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XM Satellite Radio A Case Solution
XM radio’s value proposition for its consumer segments was primarily the provision of satellite radio regardless of their location in the United States. Other terrestrial radio channels are offering a limited selection to choose from and are plagued with commercials that annoy listeners. XM radio has aimed to cover these aspects through a provision of more than 50 channels to choose from, all of those commercial free. Technological advancements regarding wireless, chipset, and audio coding technologies enabled the company to deliver on its promise and make the service available nationwide. This also enabled the company to target a wider consumer base given the various preferences of consumers with regards to the genre of music or the content they wish to hear. Moreover, keeping up to par with technology, the company is also offering online radio to consumers who are at home and wish to listen. Pricing has also been a part of their value proposition as consumers are to be convinced to pay for a service that they haven’t paid for in the past. Subscriptions allow customers to listen to the radio from office and at home as well, thereby making it convenient and portable.
Following questions are answered in this case study solution
What is the value proposition of XM to various consumer segments? Who should be the primary target market for XM?
What aspects need to be considered in pricing the radio receiver and subscription fee? What is the optimal price for a monthly subscription? Assume a five-year lifetime for a customer? How would your answer change if the lifetime was shorter or longer?
How should the price of the service change over time? Should you price high initially and then decrease it over time?
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?
Case Analysis for XM Satellite Radio A
Limiting the target market would not be ideal for the company given the strong competition from SIRIUS. The primary target market should be any individual, both male and female, between the age of 25 and 50. Since the radio is subscription based, this age bracket come under the working class and would be willing to pay. The company must not limit its target market to any specific segment and aim at targeting all the niche segments that fall under these age brackets and are willing to pay for the service. The following sub-segments would be a part of the primary target market for the company. Firstly, truck drivers, RV owners and commuters who drive for a considerable amount of time on a given day. Secondly, business travelers who have a high amount of commute are also part of the primary target market. Thirdly, office workers who listen to the radio and even outlets and businesses where non-stop music can be played are also a subset. Fourthly, consumers at home who wish to listen to radio while at home. Lastly, technologically friendly consumers who would be willing to pay for a subscription and listen to radio online are also an important segment of the target market.
2. What do aspects need to be considered in pricing the radio receiver and subscription fee? What is the optimal price for a monthly subscription? Assume a five-year lifetime for a customer? How would your answer change if the lifetime was shorter or longer?
Several aspects need to be taken into consideration while making pricing decisions for the radio receiver and the subscription fee. It is important to understand that consumers have access to the radio without a charge and making them pay for it is a tricky situation. The price would have to be justified based on the value of the service the consumers would receive. The first choice for XM was to get into a partnership with aftermarket manufacturers and then select amongst the vendors. XM would have to choose manufacturers based on which one offers the best price for the satellite radios. Installation costs would also be incurred by consumers and those need to be taken into account as well. These factors are pertinent to the initial capital investment and the installation costs that the consumers would have to bare.
Secondly, the subscription fee that is a recurring charge for the consumers needs to be determined. It is important for XM to understand that this amount needs to be nominal, something that the consumers would be willing to pay. The product comes under the category of a luxury product; something consumers don’t need. Disposable incomes of the target market need to be taken into account, and the subscription fee should be a very small proportion of the same. Given the data in Exhibit 9, it would be best to charge a subscription fee of $10/month. The exhibit also highlights the probability of purchase given various prices of the radio device. This would, however, depend on how well XM can negotiate with vendors and suppliers to arrive at an optimal price that would be beneficial for both the company and affordable for consumers.
Subscription prices need to vary based on the consumers’ time spent with XM. It is important to ensure that consumers are lifelong customers and pricing need to adjust in a similar fashion to incentivize them. Subscription fee needs to be cheaper, the longer a consumer stays subscribed. Moreover, entering new markets and establishing itself, XM at the moment can’t afford to charge a higher subscription fee from consumers. The subscription fee of $10/month would be suitable for customers who join initially but needs to reduce as the customers become regular and long-term in their use of the service for e.g. the monthly subscription can be $10/month for the first year, $8/month for the second year, $5/month for the third year and $2/month after the customer has been availing the service for five years. This would be an added incentive for customers also as their overall cost of the service decreases over time.
3. How should the price of the service change over time? Should you price high initially and then decrease it over time?
As noticed in the case, XM is undergoing certain research and development to come up with a superior product for consumers. It is important to secure funding for the same that would be generated through the subscription fee. Moreover, with the increase in subscriptions the company would be able to lower other operating costs in the future.
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