Given Virgin Mobile’s target market (14-24 year olds), how should it structure its pricing?
When examining this case study, Virgin Mobile USA, and evaluating the different pricing options, it provokes the same question we addressed in class on Tuesday, October 23, 2007. How should a company, in this case Virgin Mobile, enter a market and take some of the market share?
I believe Virgin Mobile has two options. The first option is the obvious for their target market and any new product entering a saturated market, the pricing should be low if not the cheapest product out in the market. The second pricing structure that would appeal to Virgin Mobile is pricing their product in the middle or average of the industry standard.
Examining the first pricing structure strategy, it has positive and negative aspects to it. Some of the positive aspects include taking a great portion of the market share for those customers who value pricing in choosing their products. This pricing also goes along with Virgin’s target market, 14-24 year olds. This age group does not have a lot of spending money, if it is their own, or the parents’ do not want to pay a huge phone bill. The pricing would appeal to their target market and help create a young and hip image.
While this pricing structure strategy would help gain consumers that value pricing when choosing their products, it can also work against Virgin Mobile. This pricing can create the image that the phones do not have as high of a quality if they are priced below the industry low. This structure would accomplish the goal of attaining a sizable amount of the market share, but it would not be as profitable as the second pricing structure strategy.
The second pricing strategy looks to gain market share while earning a bigger profit. The pricing structure strategy would be to conduct research to find out what the industry is pricing. For example, if the industry low is $49 to a high of $299 then Virgin Mobile should price itself around $179. This pricing structure strategy would gain a great part of the market share for a couple of reasons. First, it would send the message that their product has a higher quality than the lower priced products in the industry, and it would be priced that it is not the most expensive, so more consumers could afford it. This pricing structure will create the air about the product as being the new hip product to have. Which is a quality Virgin Mobile’s target market cares about. This generation wants the latest products that will make them look cool or good. The negative with this type of pricing is that it won’t gain as big of a portion of the market share as the first pricing strategy, but it would garner more profit. It could also pose the threat of being too expensive, if the industry range is higher.
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 considerations (e.g., contracts, the size of subsidies, hidden fees, average per-minute charges, etc.).
Each one of the three different options provides a unique way Virgin Mobile USA can enter the market and gain a following. However, one option stands apart from the others and fits with what Virgin Mobile is trying to convey.
That option is option three. Option three is titled “A Whole New Plan.” The idea behind it is starting afresh and coming up a different pricing structure that is different from everything out on the market now. This is the most radical and risky of the three options, but if executed correctly can proved to be profitable and the right choice.
Some specifics Dan Schulman discussed that would be incorporated into this option would be: no contracts, prepaid compared to post-paid, no hidden fees, and off-peak hours. Declaring Virgin Mobile would not have contracts is huge, but when considering their target market, it fits. When considering Virgin Mobile’s target market ranges from 14 to 24, it would guarantee the younger teens would be able to purchase their products. If they had contracts Virgin Mobile’s under 18 target market wouldn’t be able to sign the contracts, they would have to get a guardian or parent. Another fault with their younger target market is their bad credit. If Virgin Mobile eliminated contracts then they are creating that setting for more customers. Those customers would be a mixture of those that wouldn’t be credit approved at Virgin Mobile’s competitors.
Prepaid vs. post-paid minutes is another important variable when considering option three. This detail takes into mind the different lifestyles of their target market. The consumers might be occasional users and this quality would be ideal for them. It also goes along with the group of consumers who do not have good credit. This group of consumers tends to purchase prepaid plans since they don’t require credit checks.
When purchasing any item or service, you do not want to be deceived. This is the idea behind no hidden fees. Most of Virgin Mobile’s competition hits their customers with hidden fees which causes them to be unhappy and distrust the company and brand. Virgin Mobile’s solution is simple, eliminate all hidden fees. This will create the image of “what you see is what you get,” which will help attain more of the youth market and even some unhappy customers of their competitors.
