Virgin Mobile USA: Pricing for the Very First Time - Case Study Example

Running Head: VIRGIN MOBILE USA Virgin Mobile USA: Pricing for the Very First Time Virgin Mobile USA: Pricing for the Very First Time Virgin, one of the UK top three recognized brands, is one of the companies that managed to be successful in various industries and environments due to a strong system of values the company presents to its clients. However, new technologies and services come up to be introduced to the world: a wireless phone service has been chosen by Virgin to be launched in the US as the next step of company’s international operations. The goal of Virgin-Mobile was to gain a million of total subscribers in a year of operating in the US market, and three millions in four years. The technical problem with infrastructure development had been solved via entering a 50-50 joint venture with Sprint so that Virgin can host its service on Sprint’s networks and purchase minutes from Sprint on an as-used basis. Such a solution is to provide Virgin with a stable technical base an acceptable price. The good point is that minutes are paid for only after they are used, so that the company does not have to pay in advance being uncertain about whether the time will be paid back by the customers. The chosen market to target is peopled aged from 15 to 29. There were several reasons to lead to such a decision. Firstly, young customers often have poor credit quality, and this segment of potential market is not targeted by major US wireless service providers. So, this reduces the competition in the segment. Secondly, the US companies believe youth will not use their mobile phones frequently: considering the high customer acquisition cost the providers are not willing to risk. Virgin-Mobile, on contrast, is sure that the situation can be changed by presenting to this group of consumers a wider range of opportunities to acquire having subscribed to the service. The company believes that young people were not among the most active service users because their needs and demands were not properly met by the existing providers. One more reason to target this particular audience consists in young people’s openness and quick acceptance of new technologies and innovations. Among the advantages Virgin-Mobile decided to present to the youth market was delivery of a wide range of mobile entertainment contents. Youth shops like Target, Sam Goody and Best Buy have been chosen to become a part of the distribution channel where Virgin products would be sold packed in see-through packages for the customer to be able to pick a phone without any help from the salesperson. Unlike other cellular carries that buy handsets from manufacturers for $150-300, Virgin purchases phones for $50-100. Besides, the company has entered into agreements with distributors so that they charge only a $30 commissions per phone instead of a traditional $100. Nearly $60 million were planned to be spent on the promotion campaign. Most of the advertising activities are targeted at the particular audience and in such a way tend to be more efficient comparing to those of the rivals. So, Virgin Mobile team has justified and developed major market entry strategies which are likely to succeed if implemented well. The only issue to be solved before introducing the product and service is that of the pricing strategy that would attract subscribers. Most of the US subscribers have contractual agreements with their providers which require a credit check. Another option consists in purchasing a ‘basket’ of minutes which involves penalties for overage and a fixed monthly fee. One more feature of the traditional US providers’ approach consists in cheaper off-peak minutes. Their time starts mostly at 9:00 p.m. Hence, based on all the given facts Virgin Mobile has developed three optional pricing strategies that insure competitive prices, profitableness, and no extra competitive reactions. The first option is to establish prices like those of the competitors. This would be quite profitable for several reasons. Firstly, Virgin purchases manufacturer’s phones cheaper than competitors, so the acquisition cost is lower. Secondly, Virgin pays lower commissions to the distributors. Customers would be getting more services and opportunities for the same price while the company – getting as much profit as the competitor. However, there seems to be one weakness in this solution: competitors have already got a number of subscribers that bring them profit, while Virgin has to start from the very beginning. Considering a rather limited promotion campaign budget, it may be quite risky to rely only on the innovation the company brings in. First of all, even though Virgin presents more features for the same price, the consumers aged 15-29 are still having ‘poor credit quality’ and their financial opportunities regarding subscription will not change. Secondly, subscribers of other providers are already used to their provider and service, and the transition to another one, even though it might be better and newer, may be quite problematic. According to Geoffrey Moore (1991), only 2-3% of people are always ready to accept change and only 10-15% belongs to the early adaptors who, more than the majority of people, are able to accept the change. Hence, it will take quite long till the majority of population adopts the change and Virgin gets an expected result. The second variant to consider consists is establishing a lower than the competitors’ price. The pricing structure would copy that of the competitors, but actual prices per minute would be lower for certain baskets and include volume discounts, better off-peak hours, and fewer hidden fees. It is a better variant, but it also requires credit cards, credit checks, pre-paid or post-paid arrangements, etc. So, if even the competitor’s or new subscribers decide to subscribe to the service, Virgin will be still getting less profit due to the system of discounts and better off-peak hours. The third proposed option involves a complete revision and potential modification of the whole pricing structure. Surely, such an approach may involve many risks, like a churn rate risk, but still it seems to be the most effective one. Besides, in any industry change is inevitable and change is actually what makes an organization develop, grow, and succeed. The first question here is whether contracts are needed. The main purpose of contracts seems to be providing a guarantee annuity stream. But industry churn rate makes 2.0% monthly. Surely, contracts make the company feel safer. Nevertheless their elimination would allow more people to use Virgin’s products and service. The second question is whether to adopt a pre-paid pricing structure. On one side it would also allow more people to use the service. On the other hand – there is a risk that they will not use it much. Besides, the pre-paid system requires development of some mechanism for the customers to add minutes to their phones. Looks quite complicated, but what should be considered is that a pre-paid system, which allows customers to choose how much they have to pay for a conversation, will give people with poorer credit quality more opportunities to use the service. Instead of getting huge bills at the end of the month, customers will be getting an opportunity to control and manage their spending on communication. This is likely to attract a significant, if not the greatest, part of the potential market. Besides, if the company implements the pre-paid pricing structure the handset subsidies may stay equal to those of the rivals because if a customer has to choose among two services for one price, one will definitely chose the one which allows him to control the spending. As for the hidden fees, they are better to be included in the general cost per minute: though on the first sight the price might seem high, any person will easily figure out that compared to all the fees and changes of another company summed up, this price is not higher. So, based on the facts presented above, an alternative solution might be even combining two options: contracts and pre-paid service. In such a way they company will have a chance to evaluate the success of the new pre-paid service, and make further decisions based on the acquired data. Secondly, contracts will hedge some risks and add to the stability, providing Virgin with valuable time for further market research and strategic planning. It should be also considered that different people accept innovations differently. For some it is easy to try new and they become early adopters or adoption pioneers. At the same time, there are people who adopt new products not so easily, and need some time to accept the innovation fully. Hence, a company issuing some new product or concept is to be aware of how the target audience will respond to new and, consequently, develop a strategy which will make early and late majority accept the product faster (Kotler, 2001). References: Kotler, P., 2001. Marketing Management, Millennium Edition, Custom Edition for University of Phoenix, Prentice-Hall Inc., New Jersey. McGovern, G., 2007. Virgin Mobile USA: Pricing for the Very First Time. Moore, G., 1991. Crossing the Chasm. Harper Collins. Read More