Virgin Mobile Case Study

Virgin Mobile Case Study

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Virgin Mobile is most value for money among all mobile carriers for the youth because of it simple and no strings attached talk plans.

Ans.1)

The dissatisfaction is mainly because of the pricing. The customers do not trust the pricing. The mobile carriers advertise “free this” and “free that” but in actual there are a lot of hidden charges. The customers hate being conned.  

Over 90% of all subscribers are on contractual agreement.  The customers are required for purchase bucket minutes wherein any excess usage is penalized by high call rates. If the customer does not use the bucket minutes the price per minute goes up. Customers find it difficult to estimate with accuracy the number of minutes they would need in a month and any error in estimation lead to higher costs.

The mobile carriers charge less for off-peak than on on-peak minutes. Over the period the off-peak time has shrunk. Earlier it was 6:00pm, which was revised to 7:00pm , then  8:00pm and currently 9:00pm. Cingular charges a monthly fee of $7 to move back the peak time back by 1 hour. Customers find it difficult to optimize usage in such a tight range and end up paying more.

Customers resent the additional charges that are slapped on bill. The carriers will only inform the customers about the bucket minutes charges and won’t mention the taxes and the universal service charges one has to pay. This leads to customers paying higher bills.

Moreover, once a customer has signed a contract he is stuck to it for the time of the contract, typically for 1 or 2 years. The postpaid customers have to go through a thorough credit check but then those do not clear the credit check are compelled to opt for prepaid service. The prepaid service cost a lot more.

Inspite of all the customer dissatisfaction the carriers have not responded aggressively because of fear of loss in revenue. If the customers were to optimize their plans and usage the carriers would make less money. It is the confusion within customers that leads to shelling out more money. The contractual agreement protects the carriers against churn and guarantees annuity stream. The telecom market is highly competitive and mature and hence carriers are wary of adopting an unconventional approach. The existing carriers do not have a specific target customer and it is a one scheme for all approach.  

1. Hidden Charges
2. Contracts
3. Off-peak has shrunk
4. Complicated plans
5. Additional charges
6. Credit checks
7. Prepaid vs postpaid

1. Hidden Charges: Off peak on peak, non-flexible timings, Once the pack gets over the rates they pay per minute is high

2. If they use fewer minutes they are still charged the entire amount, which is technically driving up the price per minute

3. Industry is making money from customer confusion

4. Contracts were binding for certain periods of time/rigorous credit checks

5. Carriers charged an additional fee on to the plan (Taxes, universal service charge)

6. One-time costs that are loaded on top of the bill that is not advertised

7. Prepaid vs postpaid

Ans.2)

Major carriers earn money by creating confusion. Customers are unable to optimize their plan according to usage and end up paying more. The average cost to acquire a customer is $370 therefore, the major carriers focused only on those customers wherein the break-even time/minutes were lower. The average monthly cell phone bill was $52, representing about 417 minutes of use. The monthly cost to serve is $30. Therefore to break even the customer acquisition cost considering the average costs is as below:

Break Even months = 370/(52-30) = 16.81 ~ 17 months.

Therefore the carriers are wary of acquiring low value customers. The contracts were usually for a period of 1 to 2 to allow to break-even and earn profits.

For customers under contract Lifetime value (LTV) :

Churn is 2% monthly → 2X12 = 24% annually

Therefore retention r = 1-0.24 = 0.76  

LTV = (M/(1-r+i) – AC

       = (22X12/(1-0.76+0.05) – 370

       = $540.35 (Profit)

As per the data $29 plan ends up being $35 because of taxes and universal service charges

Therefore taxes = (35-29)/29 = 20.69%

For customers under contract Lifetime value (LTV) considering 20.69% taxes :

Churn is 2% monthly → 2X12 = 24% annually

Therefore retention r = 1-0.24 = 0.76  

LTV = (M/(1-r+i) – AC

       = (22X12/1.21X(1-0.76+0.05) – 370

       = $382.35 (Profit)

For prepaid under contract Lifetime value (LTV) 

Churn is 6% monthly → 6X12 = 72% annually

Therefore retention r = 1-0.72 = 0.28

LTV = (M/(1-r+i) – AC

       = (22X12/(1-0.28+0.05) – 370

       = - $27.14  (Loss)

Considering the Lifetime value if the carriers were to target prepaid customers they would incur a loss. If the monthly cell bill of an user is less than $30 the carriers would keep incurring losses.

The carriers offer lower call rates for higher contract commitment minutes but customers often estimate more than they use and hence the actual usage is less than the commitment. This proves beneficial to the carriers.  Other source of revenue for the carriers is charging higher during peak hours. Mobile entertainment is another source of revenue which has been growing over the years.

Ans.3)

Yes, we agree with the target market selection of 14 to 24 year old. The telecom industry in USA is overcrowded and snatching a piece of the market share for a new player is difficult. But data shows that the penetration in 15-19 years old at 15%-18% is the lowest as compared with Finland, Japan and UK. The penetration among 20-29 years, at 45% is also not too high. This presents a good opportunity to Virgin mobile to serve the underserved.  The growth rate among this demographic is expected to be strong in the next 5 years. The 14-24 years old age group presents individual who have a poor credit history because of lack of exposure to credit. The individuals aged higher with the same demographic are the ones who have just started working and therefore do not have a sufficient credit history. Poor credit history does not necessarily mean tendency to default. The underlying reasons of a poor credit history do matter.

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