the actual usage, customers will not be disappointed with the unused
bucket of minutes
minutes or the extra penalty of over usage.
The target customers (Age group : 15 to 29 years) have a different life

style as compared to typical business person and the same off-peak
Off-peak hours
hours may not be applicable to them. Hence, the off-peak hours should
be re-defined in a convenient way for the new plan.
The proposed plan provides for a simple plan with complete

Hidden Fees transparency. The plan would eliminate all hidden fee such as taxes,
universal service charges and other one-time fees.
-3-
3. Provide evidence of financial viability (profitability of the option chosen). Also, list the
risks associated with the option chosen.
Financial viability:
Post Paid Pre Paid Total Remarks

Estimated User 250000 750000 1000000 (Estimated Market Size Skewed towards prepaid)
Calls 60 30
Other Services 10 45 Revenue Skewed towards Value Added services in
Revenue 5.83333 6.25 prepaid and Towards voice in post-paid
CCPU 2.625 2.8125 45 % of Revenue
r 0.98 0.94 Given in exhibit 11
i 0.00417 0.00417 Given in exhibit 11
Actual cost 60 60 Lower Cost Handset in Prepaid and Higher in Post Paid
Handset Cost 0 0 Cost to Company
AC Advertisement Cost 5 5 5000000 Advertisement budget as per case
Commission to seller 5 5 Assumed 10 $ per sale
Handset cost kept same so as to give sense of
evenness and much below market price of
Hand set Cost to Customer 60 60 Completion
LTV 122.76 43.57
Up Front Cost to customre

Three Months 77.5 78.75
Discount 10 10
Net 67.5 68.75 Budled Sale Value of 3 month plan
Net Margin per sale -0.375 0.3125
Risk associated:
Low commitment from consumer side.

Non accusation of consumers will lead to increase in per customer Advertisement cost.
Aggressive pricing from competition.
Very Price sensitive consumer
Lower capacity to pay in target segment ( 15-19 year users)
High volume of customers required for offsetting Advertisement cost.
-4-
4. Can you identify elements of this case that are similar to those already covered in
class (3 cases )
South West Airlines Case:

o In South west airlines the company tried to serve the customer what they needed at
economical prices.
o The consumer while getting into the contract/service knew the value for money he is
getting.
o Consumer were offered the striped down version of a premium service which the happily
accepted as it was economical and not given by anyone else.
o They established a monopoly in highly competitive market.
o Virgin Mobile is also trying to offer stripped down version of a premium service.
o They are open regarding charges and ensure that costumer dont feel cheated while using
the services of Virgin mobile.
o Both the cases economy depends on volume and serving previously unserved or
underserved segment.
Star Bucks Case:

o Star Bucks counted on providing the consumers something more than a coffee.
o Star Bucks made sure that they were present at every nook and corner and within reach on
consumer.
o The requirement and profile of consumer were always changing hence adopting according
to need of consumer is crucial.
o Same applies for Virgin Mobile they are trying to offer consumers something more than
just voice services in from of value added services.
o Strength of virgin will lie in maintain presence in every store which sells cellular contract
giving consumers high contrast of product value.
o The requirement of consumer will change with time and virgin mobile has to adopt
according to needs of consumer.
Aqualisa Qaurtz Case:

o In Aqualisa case, we saw that having a great product is not enough a matching marketing
strategy is essential for its success.
o For virgin mobile a strong marketing strategy is required to establish it in a market which
is already being saturated and price war is going on.
o Buy-in of entire value chain is required for a successful product.
-5-

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INDIAN INSTITUTE OF MANAGEMENT CALCUTTA

POST GRADUATE PROGRAMME FOR EXECUTIVES

COURSE : MARKETING MANAGEMENT

ASSIGNMENT : VIRGIN MOBILE USA: PRICING FOR THE

Prepared & Submitted by:

As the proposed plan is a pre-paid plan with call price depending on

The target customers (Age group : 15 to 29 years) have a different life

The proposed plan provides for a simple plan with complete

Post Paid Pre Paid Total Remarks

Up Front Cost to customre

Low commitment from consumer side.

South West Airlines Case:

Star Bucks Case:

Aqualisa Qaurtz Case:

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