Homework
Case help for Virgin Mobile
There are two aspects of pricing in this case.
a. Pricing levels - the overall amount a consumer pays.
b. Pricing structure - how a payment is presented to the consumer. The case illustrates the extent to which different payment structure, e.g., bucket pricing, pre-paid versus post-paid, contracts, hidden fees, etc.
Three options of pricing.
Option I and II- Similar to the major carriers. Students should consider why major carriers should use the current pricing structure. Why should they keep ‘contract', ‘bucket pricing', ‘hidden fees', etc? You may need to take into consideration cost and benefits of having each component of the structure. Some may require simple calculation and some doesn't.
About pricing levels, you may need to calculate the following. Because option I and II are similar to major carriers, you may use numbers related to the current industry practice.
i. Acquisition costs may include advertising per gross add, sales commission paid per subscriber and handset subsidy. It may end up range. You can use an average or middle value as rough estimation.
ii. Break-even analysis - you can use an excel spreadsheet that I used in the workshop or lecture. Or, simply use the following formula.
BEP = FC/(Price - VC) = Acquisition Cost / (Revenue - Service Cost)
iii. Customer Life-time value analysis - You can use either excel spreadsheet for a limited time period or infinite lifetime value calculation. Simple one would be the infinite lifetime. CLV calculation can be done ‘with' and ‘without' for comparison. You can show the value of having ‘contract'.
iv. Break-even and CLV analyses without hidden fee -You may be able to show how hidden cost boosts economic benefit to current industry. The case mentions an example where current cellular bill becomes certain number due to hidden cost. What would be margin without hidden fee?
Option III- a different pricing approach. Different target market with different pricing structure and levels. Compare AC, BEP and CLV of new pricing approach with those done above. Examples are
i. Acquisition Cost is lower then before due to low commission, low advertisement and low handset subsidy.
ii. Additional pricing element should also be considered. E.g., pre-paid option, no or little hidden fees, etc.
iii. Due to pre-paid option, revenue calculation is based on usage of number of minutes per month. The case shows Virgin's estimates. Use new AC, revenue and churn rate without contract to compute BEP and CLV. What would be a ‘proper' price to achieve similar break-even as current major carrier? You need to figure out appropriate pricing level with BEP and CLV analysis.
Discussion Questions for Virgin Mobile Case
Consider the questions below in analyzing the case and preparing your report.
A. Assuming Virgin Mobile's target segment (14-24 year olds), how should it structure its pricing? Which of the suggested options would you recommend? In proposing your pricing plan, please be as specific as possible with respect to various elements ----- contracts, size of the subsidies, hidden fees, average per-minute charges, etc. (It is important to carry out and describe the necessary calculations to examine the impact of each one of this elements).
B. Please provide evidence of the financial viability of your suggested pricing strategy. (Hint: You will need to conduct quantitative analysis using available case information to do this. Using the customer life time value lecture and workshop might be particularly useful to answer this, as well as the next question).
C. The cellular industry is notorious for high customer dissatisfaction. Despite the existence of service contracts, the big carriers roughly churn 24% of their customers each year (2% per month). Clearly, there is little loyalty in this market. What is the source of this dissatisfaction? What role do pricing variables play in affecting the consumer experience? Why haven't the big carriers responded more aggressively to customer dissatisfaction?
D. How do the major carriers make money in this industry? What is the financial logic
E. underlying their pricing approach? Again, please explain in depth
F. How would you evaluate Virgin Mobile's value proposition (e.g., VirginXtras)? What do you think of its channel and merchandising strategy?
G. Do you agree with Virgin Mobile's target segment selection? What are the risks associated with targeting this segment? Why have the major carriers been slow to target this segment?
H. How has pricing strategy in the cell phone industry changed since the time of this case (2006)? Specifically, analyze the current pricing strategy of Australian mobile phone companies.Which aspects are similar and which aspects are different from the Virgin Mobile approach?
Format your homework according to the following formatting requirements:
i) The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
ii) The response also includes a cover page containing the title of the homework, the student's name, the course title, and the date. The cover page is not included in the required page length.
iii) Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.
Attachment:- Price-Elasticity-and-Price-Response-Functions.rar