Case Analysis of Virgin Mobile

823 Words Aug 26th, 2014 4 Pages
Virgin Mobile Pricing Strategy

Situational Analysis
Virgin Mobile, a MVNO is planning to launch its services in USA. It’s target is underserved Demographics of 15-29 years as this age group is underserved by the regular telecom operators due to their low credit score ( Under 18 demographic cannot go for contract). They are planning to launch their product with service offerings that focuses on value added services.
Problem Statement
* The industry structure is such that supports post-paid user base and is completely different from UK industry structure.
* Virgin will have to attract the new user base with lower budgets and this segment does not have a credit score
* The industry has matured and the big players already have
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So servicing can lead to losses if pricing not done correctly

Cost structure
Cost of Acquisition of a customer for Virgin
Commission = $30
If virgin sells its phone at $30
Cost of ad = $60million/1 million target user = $60 per user
Unit Cost per user = $120
Customer LTV in case of prepaid
The industry average revenue per customer is given as $22 (52-30 = 22)
The churn rate is 2% per month. So for a year retention rate,r, will be = 1-(.02*12) = .76 or 76%
Interest Rates = 5%
Yearly margin =22*12 = $264
LTV for a normal operator = {264/ (1-.76+.05)} – 370 = $540
LTV for Virgin = {264/(1-.76+.05)} – 120 = $790
Hidden costs = 35-29/29 = .21 or 21%
If Virgin removes the hidden cost then Margins will reduce to (264/1.21) = 218.18
LTV after removal of hidden cost = 218.18/(1-.76+.05)} – 120 = 632.34
LTV after removal of contracts for Industry = {264/ (1-.28+.05)} – 370 = $430
Since Virgin Mobile is trying to create a bucket (option 2) by considering ARPU at 200 minutes, it should try to keep its price per minute at around 25 cents per minute (Exhibit 10b) for third option
Monthly minutes = 200 min
Monthly cost to serve = .45*200x= 90x
Monthly margin = 200x-90x = 110x
Keeping x as .25
LTV = (.25*110*12)/{1-.72+.05} -120= $309
Recommendations
* Since LTV in option 3 is lower than industry average LTV, therefore option 3 should not be considered
* Option 1 does not…