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AEM 4160: Strategic Pricing Prof.: Jura Liaukonyte Virgin CeLL CASE: EXCERCISES. Pricing Structure from the Carrier Perspective. Contracts: Annual churn rate WITH contracts =2% * 12 months = 24% (p.8) Annual churn rate WITHOUT contracts =6% * 12 months = 72% (p.8)

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Aem 4160 strategic pricing prof jura liaukonyte virgin cell case excercises

AEM 4160: Strategic PricingProf.: Jura LiaukonyteVirgin CeLL CASE: EXCERCISES


Pricing structure from the carrier perspective
Pricing Structure from the Carrier Perspective

  • Contracts:

    • Annual churn rate WITH contracts =2% * 12 months = 24% (p.8)

    • Annual churn rate WITHOUT contracts =6% * 12 months = 72% (p.8)

    • The difference: 72% - 24% = 48%

      Take AT&T example: customer base = 20.5 million

      If AT&T abandons the contract based plan how many new customers would it need to acquire to offset customers from an increased churn rate?

    • Additional customers lost to churn: 48% * 20.5 mln = 9.84 mln

    • Acquisition cost per customer: $370 (case p.2)

    • Total cost of offsetting higher churn rate: $370 * 9.84 mln =$3.64 bil.

      Not surprising that major players still continue to hold the contracts.



Bucket menu pricing
Bucket/”Menu” pricing

  • In reality most consumers are paying more than their optimal rate = if they new exactly how much they will consume

  • “industry makes money from consumer confusion”

  • Pricing menus allow carriers to advertise low per minute rates

  • But most consumers end up choosing the wrong menu.


Hidden fees
Hidden Fees

  • Able to promote low per minute prices, but still collect additional revenues


Acquisition costs
Acquisition costs

  • Advertising per gross add: from $75 to $100 (p.5)

  • Sales commission paid per subscriber: $100 (p.5)

  • Handset subsidy provided to the subscriber: $100 to $200 (p.9)

  • Total: from $275 to $405

    • (let’s assume somewhere in the middle = $370)


Break even point
Break Even point

  • Monthly ARPU (average revenue per unit): $52 (p.3)

  • Monthly Cost-to-Serve: $30 (p.3)

  • Monthly Margin: $22

  • Time required to break even on the acquisition cost

    = $370/ $22= 17 months

  • In the cellular industry the monthly margin is relatively fixed across periods, therefore the traditional LTV can be simplified (assuming infinite horizon):

M = margin the customer generates in a year

r = annual retention rate = (1-12*monthly churn rate)

i = interest rate (assume 5%)

AC = acquisition cost


Ltv with contracts
LTV with contracts

  • The annual retention rate in the industry

    = 1-12*0.02=0.76


Ltv without contracts
LTV without contracts

  • Eliminate contracts -> churn rate increases to 6%

  • Calculate the LTV:


Eliminate hidden costs
Eliminate Hidden Costs

  • $ 29 cellular bill becomes $35 due to hidden costs

  • Increase of 21%

  • If these costs were eliminated, the $22 margin would be reduced to $18.18= $22/1.21

  • Break even would become 20 months = 370/18.18


What happens to ltv
What happens to LTV?

  • Without hidden costs, but with contracts

  • Without hidden costs and without contracts

  • Elimination of contracts drives LTV below zero

  • Hidden costs boost the bottom line


Option 3 different pricing approach
Option 3: different pricing approach

  • Target audience: Youth

    • Loathe contracts

    • Fail credit checks

    • Ideal plan: no contracts, no menus, no hidden fees…

    • How to differentiate itself, and have a positive LTV

    • Look at the factors that affect LTV


Options for lowering acquisition costs
Options for Lowering Acquisition Costs

  • Advertising costs per customer

    • Industry=from $75 to $100

    • Virgin planned ad costs = 60 mil/1mil= $60 (p.5)

  • Handset subsidies:

    • Current industry handset cost: $150 to $300 (assume $225) (p.5)

    • Current industry handset subsidy: $100 to $200 (assume $150) (p.9)

    • Current industry handset subsidy as a %: 67%

    • Virgin’s handset cost: $60 to $100 (assume $80)

    • Assume Virgin’s subsidy around 30% = $30


Acquisition costs1
Acquisition costs

  • Then Virgin’s AC would be just $120 vs. industry average $370

    • Sales commission: $30

    • Advertising per gross add: $60

    • Handset Subsidy $30

    • Total: $120


Consumer friendly plan how to achieve profitability
Consumer friendly plan: how to achieve profitability

  • Break Even analysis: at what per minute price would Virgin break even:

    • Virgin’s monthly ARPU: (200 minutes)*(p), where p=price per minute

    • Monthly cost to serve: .45 * 200 * p

    • Monthly margin: 200p - 90p = 110p

      p > 0.07


Other price points
Other price points

  • What if Virgin charged per minute price comparable to other industry prices, somewhere in between 10 and 25 cents:

    • At 10 cents:

    • At 25 cents:


Virgin s pricing plan what happened
Virgin’s Pricing Plan: What happened

  • A prepaid plan

  • No contracts

  • No hidden charges

  • No peak off peak hours

  • Very low handset subsidies

  • No credit checks

  • No Monthly bills

  • Price: 25 cents per minute for the first 10 minutes; 10 cents/minute for the rest of the day

  • No exact numbers, but churn rate lower than 6%


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