While eliminating hidden fees, Virgin Mobile also looked more closely at their off-peak hours. They decided to reexamine them. The company recognized that their target market doesn’t live the same lifestyle as an adult, so Virgin Mobile created the service which made sense to their target market.
All these features that Virgin Mobile would incorporate into their “A Whole New Plan” set them apart from the competition. Option three provides Virgin Mobile with the ability to stick with the company’s value proposition of always being innovative and supplying the best products and services to consumers.
How confident are you that the plan you have designed will be profitable? Provide evidence.
I am very confident the plan I have designed will be profitable. I will not hide the fact it will be very hard at first, but that is expected with a highly saturated market. The evidence is in the stock reports. Virgin Mobile entered the New York Stock Exchange and showed moderate growth. Granted in today’s time, the stock market is a hard place to judge any business, but it provides enough evidence that Virgin Mobile is earning revenue or profit.
According to Yahoo.com, Virgin Mobile, or VM (NYSE symbol), has a 25.40% quarterly revenue growth. This figure shows that the company is profitable that grows each quarter. This statistic is also telling due to the industry percentage, 19.20%. What concerns me is what the stock is being traded for. It is slowly declining; however, this is commonplace for many stocks. The real test will be time, whether or not this company can continue to be innovative enough to compete with the industry while continuing to earn a profit.
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 fees, off peak hours, etc.) affected the consumer experience? Why haven’t the big carriers responded more aggressively to customer dissatisfaction?
The source of all the dissatisfaction stems from many different things. Most consumers do not trust the industry pricing plans. Companies advertise, “free this” or “free that”, but young people know that there are many different hidden charges, and they resent this. Consumers these days are savvy, and they hate feeling like they are being used. Other factors include contracts, pricing, buckets, hidden fees, and off peak hours. Over 90% of all subscribers in the U.S. have contractual agreements with their cellular providers. The contracts are generally for a period of one to two years, and require rigorous credit checks. This is very unsettling for many consumers. People don’t like being “tied down” to a cellular provider or the strenuous credit check.
Hidden prices play another factor in this dissatisfaction. These include taxes, universal service charges, and many one time costs. Many plans also have established “buckets” of minutes. Customers then sign-up for a bucket of minutes. However, if the customer exceeds their allotted bucket of minutes they are penalized with extremely high rates. On and off peak hours are also concerns. Originally, off-peak hours began at 6:00pm, and then it gradually changed to 9:00pm. All of these various pricing strategies have led to the dissatisfaction of the consumer’s experience. These pricing strategies have also excluded a demographic that is projected to be very robust for the next five years; the consumers aged 15 to 29. With the rigorous credit checks needed to attain a cell phone this huge demographic does not qualify. Many younger consumers either have no credit or bad credit. Another stipulation to obtain a call phone is that you have to be 18 years of age. This alone excludes part of the demographic. However, big carriers have not responded aggressively to this consumer dissatisfaction. The big carriers including AT&T, Cingular, and Verizon carry so much of the market share. Out of the 103 million subscribers in the United States all three of these big carriers have of market share of at least 20 million subscribers. That’s over half of the market. The big carriers have such a monopoly on the cell phone industry that it is not necessary for them to try to improve their customer dissatisfaction rates.
What do you think of Virgin Mobile’s value proposition (The Virgin Xtras, etc.)?
According to Virginmobileusa.com, “our team works to provide not only the best wireless products and services, but we also hold fast to fresh style, innovation and championing the consumer.” With this statement which they call part of the Virgin Mobile story, by adding such values as The Virgin Xtras, no hidden fees, exclusive content from MTV, and so much keeps true to their word. Due to their goal of attracting a youth market, Virgin Mobile USA is always trying to add new features that keep their products exciting in the eyes of the consumers.
