Professional Documents
Culture Documents
First Time
Amelia Cook
Eddie Larison
MBA 532
2.6.07
Company Background
Sir Richard Branson is the man behind the Virgin empire. Virgin is a U.K. based
corporation that has more than 200 corporate entities and is involved in everything from planes
and trains to beverages and cosmetics. Virgin is one of the top three most recognized brands in
Britain. Virgin is an innovative company that looks at industries that offer opportunities for
Virgin to enter. For example, Virgin prefers to enter industries in which the customer
Branson, who is known for his wild and wacky antics, launched Virgin Mobile USA in
July 2002 after successfully launching Virgin Mobile U.K. in 1999 and attracting more than 2.5
million subscribers in less than three years. The U.S.-based communications venture hoped to
have 1 million subscribers by the end of the first year and 3 million subscribers by the end of the
third year. Branson knew that the cellular communications market was nearly saturated in the
US and Virgin would need to find a niche market within the industry and select a pricing strategy
Virgin Mobile U.K was innovative in that it was the first cell phone company to be a
mobile virtual network operator (MVNO) in the all of its markets. This meant that it did not own
its own network; instead, Virgin leased available network space from an existing cell phone
company. Branson planned to use this same business model in the launch of the U.S. firm. They
would partner with Sprint and purchase network space on the Sprint PCS network.
The Crowded Cellular Market: Identifying a Niche
Subscribers
AT&T Cingular Verizon
The US market for cellular service VoiceStream Alltel Sprint
US Cellular Leap Other Carriers
2001 and the market was considered to be at its maturity stage in the product life cycle.
However, Branson and his team identified a niche market with 15-29 year olds. This group was
The reason that this was a largely ignored market segment was that most people in the
15-29 year old age group had poor or nonexistent credit. Most cellular carriers require credit
checks with their service agreements and for this reason, most people in this age group had a
difficult time acquiring a cell phone contract. Virgin thought that this segment had been
underserved by the existing carriers and that it represented the greatest opportunity.
Consumers in the teenage to young adult market are inconsistent in their lifestyles. They
go to college, are just leaving home, or getting their first cell phone while still in high school.
The cell usage of these consumers is inconsistent and sparse. The calling patterns of this
demographic are different than that of a businessperson with the national average using 417
minuets per month. Teenagers and young adults embrace the new technologies of cell phones
such as text messaging, downloading ring tones or information, or upgrading to colorful and
as potentially profitable and a way to differentiate its service in the U.S. First, penetration of the
15-29 age group in the U.S. was far lower than that in Finland, the U.K., and Japan (Exhibit 2).
In fact, in other countries, this age group had higher market penetration than the 30-59 age
group. Furthermore, teens were tech-savvy and would embrace new features (see VirginXtras)
as fast as they could be created. Teenagers in America had access to cash and regularly
purchased cutting edge technology, such as the Xbox and MP3 players. Finally, in 2002, parents
were beginning to view cellular phones as a great way to keep in contact with their children.
Teenagers could use phones to call for a ride or check in on the weekends. Parents were willing
VirginXtras
The revenue for nontraditional entertainment on cell phones was expected to increase
over the coming years; Virgin decided that it needed to be on the cutting edge of delivering
content, features, and entertainment to its consumers. Virgin called these features “VirginXtras.”
The company signed agreements with MTV networks to deliver music, games, and other content
to the Virgin Mobile consumer. In addition, Virgin would also include other extras in their plans
to appeal to the teen and young adult market, such as text messaging (a feature popular in Europe
by 2002, but slow to catch on in the U.S.), online real-time billing, ring tones, wake-up calls, and
more.
Purchasing the Service
Virgin Mobile examined the typical methods for providing cell phone service used by the
U.S. carriers and saw that dramatic decreases in selling costs could be made by the creation of a
radically different channel strategy. Instead of leasing mall space for kiosks, hiring expensive
sales staff, and paying costly commissions, Virgin decided to make its service accessible for its
target market—they would contract with retailers like Target, Best Buy, and Sam Goody to sell
Virgin phones and plans off the shelf. No expensive sales staff would be employed,
commissions to the stores would be lower than the industry average, and the phones would be
stocked in the places where the youth market shopped. Additionally, Virgin opted to contract
with a virtually unknown phone manufacturer to produce less-expensive phones with trendy
Advertising
Cellular advertising in the U.S. was a bloated beast when Virgin entered the market in
2002—the industry as a whole was expected to spend $1.8 billion that year to retain and attract
customers in a mature market. Virgin Mobile, on the other hand, aimed to spend a mere $60
million on extremely targeted advertising and quirky stunts to get teens and twenty-somethings
talking about Virgin Mobile. Virgin wanted to target the youth market in such a way that it felt
exclusive for that market. Virgin did not want the parents to “understand” what all the hype was
about.
Once Virgin Mobile had identified its target market and deemed it substantial enough to
pursue, the question became, how to structure pricing? As Virgin saw it, the company had three
pricing options.
