Virgin Mobile Usa: Pricing for the Very First Time

Virgin Mobile USA: Pricing for the very first time

Executive Summary

Virgin is one of the world's most recognized and respected brands. The company was established by Sir Richard Branson in 1970 and has been expanded into different areas such as travel, entertainment and lifestyle.

Dan Schulman was appointed as CEO of Virgin Mobile USA in 2001, with 18 years experiences in telecom industry, Dan was confident that he would help Virgin to achieve 1 million subscribers by the end of first year. After the team developed VirginXtras as the key strategy to enter youth market, the key decision was to determine the pricing strategy.

U.S. Mobile Market and Virgin Mobile USA

The U.S. mobile market was saturated at the end of 2001, it comprised six major carriers and other regional and affiliate providers. Industry penetration rate was up to 50% and it was considered as a mature market.

However, Virgin identified a niche market where the customer penetration was much lower among consumers aged from 15 to 29. In particular, this market seemed untapped by big players due to poor credit of young consumers.

The average cost of acquiring a customer was very expensive and it was approximately $370. Therefore, big players did not believe it was worthwhile especially young consumers might not even use phone regularly. In addition, the average mobile phone bill for the national carriers was $52 and the cost of serving a customer was approximately $30 per month, so carriers tend to be cautious about acquiring low-value subscribers.

While young customers may not use phone on a frequent basis, they do use other functions such as text, download music and new ring tones etc. Mobile phone is more than a tool for them, and it is a fashion accessory and a personal statement.

Solutions

Having identified this special needs, Virgin Mobile USA team developed a value proposition for virgin mobile that includes the delivery of content, features, and entertainment (MTV networks etc) that they called 'VirginXtras'.

Establishing relationship with MTV network was a strategic move for Virgin Mobile as MTV Network is home for some of the most recognized youth brands and it was targeting the customers under 30 which perfectly fits Virgin's target customer age as well as Virgin's value proposition.

In addition to MTV Networks, VirginXtras also provided other services such as text messaging, online real-time billing, rescue ring etc. These features accurately grasp young customers' psychologies and the team believes these features would appeal to the youth market, generate additional usage, and create loyalty. Most importantly, customers are likely addict to these features and services so they will be inseparable from mobile phones.

While most carriers sold their services through shopping malls, retail outlets and electronic stores, Virgin differentiated distribution channels from traditional ones and they sold through places where youth normally shop such as Target, Sam Goody music stores and Best Buy. Virgin also re-designed the packaging (clamshell, clear, see-through package) so customers can purchase mobile phone without a sales person's help.

In addition, Virgin contracted with a handset manufacturer - Kyocera to produce cheap and colourful mobile phones with interchangeable faceplates. The packs were normally visible on large point-of-sale displays that company would provide to retailers. Also Virgin had agreement with Target and Best Buy that both of these retailers would charge lower commission of $30 comparing with industry average of $100. This has significantly lowered the cost for Virgin.

Since Virgin only targeting youth market, therefore, they can communicate with their customer more efficiently and effectively by using more interesting and entertaining ads. They also were working with youth magazines and planning high-profile street marketing events. In particular, they also planned a special event to launch Virgin Mobile USA with appearance of Sir Richard Branson.

Finally it comes to the price decision. The team designed three different price options with few constraints such as competitive price, profitable plans and do not trigger competitors' reactions.

Option one was similar to industry price structure, option two was to adopt a similar pricing structure with actual price slightly lower than competition and option three was a whole new plan. The third option was to design pricing plan from scratch and significantly differentiate from existing ones.

Analysis of Options

For the first option, it is easy for company to promote as customers are used to 'buckets' of minutes and peak/off-peak distinctions, also this can minimize advertising budget and can simple just display plans on the package so customers can pick up without help from sales person. The biggest downside of this pricing strategy