Virgin Mobile

Virgin Mobile

Given VMs target market, VM should structure its pricing model based on option 3. Virgin Mobile should institute the whole new plan model based on the fact that it is a radical departure from the rest of the cell phone industry. Refer to the Virgin brand values to find that one of their core values is to move into areas where customers have traditionally received a poor deal and offer something better, fresher, and more valuable. Virgin also takes pride in offering innovation and a sense of competitive challenge. Given the values of Virgin, the radical new pricing strategy offered by option 3 fits nicely with Virgin's core values. However, a final pricing decision should be based on much more than core values. Many other regional carriers and smaller national carriers account for the remainder of market share. While LTV calculated on Virgin's option 3 may not be as high as the industry, Virgin's approach to entering the market may be worthwhile to accept a lower LTV if the entry approach creates demand for their services.

In choosing an option, the core values, target market, and pricing scenarios should all be considered before making a decision. One important note about the target market is that 14-24 year old consumers have little to no experience with contracts and typically have poor credit scores. Additionally, the 14-18 year old consumers must have a parent sign a legal contract. Given these facts, it appears that a marketing campaign directed at 14-24 year old consumers excludes those individuals, typically parents, who must agree to the contract terms. By choosing option 3, Virgin avoids altogether the need to convince both teens and their parents to agree on contract terms. Option 3 actually removes the additional step of signing a contract in the purchase process by removing the need for parental approval. Also by choosing option 3, Virgin is incorporating the customer perspective. By targeting the 14-24 year old market, Virgin researched the buying habits and unique challenges this segment faces in the marketplace. Virgin understands the ease of eliminating contracts and credit checks for this age group and is considering this customer perspective by choosing option 3.

The source of customer dissatisfaction in the cell service industry stems from lack of customer focus by the major carriers. The basis of the cell service industry is gaining customers through long-term contract commitments fraught with confusing parameters. The contracts are not written from the perspective of the customer, rather they are written to insure customer commitment for a period of time. Once the customer is committed to a carrier, terms of the contract are inflexible. For example, if a customer exceeds allotted minutes one month but doesn't reach the minutes allotted the following month, the customer is charged for the overage and is not reimbursed for the minutes not used. This is an example of the supplier's gain at the expense of the customer's loss. The major carriers don't have a clear understanding of the customer's needs. If they don't understand the customers needs they can't demonstrate the ability to meet those needs, thereby creating customer dissatisfaction.

At first glance the multiple product offerings of the carriers appear to provide customer value. However, the carriers don't bundle the various products in a concise manner that customers can understand. In fact, the purpose of bundling products in such a confusing manner is not to create customer value but to create additional carrier profits. If a salesperson must spend in excess of five minutes, which is typical for cell service providers, explaining the products, variations, terms of agreement, and answering questions, then the process by which products are sold is too complicated. The customer experience of spending precious time understanding the complexities of cell service products, coupled with the rigidity of long-term contracts leads many customers to agree to terms and products they don't actually need. Therefore, the customer experience is less than helpful. Over a period of months to years, many customers realize they don't have the plan they need and look to other carriers for better value. This leads to the high churn rates experienced by the major carriers.

Perhaps the four major carriers are too involved in a competitive war to gain customers to understand the value of retaining customers. Indeed, the overall advertising budget for the cell service industry was listed as 1.8 billion dollars for 2002. Nowhere in the case did I find a listing of the budget for customer service and retention plans. Given this glaring omission of information, I assume the focus of spending on advertising is to gain new customers not retain existing customers. The major carriers have been slow to respond to customer dissatisfaction mainly because they are busy attracting new customers and do not have a grasp of the lifetime value of current customers.

The current major carriers in the cell phone service industry make money through long-term contracts and the confusion involved with signing those contracts. Each contract has a mix of on and off-peak hours, buckets of minutes, length of time, cost of phone or offer of free phone, and roaming charges, among other services. For a customer to purchase cell service through an existing carrier, he or she must attempt to purchase the plan that exactly fits their needs. Unfortunately for customers, the mix of services and charges make it difficult for customers to clearly understand their own usage patterns; consequently, most customers purchase the wrong package of products for their needs. Carriers make additional profits off the inability of customers to purchase the correct package.

Based on pricing strategies, it appears the major carriers are offering bundled products to increase customer value. This strategy does not work because customers find it difficult and confusing to understand the bundling process; therefore, the service does not add customer value. The carrier pricing strategy, whether intentional or not, actually decreases customer value and increases customer cost. Furthermore, the pricing strategy does not take into account customer perspective nor does it take into account offering lower prices when it should. The pricing strategy appears to be a cost-based strategy given that the carriers cost of servicing a customer is approximately $30 per month and the average monthly bill is approximately $52. Based on the reluctance of the major carriers to take on customers who do not use cell phones frequently, it appears the carriers are using cost to determine which customers they are willing to service. They need higher usage customers to cover the cost of service each month. Finally,