Virgin Usa – Pricing Strategy

Marketing pic utter(a) USA Francesco Marani Problem Statement pure(a) peregrine is entering the US liquid grocery store place. Low brand wisdom in USA and limited financial resources for advertisement represents a reserve because to enter successfully in such a market Virgin holds to swiftly attract its potency aim client, in pose to establish a critical mass and financial strength to have got itself from incumbent and/or other potential entrants ( toll-wars, dumping, etc).The profile of target customers, offspring in amidst 15 and 29 years old with piteous credit credentials and high income / expense elasticity (sensitivity to changes in terms and income), is in conflict with the need to retain customers for a minimum stay of 17 months as currently in the market ($ 370 / 52-30 = 17), in golf-club to breakeven recovering the Cost per Acquisition (certified public accountant). Situation Analysis Competition the unstable Industry in USA there atomic number 18 6 national carriers, as healthful as other small regional providers.The market is overcrowded, mature, highly competitive and concent lay outd (3 largest carriers covering about 59% of the market face 1) requiring large capital economic consumption (CAPEX). High labor rate contribute to create uncertainty on the profitability of clients biticularly because the carriers are perceived as utility providers rather than service providers. Advertisement expenditure by market leaders is high in club to beget unsatisfied customers. Customer Market Most of the new subscribers of mobile go (117 Mln in 2001) opt for a contractual agreement with mobile carriers, which implies wear the bulk of customers are locked into an agreement and potentially dissatisfied. Carriers raise m stary with undercover fees, taxes and unexpected charge (calls during peak time and in excess of periodic allowance). Customer confusion, dissatisfaction and homogenous offer could be some of the reason fag end the significant churn rate. We can stick out that a significant accumulate of the remaining subscribers (13 Mln) are mainly concentrated within the younger part of the population, in m any(prenominal) instance unable to sign up for a contract given their lower credit credentials.Virgin aims at attracting 1 Mln of subscriber on the first year and is partnering with MTV, specialized magazines and selected stylish stores consistently with its target customers. Company Virgin Value Preposition The Virgin brand in other European market is associated to measure out for m one and only(a)y, innovation, a hip and trendy image, and also ability to shake industry convention and status-quo. Virgin is readying to enter the USA market aggressively, where it has al close to no brand recognition, guidance on understanding and meeting customer call for rather than operational the physical infrastructure (MVNO coming).By nerve-racking to differentiate its offer and value preposition fr om the flat and boring offer of established carrier Virgin is trying to change the concept and the perception of such service. Final goal would be reducing dissatisfaction and hence the churn rate, potentially increase the average expenditure per customers by in other delight services. Context Virgin target customers are the youth between 15 and 29 years old, with slight(prenominal) stable economic and consumer behavior, but a high attitude to spend. On a comparative basis, penetration rate is expected to growth the most on Virgins target customer.Additionally revenues generated by entertainment services are expected to grow exponentially (annual growth in a higher place snow%) creating an special revenue stream. Alternatives Clone the industry termss Adopting the same price structure available in the market seems to be a scheme consistent with the need of a simple communication, while differentiation get out be based on transparency, attention to customer needs and super erogatory services. Such price replicating system can be difficulty defendable in the long term.The owners of the meshwork infrastructure, which in some instances is also a provider of mobile services, could easily cross-subsidize their mobile business and skip its CPA to compete aggressively with Virgin, neutralizing its strategy given their superior rental network cost advantage. Any price war is likely to create an straightaway change in customer preferences, in particular Virgins target customer (15- 29 years) is likely to be strongly bear upon given their traditional high sensitivity to prices change (price elasticity typically high).Price below the Competition The option to adopt a quasi-similar determine structure, with an exception for the bucket of consumption in between 100 and three hundred proceedings, has the same pros and cons of the one in front mentioned, in addition to increase the chance of triggering an aggressive competitive reaction by incumbent (price wars). Both the above options fail to address three significant aspects ? The high churn rate, which is one of the main problems in the service industry, is not