case study: Virgin Mobile USA new commodity pricing

Q.1 Read the case “Virgin Mobile USA: Pricing for the Very First Time” and answer the following questions. When making assumptions, you should use the information that is provided in the case.
(i) a. Calculate the annual retention rate with contracts. (2 points)
b. Calculate the annual retention rate without contracts. (2 points)
c. Suppose that AT&T has a customer base of 20.5 million at the beginning of the year, and suppose further that AT&T is considering switching from providing contracts to not providing contracts. If they switch and would like to keep the same number of customers at the end of the year, how much additional total acquisition costs does AT&T need to pay at the beginning of the year? (3 points)
[Hints for part c: “the same number of customers at the end of the year” refers to the situation with contracts and the initial customer base is 20.5 million at the beginning of the year. So first, you need to figure out under this situation, how many customers will still be with AT&T at the end of the year, say it is X million.
Now in order to have X million customers at the end of the year under the situation without contracts, you might need to change the initial customer base at the beginning of the year (because the retention rates with and without a contract may differ). Therefore, you will need to figure out the new initial customer base, and then figure out the acquisition costs under this hypothetical situation.]
(ii) a. Calculate the average monthly profit margin per customer in the wireless phone market. (2 points)
b. Given this average monthly profit margin, calculate the number of months required to keep a customer in order for a phone company to break-even. (2 points)
(Note that the last sentence of Exhibit 11 (p.19) says “Interest rates were 5%.” You should assume this is an annual interest rate.)
c. Calculate the CLV if a wireless phone company use contracts. (2 points)
d. Calculate the CLV if a wireless phone company does not use contracts. (2 points)
(iii) What would be the per customer acquisition cost for Virgin Mobile? (3 points)
(iv) Suppose that Virgin Mobile decides not to use contracts and simply charge consumers by minute. Given the acquisition cost in Q.3, calculate what Virgin mobile has to charge consumers on a per minute basis so that the break-even time is 17 months.
(2 points)
(v) The case lays out three pricing options. Which option would you choose and why? You need to provide both quantitative and qualitative support for your answer, and also show that your choice can be implemented profitably (you need to show this quantitatively). (10 points)
[Hints for part v: By qualitative reasoning, I don’t mean applying the psychology of pricing. What I mean is that you need to argue for your choice. Imagine that you are making a case to your boss (say, Dan Schulman, the CEO of Virgin Mobile), you need to base your argument on the evidence you have (provided in the case) to make a recommendation. When you present your recommendation, you will need to show him how you tie the evidence together (including calculations such CLV, profitability, etc.). In order to get high marks, your argument has to be logical, convincing, comprehensive, and evidence-based (by “evidence”, I refer to the information given in the case, and any additional analysis that you do based on the information given in the case).
Keep in mind that this is a business case analysis. There is no ONE right answer to it. But any answer that has logical flaws, sloppy, is simply hand-waving, without supporting evidence, etc., will likely land you low marks.]

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