I believe Virgin is being creative and innovative with their products. These Xtras help not only Virgin but the industry. It helps push their competitors to strive to put products on the market that excel the previous. By making their features more on the entertainment end to attract their target market of 14 to 24 year olds, Virgin Mobile creates the possibility of additional usage. This would also create loyalty among their consumers, which would be very profitable for Virgin Mobile USA in the future. It would also give Virgin Mobile an advantage over their competitors. If they are able to create consumer loyalty with the youth market, which is a market none of their competitors are going after for the fear of low-value subscribers, bad credit, and infrequent usage, it would speak volumes and establish Virgin Mobile USA as a mainstream provider.
What do you think of its channel and merchandising strategy?
Virgin Mobile created a different channel strategy for attracting their target market. They needed to create one that would help get their products to their target. This included the placement of the products at stores were their audience shops. These retailers include Target, Best Buy, Sam Goody, etc.
Virgin Mobile USA also thought about how their target market shops. They want to examine the products and touch them, not talk to a sales person and the products not being kept locked behind the counters. Knowing this information, Virgin created a clear see through packaging that allowed consumers to look and touch the product. Also, this new sales tactic allowed the youth market to examine the products without the store’s salespeople harassing them. The Virgin Mobile USA team also created large point-of-sales displays to showcase and feature the new packaging. The displays were made available to the retailers so that they would feature them.
Virgin Mobile USA not only changed the way they were going to package the product, but they made strides to reach the desired market to make them aware. Virgin Mobile had a different way to approach marketing. They needed to be innovative since they only had $60 million dollars compared to Verizon Wireless and their $650 million dollar budget. Dan Schulman, Virgin’s CEO, said it best, “Unless you’re between 14 and 24, you’re probably never going to see our ads.” They created ads that featured teens and made them stand out to the rest of the industry. Virgin made sure to place the ads in magazines with a youth following and create a buzz by sponsoring and planning street marketing events.
Do you agree with Virgin Mobile’s target market selection?
I do agree with Virgin Mobil’s target market selection, which is between the ages of fifteen and twenty-nine. If marketed successfully, this demographic had the greatest potential for growth because prior to Virgin Mobile’s entrance, it was the least penetrated. Virgin Mobile did decide to go forth and enter this market, and have now become very successful, not only because they tapped into the consumer needs’ of this younger demographic, but offered services not yet offered by national service providers.
What are the risks associated with targeting this segment?
The largest risk Virgin Mobile faced was the chance of failure; consumers’ not accepting their service plans. With other service providers being already well established, Virgin Mobile took a large risk when entering the United States. Consumers are often very brand loyal, especially with products or services that take up a larger part of their income. This meant that Virgin Mobile must promote their own products and services, and also concentrate on why they differ from the competition.
An issue that arises when marketing towards a younger demographic is that this demographic may not be employed, which is common for high school students and some college students. The older portion of this demographic probably has lower salaries than that of the thirty to fifty-nine age demographic, who many of which have established careers with higher salaries. Multiple risks can come from this issue of lower income. The first of which is quite obvious in that because an individual does not have an inflow of money, they have no way of payment to a service provider. Either this is the case, or the parents of these children do not have enough disposable income to provide a cell phone and service to their child.
Why have the major carriers been slow to target this segment?
During the time of Virgin Mobile’s entrance into the market, there were six national cell phone carriers, none of which marketed towards the younger demographic. One of the reasons why these carriers were reluctant to market towards this demographic was that they required a credit check upon signing a contract with the service provider. This becomes a problem because a large portion of this demographic, teenagers in particular, have not yet acquired credit cards, therefore not possessing any credit at all.
Another reason why other service providers have been slow to target a younger demographic is because they wanted to be “safe”, in that they wanted to target business men and women (the thirty to fifty-nine age demographic). This demographic is consistent with their cell phone use; using a higher number of minutes every month. Because of this high number of minutes used, they pay for a highly monthly rate plan. It would be a risk for these providers to market to a younger demographic because of their inconsistent minute usage per month. Because a lower monthly rate plan would apply, this would result in less profit for the service provider.