Case Analysis: Virgin Mobile Usa

Case Analysis: Virgin Mobile USA

What we are analyzing here is pricing of a service in a market which is saturated, as it has reached maturity, is highly capital intensive and in which a large amount of competition prevails. Virgin however is a known brand name with an extremely diversified portfolio. It has experimented successfully with the telecom business in the UK but failed in Singapore. It now targets the USA market; the problems before it are to: come up with an appealing offer and ensure a run rate of 1million subscribers in the first year and three million by the fourth year.

Keeping with the brand strategy and philosophy of making a difference, it enters areas which are unserved or poorly served which in this case is the age group of 15-29 due to their low frequency of usage and poor credit rating. While targeting this segment lifestyle and psychographic factors are important as usage is inconsistent and based on school and vacation periods.

Virgin tie ups consist of collaborations with MTV an iconic youth brand which would feature in and provide some of the Virgin Xtras, Its services would be hosted on Sprint's network, Kyocera for handsets, Target and best buy as retailers and youth magazine editors for promotions. The channel they are targeting would be point of sale displays at retailers, targeting 3000 outlets, with commissions lower than industry average.

Advertising budget was far less than competitors and consisted of TV and print ads and a huge launch event.

Pricing in the industry involved contractual agreements and 'buckets' of minutes. Under and over utilization would lead to penalization in terms of high price/minute. Complicating the pricing issue were peak and off peak charges and hidden costs.

Problem for virgin was to come up with a pricing structure which was competitive, profitable and did not trigger off competitive reactions, keeping with the run rate they had set for themselves.

The issues involved in pricing are:

 Market structure:

The market for the phone service is dominated by post paid plans. They have close to 90% of the market. The prepaid category is looked at with disdain by the users also, because it is indicative of the fact that his credit history was not very strong. Further the company also is not very happy selling prepaid offers because there is little brand loyalty in case of prepaid. The cost of acquisition in case of prepaid often exceeds the revenue generated and customer churn rate is high (6%). The reference price for the service category is given by contractual plan offering buckets of minutes by the six national carriers. Further industry penetration is about 50% hence Virgin is dealing with a highly mature market

 What is the profile of the user:

The users are between the age group 15-29, primarily classified as the youth. They use phones infrequently for 100-300 minutes approximately. Usage is also inconsistent as far as time periods are concerned (e.g. school Vs vacation). They are weary of hidden charges and have different peak and off peak times than the rest of the users. The will not ideally want to spend a lot of time deciding on the myriad plans, and their purchase was more often than not spontaneous since their usage was low. They used the phones more as a fashion accessory or to make a personal statement. Virgin essentially was targeting their self concept, however we see a problem with the huge target segment since the lifestyle and psychographics based decisions would be different in such a wide category. We are then compelled to ask whether Virgin would efficiently be able to satisfy this segment.

 How price is seen by a user:

A user views price as confusing due to the permutations and combinations associated with it. Individual customer needs might vary, from low cost to quality to value based. He can also draw inferences as to how the service quality might be from prices, high prices can set high expectations and low prices can cause them to suspect service quality. Hidden costs are also detested by users and make them incapable of comparing plans by different service providers which might aid decision.

 How target segment views price:

The user is dissatisfied with traditional or existing service providers, due to inadequacy of plans to cater to his/her needs, since peak and of peak times might be different and the talk time he requires or uses is not economical as per the pricing plans of other industry players. He/she also finds it difficult to evaluate plans due to the hidden costs associated with it. Difficulty in clearing credit checks is also a problem for him as he might not have a reliable flow of income. There is also a fear of being exploited that is a fear of high price or a fear of uncertainty

 Complexity in pricing for services:

Pricing for services is far more complex as compared to a good. This is primarily because services are inherently heterogeneous and intangible and hence there can be innumerable permutations and combinations of pricing plans, plans can be also used to cater to particular customer needs, however implications on cost efficiency cripple this. Even providers cannot accurately say what the service will entail which makes it difficult for hem to estimate price well in advance, due to which customer dissatisfaction might arise. Every individual might want specific need to be satisfied which may not be feasible. Lack of accurate reference prices might deter comparison of service prices for users. Consumers might fail to understand what they are paying for and how they are paying due to hidden costs. In services since users cannot see them or ensure what they would be like price might not as important as it would be or repurchase. A very important element of pricing in services is non monetary costs- time (understanding complex pricing plans), search(evaluation of plans), convenience (peak and off peak times to gel well with the youth) and psychology (fear of high cost/ invasion of privacy).

We are now in a position to evaluate the options available to us.

1. Clone industry prices

We found that this was easy to promote and the customers know of it and so it would not entail making efforts to help them understand the plan. Virgin could simply put in on the package and it would also confirm