Virgin

Introduction

The objective is to analyse the initial marketing and pricing strategy of Virgin as it targets the relatively unsaturated and overlooked youth segment of the American mobile communications market. To succeed, Virgin must define a pricing strategy that achieves Virgin's objectives of building a customer base and achieving profitability. To this end, Virgin's value proposition - promotion, placement, product, and pricing Ð'- will be examined, and recommendations provided.

Promotion (Advertising)

In the commoditized mobile industry, advertising is essential in acquiring new customers. The average advertising expenditure per customer in the industry ranges from $75-$105. Where in this range a company's advertising costs will fall depends on factors such as market saturation, attractiveness of value proposition, effectiveness of marketing campaigns, and competition.

Virgin can be confident that its cost of customer acquisition will be lower (~$60) than the industry average ($90) and the current market range. Virgin is utilizing a focused pull strategy, addressing an unsaturated market segment, with little competition, and with a market segment which makes buying decisions based largely on word-of-mouth. Therefore, Virgin should achieve a higher customer yield per dollar spent in advertising (industry average substitutes for worst-case assumption).

Table 1 illustrates that given Virgin's $60 million advertising budget , Virgin should reach its goal of 1 million customers (at $60/customer) during the first year. Worst-case scenario estimates 666,666 customers. A better-than-expected return on advertising would yield more than the target.

Table 1 - VIRGIN'S ADVERTISING SUMMARY

Year 1 Budget Cost/Customer Total Customers

$60,000,000 $90 (Industry average) 666,666

$60,000,000 $60 (Virgin Estimate) 1,000,000

Placement (Distribution)

Virgin has a unique distribution strategy Ð'- selling products off the shelf at stores like Best Buy where the target segment buys electronics. Because Virgin pays $30 commission (instead of the industry average of $100) this is simultaneously more targeted and lower cost compared to competitors.

Virgin buys handsets from Kyocera, a "bargain" brand and differentiates the phones with fashionable interchangeable faceplates. While competitors acquire handsets from name brands, having to heavily subsidize the phones to sell them in an acceptable price bracket of $60 to $90, Virgin pays between $60 and $100 for their phones. Therefore, Virgin can place handsets in the market without subsidy and compete.

In summary, Virgin enjoys sales cost advantage against its competitors. Low sales costs put Virgin in the position to offer a very attractive value proposition by subsidizing the handset, underselling competitors (see Table 2).

Table 2 Ð'- VIRGIN'S DISTRIBUTION OPTIONS

Average Handset Cost ($60 - $100) Subsidy (%) Subsidy (USD) Retail Commission Total Cost of Sale

$80 0 0 $30 $30

$80 50% $40 $30 $70

$80 75% $60 $30 $90

Virgin can further enhance the value proposition by bundling free minutes (at a low cost to Virgin) with the phone Ð'- this could be an effective strategy to get phones to the target audience.

Product

Another opportunity for Virgin to create value is to differentiate its product. Virgin's push in this area is with VirginXtras Ð'- a pack of entertainment services. This is a potentially lucrative addition to Virgin phones given that entertainment services' revenue is growing (see Table 3 and Case Exhibit 3).

Table 3 Ð'- MOBILE INDUSTRY ENTERTAINMENT REVENUE

Total Subscribers - 2002* 150,000,000

Entertainment Revenue (2002-2003)** $36.5 Billion

Estimated Entertainment Revenue/Subscriber (2002-2003) $243

*Total Subscribers In 2002 is estimated by adding the number of subscribers in 2001 to the number of new customers in 2002, estimated by taking the 2002 advertising budget and dividing it by $90, average cost in advertising dollars of adding a customer.

** The average of the two years estimated revenue provides a more accurate picture because Virgin's first operating year will stretch from summer 2002 to summer 2003.

One of Virgin's possible pricing options, pay-as-you-go, is a differentiator, and has the added bonus of saving the cost of bad debt collection.

However, Virgin is gambling in some areas. For instance, Virgin hopes that its brand will stick in the U.S. market, despite limited brand recognition. Virgin is wisely sourcing its entertainment through the ever popular MTV and advertising in young people's magazines.

Virgin has failed to consider the importance of customer service to its product. There appears to be no consideration in the budget for how Virgin will provide technical/repair support and insurance to guard against handset failure rates given their unique distribution. Perhaps more importantly, Virgin needs to consider how it will provide a way for its customers to top-up in every populated city in the U.S. (contract providers generally have national coverage). These issues cannot be overlooked with churn the Damocles Sword.

Pricing

Pricing is a valuable differentiator and a key component of Virgin's potential profitability. Virgin has to consider 3 possible (simplified) pricing schemes:

1. Offer post-paid contracts at industry average pricing;

2. Offer post-paid contracts with a price below the competitors; and

3. Offer a new model based on prepayment pricing structure (with further variation in handset subsidy) (see Tables 3 and 4).

Table 4 Ð'- VIRGIN'S PRICING SCENARIOS

Element Scenario