Marketing analysis of a case study

Virgin Mobile USA: Pricing for the Very First Time

The cellular industry is legendary for customer dissatisfaction. With a 24% churn rate, clearly there is little loyalty, in spite of service contracts. What is the source of all this dissatisfaction? Why have the major carriers not responded aggressively?

There are a variety of factors that contribute to the low levels of satisfaction and the high churn rates as a result in the cellular industry. Much of the churn and dissatisfaction with cellular service providers is in their myopic and often deliberately confusing approach to defining service plans, service levels, service pricing, and the hidden service charges for calls made either outside the primary calling area, or outside the calling plans' peak time periods. The labyrinth of service plans, programs, and pricing programs has created so much confusion that the rise of pre-paid services and the certainty of costing they provide have actually been welcome even by credit-worthy customers as well. While all these factors contribute to the significant backlash cellular industry providers face, the daily frustrations of dropped calls and the lack of coverage in key areas of the country also fuel the high churn rates and typically low customer satisfaction scores that cellular industry providers gain in yearly satisfaction surveys. The bottom line is that while there are still technological issues that need to be resolved in order for cellular industry providers to provide the level of coverage they claim, their myopic and very confusing approach to pricing plans and services is contributing to the high inventory churn.

While the sales organizations of cellular industry providers regularly battle with the services organizations that stress customer retention over churn, the sales forces in these companies see the market has still nascent in growing. The conflicts between sales and their continual push to organic growth over services' customer retention and lifetime value direction forces many of these companies to concentrate not on their customers, but on winning turf wars internally.

In summary, the major cellular industry providers, while continuing to build out their infrastructures and also creating a high level of complexity and confusing in their pricing, service and maintenance programs, have failed to focus on what matters most, and that is the customer and their evolving and changing needs. With 130 million subscribers and industry penetration calculated close to 50%, the mainstream cellular phone market appears to the six national carriers, regional and affiliate providers to be saturated. This assumption about the market also weighs in favor of those services organizations that argue that reducing churn is the most critical step to increasing lifetime value, not organic growth. The ignored 15 to 29 segment holds the greatest potential of all segments, yet has the same characteristics of those segments that have proven to be the least profitable due to high levels of inventory churn. The paradox these conflicting market dynamics create is what also fuels the confusion in all cellular industry providers.

What pricing strategy would you recommend to Schulman? Flesh out your strategy by including specific elements of the pricing plan, e.g, contracts, the size of the subsidies, hidden fees, average per-minute charges, etc. (Be as specific as possible, given the information in the case.)

The most viable pricing plan for Schulman is Option 3, an entirely new plan. From a branding standpoint, Virgin Mobile is continually reinforcing their nonconformist image through independent music sponsorships and a very aggressive new phone development program that is continually both reinforcing their leading-edge image and also supporting their nonconformist image as a cellular service provider. For Option 3 to be successful, Virgin Mobile must brand it as a revolution in phone services, and accentuate this message in their branding by illustrating how easier it is to communicate with the world when no contracts, no commitments, and no hassles to continue on existing plans and even swap to new phone models when they come out. Messaging also needs to include a strong nonconformist message when it comes to Instant Messaging (IM) and talking with friends. For all these branding factors to be successful there needs to be enough of a unique and nonconformist identity that every customer can identify with. Branding concepts including "Start Your Own Communications Revolution!" And "Nonconformists Needed" would be useful branding messaging. Option 3 also makes the most sense from the up-sell and cross-sell potential of additional services. Creating an add-on products and services division that includes extensive use of ring tones, online games, screensavers, and MP3s could significantly organic revenue growth as well. Targeting the overlooked 15-29 segment with this messaging will resonate.

The financial analysis of implementing Option 3 is as follows. As the 15-29 segment has little if any credit history, no contracts will be offered, significantly dropping the Selling & General Administrative (SG&a) expenses of this program. Instead, plan segmentation will focus on offering basic and deluxe services. A key revenue assumption is that basic services will be 70% of total revenues, and deluxe services, 30%. It is expected that revenues will hold constant throughout the forecast period without significant variation in this mix. With extensive up-sell and cross-sell through the use of the Virgin Mobile website and also through extensive use of call center representative who will also answer customer service and top-up questions, add-on sales of mobile entertainment services will grow at least 2 times industry projection, and will contribute to 10% growth in minutes used for both basic and deluxe plans. In terms of measuring financial performance, the critical criteria needs to be minutes used per month, minutes used per year, year-to-date spending on minutes, year-to-date spending on add-on services and products, and the same metrics for yearly customer activity as well. Additional assumptions regarding the implementation of Option 3 include the following:

key assumption is that members of the 15-29 segment will top-up through the use of cards sold through retail outlets, and most efficiently, over the Internet. Offering top-up bonuses for topping up online and therefore driving down the cost per transaction is also a critical component of this revenue and profit forecast. As the largest percentage of Internet users are in this age segment (15-29) potential for both upselling and cross-selling services in addition to offering new phones online and instant swap-out techniques for swapping an older phone for a new one will all be offered online. All of these cost reduction and revenue growth strategies are primarily designed to be offered online to drop the cost per customer interaction and also ensure a high level of scalability across a growing customer base.

Offers of preloaded phones with enough minutes to last a year are also a fundamental assumption of this revenue forecast. For the basic model and 2,500 anytime minutes ($299) or the deluxe model with 5,000 anytime minutes ($599) using the assumptions defined.

Mobile Entertainment Services revenue is projected to grow from $167.3M in 2002 to $1,421.6M in 2005, a 70.73% compound annual growth rate, which surpasses the growth rates as defined by Juniper Research in a recent report detailing the many forms of mobile entertainment (Juniper, 2006) and stating that the global market for mobile entertainment has attained $17.3 billion in 2006, growing to $76.9 billion in 2011, which is a 35% compound annual growth rate through the forecast period. While the forecast period for the business plan precedes the forecast period, is it clear the assumption of 70.73% growth is quite aggressive, yet accomplishable given the innovative branding, unique product strategy of continually offering new phones, and intensive use of multiple selling and service channels.

Automating Customer Service and completing periodic self-audits to ensure the highest level of performance possible sets the foundation for a major assumption of this revenue forecast, and that is the minimizing of customer churn. Keeping churn below 5% is attainable by Virgin Mobile USA, and as evidenced by the company's S1/a document filed with the Securities and Exchange Commission (SEC, 2007). According to the company's S1/a document today there are over 200,000 customer communications each day, with the majority handled through an Interactive Voice Response (IVR) system with a smaller percentage opting to speak with a Live Advisor, which handles 75,000 of these calls. It is imperative for Virgin Mobile to attain the highest levels of customer service possible to attain the revenue forecasts included in this case study. Having service available 24 hours a day, 7 days a week is a critical assumption of this revenue forecast.

How confident are you that the plan you have designed will be profitable? Provide evidence of the financial viability of your pricing strategy.