Virgin Mobile USA: Pricing for the Very First Time - Strategy Recommendations

Vergin Mobile USA: Pricing for the Very First Time

For the purpose of this case analysis, the following changes are to be made to the assumptions contained in the case:

This case takes place in early 2002 and your analysis, alternatives & recommendations must reflect the situation at that point in time.  You are the Chief Marketing Officer for Virgin Mobile USA reporting to Dan Schulman, the CEO of the company.

Your task is to:

Build the strategy deck for Virgin Mobile USA that effectively addresses the key issues related to the company’s entry into the U.S. mobile phone market, including a pricing, positioning and positioning statement recommendation.

Your deliverable is a document that presents the required strategy recommendations to Dan Schulman and Sir Richard Branson including appropriate supporting analysis, rationale and relevant financial projections.   The deck must tell the “story” that you are trying to tell in a clear and logical sequence.  The deck must operate as a “stand-alone” document as you won’t be there to help senior management read it or to explain what you mean if it isn’t clear in your deck.

Remember that the case takes place in early 2002 and your strategy deck must be based on the information contained in the case document.   No external research is to be used in developing your recommendation.   As well, you are not to reflect any information on what actually happened in the mobile phone market between 2002 and today.

No external research is to be used in developing your recommendation.   As well, you are not to use any information on what actually happened to the mobile phone market between 2002 and today.

As you read the case, it will be obvious that the key decision to be made is determining the right pricing level and pricing structure for Virgin Mobile to successfully enter the U.S. market.  To do this, there are a number of analyses (qualitative and quantitative) that are required.   Note that this list includes the minimum expectations for a decision of this magnitude; there may be other analyses (qualitative or quantitative) that you identify as being necessary to develop your recommendation and you should feel free to include them in your business decision deck.

?    What are Virgin Mobile and Virgin Mobile’s core competencies and competitive advantages?

?    If you wish, you can include a VRIO analysis in an appendix but I don’t want to see a VRIO in the actual body of your deck. Include the insight gained from academic concepts like VRIO in your deck without getting the reader bogged down with theory that they may not be familiar with.

Key Issues to Address

?    Why do the existing competition price they way that they do?  How do the existing competitors in this industry make money?   What are the drivers of profitability?  Which drivers of profitability have the biggest impact on profitability?  Is there a financial logic to their pricing approach?

?    A financial analysis of an average customer for the existing competitors is mandatory under the following 4 scenarios:
?    With contracts
?    Without contracts
?    With contracts and NO hidden fees
?    Without contracts and No hidden fees

?    Note that the first scenario (i.e. with contracts) is what the industry currently does right now.   The other three scenarios are hypothetical scenarios to help you drive insight and understanding about how the industry operates and how it makes money.

?    The financial analysis should include the customer lifetime value and the break-even in months (customer acquisition costs / monthly contribution margin) for each of the four alternatives.

?    There are three components to customer acquisition costs – advertising, sales commission and handset subsidy.
?    Including the monthly revenue per customer and the average price per minute (with and without hidden fees) is an absolute requirement in your pricing models
?    Determining which drivers of profitability have the biggest impact on profitability accurately requires performing a sensitivity analysis.
?    Your financial analyses should also be supplemented by appropriate qualitative analysis.

?    What can be learned about the industry by evaluating the current industry pricing structure under the above 4 pricing scenarios from the perspective of the customer, then from the perspective of the firm and comparing the two perspectives, as well as from the sensitivity analysis?  What does this mean for Virgin Mobile?

?    Elements of cell phone pricing structure that could be examined include contracts, pricing buckets, hidden costs, off-peak/on-peak differentials, credit checks, the sales process and privacy concerns.

?    How attractive is the wireless phone industry from a growth potential and profitability perspective?

?    A “6 Forces” analysis is absolutely required and should be included as an appendix.
?    You will need to seamlessly incorporate the insight from the “6 Forces” and any other industry analysis that you choose to do into your deck as part of your deck’s story, likely as part of your situation analysis.

