1 / 17

# AEM 4160: Strategic Pricing Prof.: Jura Liaukonyte Virgin CeLL CASE: EXCERCISES - PowerPoint PPT Presentation

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)

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

## PowerPoint Slideshow about 'AEM 4160: Strategic Pricing Prof.: Jura Liaukonyte Virgin CeLL CASE: EXCERCISES' - roxy

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

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

• 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.

• 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”

• But most consumers end up choosing the wrong menu.

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

• 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)

• 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

• The annual retention rate in the industry

= 1-12*0.02=0.76

• Eliminate contracts -> churn rate increases to 6%

• Calculate the LTV:

• \$ 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

• 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

• 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

• 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

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

• Sales commission: \$30

• Handset Subsidy \$30

• Total: \$120

• 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

• 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:

• 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%