a. Calculate the Customer Lifetime Values for Virgin if it plans to launch only Contract based plans in the market with a handset subsidy of $25 and fixed per minute usage charge of $ .20. b. Should Virgin go with a contract option because of higher customer lifetime value? Why or why not? What is the assumption that one would be making if one chooses option A just on basis of higher customer lifetime value? Would that assumption be realistic? (6 points) If Virgin pursues option 1 then it will clone the industry pricing structure while if it pursues option 2 then it will have similar pricing structure as industry but with lower prices. In evaluating each of the options in the case we consider the time taken by Virgin to break even with respect to a customer and the customer lifetime value for the customer. For the analysis of option 1 and option 2 we first only consider the acquisition cost and margins for other industry players and not for Virgin. If we do the same analysis for Virgin, then its customer lifetime value may be higher because its acquisition costs are lower than competition. (a) Time taken for a customer to reach break-even (or recover the acquisition cost), Acquisition Costs incurred on the customer Break Even months = Margin per month from the customer Margin per month from the customer = (52 - 30) = $ 22 per month (Based on information in case) Acquisition Costs incurred on the customer = $370 (Based on information in case) Break Evenmonths = 17 months Customer Lifetime Value (with contract and without contract) M LTV = -- AC 1-r+i Acquisition Costs incurred on the customer = AC = $370 (Based on information in case) Margin per month from the customer = M = (52 - 30) = $ 22 per month (Based on information in case) r = retention = (1 - churn) = 1 - 0.24 = 0.76 (for contract) 1 -0.72 = 0.28 (for no contract) i = 5% = 0.05 (Based on information in Exhibit 11) (Note: We are not considering monthly compounding for the purpose of simplification.) Thus, LTV (contract) = $540 LTV (no contract) = -$27.14 Clearly, having no contract leads to negative lifetime value, hence other companies are using contracts. a. Calculate the Customer Lifetime Values for Virgin if it plans to launch only Contract based plans in the market with a handset subsidy of $25 and fixed per minute usage charge of $ .20. b. Should Virgin go with a contract option because of higher customer lifetime value? Why or why not? What is the assumption that one would be making if one chooses option A just on basis of higher customer lifetime value? Would that assumption be realistic? (6 points) If Virgin pursues option 1 then it will clone the industry pricing structure while if it pursues option 2 then it will have similar pricing structure as industry but with lower prices. In evaluating each of the options in the case we consider the time taken by Virgin to break even with respect to a customer and the customer lifetime value for the customer. For the analysis of option 1 and option 2 we first only consider the acquisition cost and margins for other industry players and not for Virgin. If we do the same analysis for Virgin, then its customer lifetime value may be higher because its acquisition costs are lower than competition. (a) Time taken for a customer to reach break-even (or recover the acquisition cost), Acquisition Costs incurred on the customer Break Even months = Margin per month from the customer Margin per month from the customer = (52 - 30) = $ 22 per month (Based on information in case) Acquisition Costs incurred on the customer = $370 (Based on information in case) Break Evenmonths = 17 months Customer Lifetime Value (with contract and without contract) M LTV = -- AC 1-r+i Acquisition Costs incurred on the customer = AC = $370 (Based on information in case) Margin per month from the customer = M = (52 - 30) = $ 22 per month (Based on information in case) r = retention = (1 - churn) = 1 - 0.24 = 0.76 (for contract) 1 -0.72 = 0.28 (for no contract) i = 5% = 0.05 (Based on information in Exhibit 11) (Note: We are not considering monthly compounding for the purpose of simplification.) Thus, LTV (contract) = $540 LTV (no contract) = -$27.14 Clearly, having no contract leads to negative lifetime value, hence other companies are using contracts