Xm Radio Case Analysis

Case Study

1) What is the value proposition of XM to different consumer segments? Who should be the primary target market for XM?

XM satellite radio’s value proposition for their customers is XM’s ability to provide radio service throughout the entire country regardless of a consumers’ location. Furthermore, terrestrial radio offers limited selection and is becoming increasingly cluttered with commercials. Therefore, XM satellite radio provides a greater selection of radio for the various preferences of consumers, commercial free. Furthermore, as an added bonus subscribers will have the opportunity to listen online from their home or office.

Based on XM’s research, I believe their target market should be focused on the Tech-Seekers demographic. This demographic appears to present the best opportunity for market penetration. They are more inclined to purchase the XM service and become lifetime customers because of their desire to be on the cutting edge of technology. Moreover, this demographic is very similar to the second largest market interested in satellite radio, Tech-Friendly consumers. Therefore, there is greater opportunity for these Tech-Friendly consumers to purchase the service as well. Between these two groups, XM satellite radio has the ability to gain quick financial stability to capture more of the market share.

2) What aspects need to be considered in pricing the radio receiver and subscription fee? What is the optimal price for monthly subscription? Assume a five-year lifetime for a customer. How would your answer change if the lifetime was longer or shorter?

There are several factors that XM needs to consider when determining their pricing options. XM’s first choice of distribution was to partner with aftermarket manufacturers and determine the best vendors to produce XM satellite radios. Each manufacturer has different operating costs and desired margins. Therefore, XM needs to determine which manufacturers can provide these radios at the optimal price point for consumers. Moreover, XM needs to factor in the necessary installation costs consumers will incur for these systems will need to be put in via installation specialists like Best Buy and Circuit City. Once these factors are determined XM will be able to better access their subscription fee.

The subscription fee is the biggest part of the equation because this will be a reoccurring fee consumers incur on a monthly basis. Since this product will be considered a luxury product, XM needs to consider their targeted demographic. In doing so, XM will have to establish a price that will be in the range of their demographics’ disposable income. This pricing point is so crucial because it could potentially eliminate hundreds of thousands of customers for the company. Therefore, based on XM’s market research I feel the best subscription price is $10 per month. I feel this is the best price because there is not as much of a drop off in potential customers from $2 to $10 based on the radio’s cost.

Obviously as with any business one of the main goals is to make every customer a lifelong customer. This is because the cost to acquire a new customer is more expensive than retaining current customers. Therefore, as the lifetime of a customer becomes shorter, prices need to rise to make up for the lost revenue. With that in mind, I would charge a cheaper subscription fee as customers continued to remain with XM satellite radio. However, since XM is entering a new market and they are unsure of how the business will operate. Therefore, I would not change the subscription fee based on the lifetime of a customer. This is because there are too many variables that could happen in the first several years of this business. The only consideration I would let affect my decision to change this fee would be based on Sirius’s subscription fee. Once XM becomes more established I would then be more willing to adjust prices once I obtained a better understanding of the business. It is easy to drop the subscription fee in order to attract new customers but it is hard to raise fees if financial hardships occur. This decision would certainly drive consumers away.

3) How should the price of the service change over time? Should your price be high initially and then decrease over time? Should your price be low initially and then increase over time?

Initially the XM subscription fee will be high as the company finds the best method to do business. XM is developing a new product that does not exist and it is because of this that development costs will be high. As time goes on and the business matures, there are several costs that XM will be able to lower as they become more familiar with their market and distribution channels. Moreover, as competition increases XM will have to improve production processes to lower their prices to remain competitive.

Finally, the longer a business stays in operation the larger their customer base becomes. This helps generate a larger revenue stream which allows companies to lower their prices. However, as XM gains a stronger knowledge of their business and customers the price of their service should remain constant.

4) What aspects need to be considered in allowing advertising to run on XM's service? How does the fact that the firm could also earn money on advertising affect the optimal subscription price?

Allowing advertising on the XM service is a tricky scenario because some consumers will be buying the service for the fact that it is commercial free radio. Currently, 20 minutes of commercials exist within an hour of a terrestrial radio broadcast. This number is projected to grow as companies are looking for new ways to increase revenues. For example, in 2004 Clear Channel launched a new campaign with the slogan “Less is More”. With this campaign, Clear Channel is offering 30, 10 and even 1 second advertising spots. Consequently, consumers will begin to become frustrated with this and look for alternative methods for music, news and talk radio. Therefore, XM needs to be very cognizant of how to incorporate advertisements without upsetting their customers. XM’s biggest concern will be what channels they add advertisements to and how much air time they will devote for advertisements. The best scenario is to add advertisements to talk and news radio stations. These stations are more inclined for such spots and will provide the necessary breaks for hosts. In addition, these consumers are more tolerant of commercials than music listeners.

5) What are the implications of the expected launch plans for