1. Clone the existing industry pricing structure. Over 90 percent of cell phone
subscribers in the U.S. had contractual agreements with their providers whereby they agreed to a
“bucket” of minutes to use per month. If the customer used more than their allotted minutes, he
or she would be charged extremely high rates for the overages. If they did not use all of their
minutes, they still paid the same monthly fee and did not get to recapture the unused minutes the
next month. When the customer got his or her bill for the month, there were also substantial
taxes and service charges added to the fixed fee and overage charges. A typical monthly bill
If Virgin Mobile copied the industry prices in the U.S., they would benefit from the fact
that Americans had accepted and were used to the strange and often confusing pricing policies
and monthly billing in arrears for cell phone service. However, the advantage of working within
an established framework for pricing was outweighed by the disadvantages of this pricing
strategy. First, there would be little Virgin could do to differentiate itself from other cell phone
providers, short of the easily copied practice of dropping prices or offering better off-peak hours.
Second, by pricing with contractual agreements and billing in arrears, Virgin would essentially
have to abandon its preferred target market of teenagers, since children under the age of 18 could
not enter into contractual agreements in the U.S. Third, Virgin saw a way to create an advantage
in the industry by making pricing for cell phone service more straightforward and easy to
understand. However, the current pricing structure in the U.S. was complicated and not
transparent to the customer. Virgin did not want to force “hidden” fees and overages onto their
customers.
2. Price below the competition. Virgin could adopt a similar pricing structure as the rest
of the U.S. cellular industry, but set prices well below the competition to attract younger cell
phone users. There were several problems with this idea. In addition to the aforementioned
disadvantages to adopting a pricing structure similar to the rest of the U.S. providers, Virgin
could easily engage its competition in a price war. While consumers might like to see lower cell
service prices throughout the industry, none of the service providers would ultimately benefit
from lower prices and Virgin, being the new entrant, might be quickly priced out of the market.
3. A new, prepaid service plan. Upon examination of its target market, Virgin
recognized that a new cell phone service plan might be necessary to meet that market’s needs.
Virgin wanted to find a plan that would eliminate contracts, hidden fees, and even monthly
billing while still being profitable. The plan Virgin conceived was a prepaid plan in which
customers would buy minutes in advance and then, once the minutes were used, “recharge”
Virgin Mobile had a cost structure that was more amenable to this type of plan than any
of the other service providers. Because Virgin “rented” space on the Sprint PCS network, it did
not have the high fixed costs associated with network infrastructure. Furthermore, Virgin did not
plan to lease space for mall kiosks or employ commissioned salespeople to sell its phones and
plans. Instead, Virgin placed its phones in mass merchandisers and major retailers as an off-the-
shelf item. This distribution system was less expensive than the competition’s, and it would
likely work well with a prepaid plan. Finally, Virgin planned to spend much less on advertising
than its competitors, meaning that it could afford to take lower margins on its plans. For these
reasons, Virgin could price prepaid minutes at around 18 cents/minute, as opposed to the
industry average for prepaid plans of 35 cents/minute. (See Appendix 1 for breakeven and
teenagers and their parents by creating a prepaid plan; kids would not be able to run up a large
cell phone bill by creating overages, and parents could monitor how much money was spent to
“recharge” the phone each month. Additionally, customers both young and old would not be
faced with hidden fees and taxes in a confusing bill each month. Virgin hoped that by making its
There were also some disadvantages to a prepaid plan, most notably the monthly churn
rate expected from a prepaid plan. The lack of contracts might keep customers from being loyal
to Virgin Mobile—as soon as customers were old enough to enter into a contract with another
service provider, they could, with no penalty. In addition, customers had the option to not
recharge their minutes after they had used them all. Higher churn could eat into Virgin’s
Virgin Mobile also faced a challenge in lowering acquisition costs so that a prepaid plan
could be more profitable. Typically, service providers subsidized the cost of the phone, which
usually ran from $150 to $300. Virgin’s phones would be less expensive on average, $60 to
$100 plus the $30 store fee, but it would be difficult to price phones and plans in the stores to
recoup all of these costs. Teenagers might not have that much cash and young adults might see
the “free phone” offered with two-year contract from other service providers as a better deal.
Thus, Virgin Mobile would likely have to subsidize some of its phone cost.
Conclusion
Given the market Virgin Mobile chose to target as it entered the U.S. market for cell
phone service, the pricing option it should pursue is #3, a prepaid service plan. Unfortunately,
it would be difficult for Virgin to create barriers to its competitors to create their own prepaid
plans and also target the teenage and young adult market. However, if Virgin creates a positive
brand image with the youth market, they should be able to engender customer loyalty among that
market. Teenagers and young adults will want a service provider who understands them and is
in touch with their culture. Virgin’s image has the potential to make a connection with
consumers in this age group, and Sir Richard Branson’s antics have the potential to capture the
Interest rate: 5%
Break-even Analysis
Regular Plan
$22/1.21 = $18.18
Prepaid plan
$36/1.30 = $27.7
Breakeven (assuming half industry acquisition costs): $185/$27.7 per month = 6.7 months
Customer Lifetime Value