Dan Schulman, The CEO of Virgin Mobile USA, must develop a pricing strategy for a new wireless phone service targeted toward consumers in their teens and twenties, many of whom are believed to have poor credit quality and uneven usage patterns. Contrary to conventional industry wisdom, Schulman is convinced that he can build a profitable business based on this underrepresented target segment. The key is pricing. Schulman is currently debating three pricing options: (1) adopting a pricing approach that is roughly equivalent to the major carriers; (2) adopting a similar pricing structure, but with actual prices below the major carriers; or (3) coming up with a radically different pricing approach. With respect to the third option, Schulman is considering various alternatives including a reliance on pre-paid (as opposed to post-paid) plans, and the total elimination of contracts.
Questions to discuss in your case analysis.
1. Given Virgin Mobile’s target market (14 to 24 year-olds), how should it structure its pricing? The case lays out three pricing options. Which option would you choose and why? In designing your pricing plan, be as specific as possible with respect to the various elements under consideration (e.g. contracts, the size of the subsidies, hidden fees, average per-minute charges, etc.)
2. How confident are you that the plan you have designed will be profitable? Provide evidence of the financial viability of your pricing strategy.
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 all this dissatisfaction? How have the various pricing variables (contracts, pricing buckets, hidden fess, off-peak hours, etc) affected the consumer experience? Why haven’t the big carriers responded more aggressively to customer dissatisfaction?
4. How do the major carriers make money in this industry? Is there a financial logic underlying their pricing approach?
5. What do you think of Virgin Mobile’s value proposition (the VirginXtras, etc.)? What do you think of its channel and merchandising strategy?
6. Do you agree with Virgin Mobile’s target market selection? What are the risks associated with targeting this segment? Why have the major carriers been slow to target this sigment?
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