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Virgin Mobile USA: Pricing for the Very First Time
Problem Statement.
To define a price strategy that allows Virgin to compete in the USA mobile communications industry. Virgin decided to target a niche (young people from 15 to 29 years old) and consequently the key factor of Virgin Mobile USA success is a price strategy which fulfill their needs and at the same time assure adequate earnings.
Situation Analysis.
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Customers.
The target of major national providers is businessmen. In fact the major national carries common behavior in order to be sure to cover the cost and to have a profit, due the relative high average cost to acquire a new customer (rough $370) and the net profit (rough $22 per month), is to target customers who are presumed to:
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have a high credit quality;
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do a large use of the mobile.
Customers typically have a contractual agreement (from 1 to 2 years) with the providers; it is due the will of the providers to have a guaranteed annuity stream and to contrast the high churn trend of the market.
Low usage customers and poor credit customers are hindered by the companies which operate in the market and provide very expensive price for prepaid arrangements.
The consumers are not satisfied with the services offered in fact pricing plans are difficult to understand and it is a common practice for providers to charge hidden fees. This contributes to determine a high percentage of consumers who leave their providers (the average industry churn rate is of about 2% on a monthly base).
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Competition.
In the USA mobile communication industry is constituted by:
national carriers (Cingular, Verizon, VoiceStream, Alltel, Sprint, U.S. Cellular);
affiliate providers (AT&T);
regional providers.
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Company.
Virgin Mobile USA owns Virgin Group, which is comprehensive of more than 200 companies. The group had developed a very strong brand which allows the group to be involved into a wide range of industrial sector (entertainment, travel, beverage, and beauty). The core of the Virgin policy is to reinterpret a sector by reducing the cost and raising the care of the customers, acting in a smart and innovating (unusual) way.
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Context.
The USA mobile communications market is mature, with an industry penetration close to 50%.
The physical infrastructure to operate in the market represents a high cost for the carries.
Companies usually directly provide a handset to their customers, with a cost ranged from $100 to $210 (this cost is considerate by the companies as part of the cost to acquire a new customer).
The pricing plans presents in the market are based on:
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“buckets” (a fixed amount of minutes of conversation per month for a fixed monthly cost, plus an additional cost for the exceeding minutes, that are more expensive).
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On-peak/off-peaks period (please note that companies take a monetary advantage because customers cannot perfectly calibrate the periods with their exigencies).
It is common for the carries in this industry to operate with hidden fees (taxes and services charge for about $6 per months).
The common channel strategy in the industry is through salespersons who are in charge of:
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explain the different pricing structures (which are quite complicate and various);
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check customers credit quality.
Salespersons represent a high cost for carries.
The advertising expenses of the companies are quite high, the predict expense for the entire industry in 2002 is of about $1,8 billion.
Alternatives.
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To conform to the industry price structure, offering as plus: unique service due to the agreement achieved with MTV networks and a high quality customer’s service.
Pros.: the partnership with MTV should help Virgin USA Mobile in achieve its target market.
Cons.: without introducing any new elements in the industry pricing structure Virgin USA Mobile should not be able to enter in an high competitive an saturated market .
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To conform to the industry price structure, applying buckets with a lower per minute price.
Pros.: to charge customers less than competitors