Final Individual Project
Case Analysis of Virgin Mobile USA: Pricing for the Very First Time
Please provide a detailed analysis on the following questions. Assignments should be printed in 12-point font and business format, single line space, with one inch margins on all sides. There is no strict page limit.
1. The cellular industry is notorious for high customer dissatisfaction. Despite the existence of service contracts, the big carriers churn roughly 24% of their customer each year. Clearly, there is very little loyalty in this market. What is the source of all of this dissatisfaction?
2. Why haven’t the big carriers responded more aggressively to customer dissatisfaction? Virgin Mobile’s pricing options 1 and 2 are similar to the major carriers. Conduct an economic analysis to calculate the lifetime value (LTV) of an average customer to the current carriers (assuming an infinite economic life). What would the LTV be if the industry were to abandon the contract requirement and their customers become prepaid customers? (Hint: based on the average acquisition cost information in the case and lifetime value calculation in Exhibit 11).
3. In order for a consumer-friendly pricing option 3, Virgin might need to lower its customer acquisition costs. Virgin plans to spend a much less advertising budget of $60 million to acquire 1 million customers for the year, offer a $30 handset subsidy and adopt distribute channels such as Target. Please conduct an economic analysis on the consumer-friendly per-minute pricing option. Specifically, assuming that Virgin’s customer use 200 minutes per month and its monthly cost-to-serve is 45% of revenues, what would Virgin have to charge consumers on a per-minute basis to equal the current carriers’ break-even time? What would the LTV of a typical customer be if Virgin were to charge a per-minute price between 10 cents per minute and 25 cents per minute?