addressed by any of the mentioned strategy. The limited advertisement budget may fail to create an match and convey rapidly a clear message to any potential customers. ? The post-paid contract may be difficult to implement exploitation the intend distribution channel. Lower sales commission could also implies less prepared sales representatives, which may fail to properly complete paperwork link to credit checks. Recommendations Virgin should adopt a brand new approach entering the mobile market to quickly capture the favor of dysphoric customers, as well as people unable to sign a contract given their low credit credentials.No contracts (pre-paid solo), no privy fees & taxes, an aggressive price strategy within the 100 three hundred proceeding of consumption as a monthly allowance, with no difference between peak and off-peak charges. The average cost per minute in the industry is at the moment around 12 cents ($ 52 average bill per month / 417 min). By analyzing different possible scenario, including different retention rates and rebates in line with the market (Exhibit 2), Virgin can produce a dictatorial Lifetime Value (LTV) offering a tiered price structure, by charging 0. 19cents for monthly usage below 100 minutes, 0. cents in between 100 and 200 minutes, or 0. 06cents between 200 and 300. This solution has been obtained by result the LTV formula, leaving the price as an incognita, and assuming a 6% churn rate, a rebate from client of the mobile cost at $30 (using similar proportion of rebate as other competitors), ? PROs difficult to be replicated by competitors in the market in the short term. It best suits the need of youth people unable to pass credit checks, as well as teenagers and parents needs because it naturally limit their maximum spending in advance.LTV positive since the beginning and CPA at $160 (refer to the next share for further consideration on the CPA). Virgin can further reduce the cost per minute charges if we increase the upfront cost billed to customer for the phone (Exhibit 3), in case competitors start competing aggressively. ? CONs pre-paid are typically associated with higher churn rate, which can result in a net vent for the carriers before having recovered the CPA. Pre-paid customer in some instances use the mobile phone less than traditional users.An appropriate (easy to reach and cheap) infrastructure needs to be in place to recharge the phone. Implementation Plan Price an aggressive tiered price strategy, with price decreasing at increase consumption simple to communicate and sensitively lower than competitors (Exhibit 4). Any minutes in excess of 300 minutes can be charged at the same cost per minute applied for the 200 300 minutes of monthly consumption. No difference between peak and off-peak charges. slim no contract, no hidden fees and taxes.Every user go away be charged only an upfront cost for the phone, which in an aggressive scenario is mystify at $30, (i. e. half of the minimum amount currently charged by other carriers Exhibit 5). Communication Virgin is entering the USA mobile market using selected affiliated partner (MTV, selected magazine, etc) consistent with its target customers. The planned advertisement investment is $60 Mln, lower than competitors, but significant for a new entrant. If we consider such t investment as a cost, the total CPA is around $160 (Exhibit 2).Nevertheless, from a financial office we should consider the $60 million initial investment as the only CAPEX required, which need to be remunerated by taking into account the participation and market risk. If we assume a 16% rate of return on the CAPEX we would reduce the CPA at 109. 6 (Exhibit 6), close to the condition to make the present plan viable according to Morgan Stanley research. Success implementation of the strategy require Virgin entering and impacting its target customer swiftly, in order to build a critical mass and financial strength before being able to face any price-wars. Breakeven currently the industry break-even is 17months. If we assume average consumption around 417 minutes per month, we can see that the breakeven will be significantly lower, and around 5 month. In the present slowness we have neither considered any extra revenues generated by VirginXtras, nor a decrement in the churn rate as a likely significance of the improved customer satisfaction. Reducing the churn rate is probably one of the most important objectives in the mobile industry sectors, also because gives additional space for price reduction as demonstrated (Exhibit 2, 3, 6).Exhibit 1 pic Exhibit 2 pic * Assuming 1 Mln of customers. $60 Mln /1 Mln customers = $ 60 per customer Exhibit 3 Intermediate price reduction pic Maximum Rebate pic * Assuming 1 Mln of customers. $60 Mln /1 Mln customers = $ 60 per customer Exhibit 4 Price Advantage against Market Average Prices pic *Mkt Adv = Market price per minute Virgin price per minute. Exhibit 5 pic Exhibit 6 pic * Considering the investment on advertisement as a capital expenditure, with a 16% annual rate of return. ($60 Mln /1 Mln customer x 0. 16 = $ 9. 6