Virgin Mobile USA Pricing for the very first time Case Solution

1. Given Virgin Mobile's target market (14-24-year-olds), how should it structure its pricing? The case lays out three pricing options, evaluate those options. Which option you choose and why? In designing your pricing plan, be as specific as possible with respect to various elements under considerations (e.g., contracts, the size of the subsidies, hidden fees, average per-minute charges, etc.)

In the context of the US cellular market, the most appropriate pricing strategy for Virgin Mobile will be option 3. This will allow the organization to offer a completely different price structure to the customer. This price structure will not only be less confusing for the customers but will also add to their convenience. The selection of this option will allow the company to effectively target the market consisting of 14 to 24 years old. Similarly, as there is a great deal of competition in the US market, it will also allow the company to differentiate itself from the rest of the competition. This will assist the company’s effort to successfully position itself in the target market. This pricing strategy will entail that Virgin will charge less price per minute but would continue to maintain buckets and volume discounts. Lower price than industry standards will allow consumers to get the best price and will create a cheaper and simpler image for the company. This will also put Virgin Mobile in a better position to offer attractive off-peak hours. In addition to this, this pricing strategy will also include fewer hidden fees, which will create a sustainable brand image of the company and its products in the customers. The logic behind such a pricing plan can be attributed to the fact that the market consisting of a demographic of 14-24-year-olds does not have the monetary muscle to afford expensive and luxurious cellular packages. Therefore, such a target market will be more attracted to an affordable price package offered by Virgin Mobile. Similarly, it will allow the Virgin Mobile to acquire the customers at a young age and retain them for later years allowing the company to build a sustainable customer base for its products.

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

The pricing strategy discussed earlier will be making use of contract-free prepaid packages. This will allow the company to effectively differentiate itself from the rest of the competition, which is currently using contract enabled post-paid packages. Despite the risks associated with such a pricing strategy, the financial returns are enormous. This is due to the fact that mobile penetration in the target market of 14 to 24 years old is less than 10% in the US market. Similarly, the growth rate for the next five years is expected to be quite high. Likewise, the market niche is considerably untouched by major carriers, which makes it easy for a company like Virgin Mobile to consolidate its position in the target market.

3. The cellular industry is notorious for high customer dissatisfaction. Despite the existence of service contracts, the big carriers churn roughly 24% of their customers each year. Clearly there is very little loyalty in this market. What is the source of this dissatisfaction? How have the various pricing variables (contracts, pricing buckets, hidden fees, off-peak hours, etc. affect the customer experience? Why haven't the big carriers responded more aggressively to customer dissatisfaction?

The high threat of substitution has made it easy for customers to switch from one carrier to another. As the major carriers are offering similar products and services at similar prices, it makes easy for the customer to switch to any other carrier, whenever a slightly different offer is made available. Similarly, a complicated and confusing mix of off-peak and on-peak minutes combined with hidden fees also adds to customer dissatisfaction and forces them to switch to a better offer as soon as it is made available. Due to the forces of substitution in the market, the incumbent firms are inclined to get involved in both price and non-price competition. For instance, incumbent firms try to match the industry and the rest of the competition with any changes in the price. Likewise, the non-price competition exists in the shape of high allocation to the advertising budgets. The inability of the carriers to respond more aggressively to reduce customer dissatisfaction can be attributed to high customer acquisition cost, which stands at $370.

4. How do the major carriers make money in this industry? Is there financial logic underlying their pricing logic?

The main source of money for the carriers is through the different provisions of their contract with the customers. For instance, any extra consumption from the allocated bucket means high penalties for consumers and considerable revenue for the carriers.