?    You can assume that Virgin Mobile has selected the right target audience.
?    As your pricing and positioning work will be based on the selected target audience, you should include information and insights on that target audience at the appropriate place in your deck.  

Analysis and Recommendations

?    What price level and structure should Virgin Mobile use to enter the U.S. market?

?    For each alternative, you need to determine how much you are subsidizing the phone; do not simply take the % level of subsidy for the industry
?    A minimum of five and a maximum of 7 alternatives must be created and evaluated:
?    Current industry practice
?    For this analysis, assume that the current industry price based on the number of minutes that a Virgin customer uses
?    Current industry practice discounted 
?    You need to determine the level of discount balancing consumer, competition and company considerations
?    You must provide a rationale for the level of discount that you have chosen 
?    Current industry practice without contracts using the current price per minute for the existing competitors as provided above in the case instructions
?    A whole new plan – up to 4 different alternatives.

?    You must create and define these alternatives based on the information in the case, your assessment of the situation and your financial analysis to create options that would appeal to your target market, differentiate Virgin’s offering from its competitors and enable the business to hit its growth and profitability targets.
?    A short rationale for why each plan is a credible alternative is required.

?    Your presentation of the alternatives must make it easy to understand the differences between the different options which may include:

?    ARPU
?    ARPU with hidden fees (if applicable)
?    Peak/Off-Peak Pricing (hidden fee)        (y/n)
?    Contract                                    (y/n)
?    Phone Subsidy            (how much & why?)
?    Credit Check                               (y/n)
?    Complex Sales Process            (y/n)

?    Obviously, some of these features impact your financial analysis while others have more of a qualitative impact

?    A financial analysis must be provided for each of the five alternatives that includes projected gross and net (after acquisition costs) customer lifetime value and the break-even in months.

?    As with all decisions, a qualitative analysis is also required before you provide your recommendation.   Your criteria for this analysis must be thorough and complete including consumer, competitive, channel, brand and company close-ended criteria.   Note that this is provided as a reminder, these are not the actual criteria; they are just reminders of the criteria.   You will actually need between 7 and 8 qualitative criteria to cover off all the relevant topics.

Financial Projections

?    As you work towards making your final decision on price level and price structure in the Virgin case, comparing CLV's between your five options AS WELL AS with the current industry practice will be important to do.
?    It should go without saying that you will want to select an option that has a positive CLV.
?    You do, however, also have to consider how competitors will react or if they can react.  For example, if you select an option that is based on discounted pricing that has a low CLV, you have to consider your competitor's ability to match that price (or even go lower) given their CLV structure.

?    Determine the positioning and create a positioning statement given your recommended pricing plan.
?    While normally your price level and structure would be an outcome of your positioning and positioning statement, pricing is such a critical aspect in this market that it makes sense to determine a viable pricing strategy before finalizing your positioning and positioning statement
?    A minimum of two unique perceptual maps are required.

?    Each map should have its own unique set of axes.
?    You only need to show “current competitors” and Virgin mobile on your perceptual map.
?    You must assess the positioning options using close-ended criteria to determine the ideal position.

?    Once that is done, you then need to determine the possible functional and emotional benefits (a minimum of 3 of each category) for that position and then assess those benefits, using appropriate close-ended criteria (close-ended criteria tables using rows and columns), to determine the best combination of benefit and reason to believe to build your positioning statement with.

?    Finally, a properly written positioning statement that outlines a compelling and focused positioning to your target audience is required.

As comprehensive as they may seem to be, the above comments are not a complete list of requirements for your deck.  They are the minimum requirements for what should be covered in our deck and it is up to you to determine exactly what needs to be reflected in your strategy deck for Dan Schulman and Sir Richard Branson.  It should be obvious, however, that several financial analyses are mandatory for this case.  It is simply not possible to arrive obvious, however, that several financial analyses are mandatory for this case.  It is simply not possible to arrive at a credible recommendation without analyzing the financial implications of your alternatives in some credible way.

For this business decision deck, you do not need to define the market (it is the mobile market in the United States) nor do you have to determine how to segment the market or what the market segments are (you should use the approach provided in the case).