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Xm Radio

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Satellite Radio is at a point where several decisions need to be made before it sells its satellite digital radio. Some important considerations that XM need to decide on are: What type of segment(s) should XM market to? What will be the retail price of the product, and will XM require a monthly subscription fee? If so, how much should it be? Should XM allow advertisements on their programming? Is penetration pricing the best strategy? What would the early launch of SIRIUS

SIRIUS is going to target rural America as their primary market due to the lack of FM radio stations. XM does not want to compete in the rural America market because there are better consumer segments available. The research projected that Tech-Seekers and Tech-Friendly have the largest growth among other segments.

Offering a suggested retail price at $100 for an XM home or car radio will increase the purchase intentions for the Tech-Seekers and Tech-Friendly segments. Their purchase intentions increase steadily when the price of the radio declines.

Tech-Seekers and Tech-Friendly both seek high-tech products. XM should offer different packages to these segments. An example would be to offer a lifetime subscription for the price of 5 years, assuming the monthly subscription fee of $12. The radio transmitting device will be included in this price. The average customer lifetime value is 5 years, so an offer like this one will guarantee the revenue for a five year customer regardless of whether or not they continue to use the service. The customers will have a 30-day money back guarantee if they are not satisfied with the service and their contract will be dissolved.

Question 2: Retail Price

The optimal retail price for the radio receiver is $100 when a $12 monthly subscription fee is in place. By using the numbers from the forecasted demand of potential customers in Appendix B, a 21% increase in demand for home units and a 28% increase in demand for car units result when the price of the device decreases from $150 to $100. XM will need to charge a monthly fee and a small retail price for the listening device in order to make a profit and cover the cost of manufacturing the radio device. The estimated cost of XM-equipped radios is $270 per unit plus a 30% margin charged to retailers by the manufacturer and a 30% margin charged to the customer by the retailer. This price will amount to $550.

XM will be most profitable when they charge a $12 subscription fee, assuming a 5 year customer lifetime value, with the purchase of a $100 satellite radio for the home or for the car. Gross margin increases 14% for home units and 21% for car units when the price of the unit decreases from $150 to $100. This gross margin has been calculated using the assumption of a $12 monthly subscription fee, $.043 ad revenue per potential customer for a 5 year average lifetime value, operating expenses of $300 million, $100 million for the marketing budget for the initial launch of XM, and variable subsidy costs.

Quantity demanded is relatively insensitive to price. Using a previous price of 10 and increasing it to 12, the price elasticity of demand for the radio unit and service is -0.77.

Tier pricing should be used. Customers can receive upgrades to their service for a $3.00 increase to their monthly fee. Different upgrade packages will be made available. For example, to target sports fans, a sports package will be offered that includes updates on scores and announcing of different sporting events. Providing an NFL package with all games broadcast will allow customers to listen to their favorite team.

Question 3: Penetration Pricing strategy

After thorough analysis, it has been decided to implement a penetration pricing strategy initially as XM Satellite Radio is introduced into the market. It will result in fast diffusion and adoption. This strategy will be applied to the price of the radio. We will be charging a $12+ subscription fee which is slightly higher than the competition but we have decided to subsidize the manufacturers and come in with a low cost radio that will persuade customers to purchase our product. With SIRIUS expected to introduce their product earlier than XM, penetration strategy will help capture market shares.

In our target segment, which is Tech Seekers as well as Tech Friendly customers, there are 26.9 million and 22.7 million respectively that would purchase XM with a $12 subscription fee and a radio at a price of $100. Due to the increased amount of consumers that would be willing to purchase at a lower radio price, we have found that our gross margins will be larger with a $100 radio than with a $400 radio. (see Appendix B).

Both segments of home radio users as well as car radio users are larger in gross margin so XM will continue with this strategy until there is a need to adapt to the changing radio market.

It would be more important for XM to put emphasis and devote marketing budget money on sales force effort aimed at manufacturers and leading retail chains rather than consumer directed advertising and promotions. XM is not a self-explanatory product and the decision making process is high involvement because of having to buy a radio as well as a subscription. XM will send trained professionals out to manufacturers and retail chains to educate their staff on the benefits of XM as well as the areas where we offer superior products compared with the competition. We will still advertise to consumers but our main focus will be selling within the market that is most likely to adopt a new product and provide word-of-mouth advertising for XM which is the manufacturers and retail chains.

Question 4 Advertising

XM would be missing out on an extremely crucial revenue stream if they chose not to advertise on its satellite radio service. Taking an average of the 1997 revenue generated by the sixteen Major Radio Groups, one can see that one cume accounted for $.043 of revenue (see Appendix A). With a $100 radio retail cost and a $12 subscription price, projected demand for the home radio segment is 51,163,672 and car segment is 45,726,942. At $.043 per listener, advertising would generate revenues of $20,831,482 during the average 5 year customer life span.

Furthermore, advertising revenue in the radio industry has recently increased significantly and the trend is not projected to slow down anytime soon. With analysts projecting a 9.3% compound annual growth in radio advertising over the next four years, XM cannot miss out on this opportunity. The key will be to use subtle advertising.

To accomplish this, XM will need to carefully construct an advertising platform that will not destroy the intended differentiation of XM from local



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