Wireless Carrier VoiceDirect Cut Price to Match Competitors

Case Type: business competition; business turnaround.
Consulting Firm: Bain & Company first round full time job interview.
Industry Coverage: telecommunications & network.

Case Interview Question #00743: Our consulting firm is hired by the CEO of VoiceDirect. VoiceDirect is an American regional carrier which owns and operates the six largest wireless telecommunications network in the United States. Headquartered in Chicago, Illinois, they serve about 4 million customers in 26 U.S. states as of year 2014.

The client VoiceDirect has been packaging and reselling excess capacity on their cellular network to highly fragmented prepaid phone card buyers. Over the past few years, VoiceDirect has lost significant market share to their competitors. What is happening here, and how can you help VoiceDirect turn around the down trend?

Additional Information:

Who are the client’s competitors? Only five other major players in this market (Verizon Wireless, Sprint, AT&T, T-Mobile, U.S. Cellular)

What is their pricing? VoiceDirect charges five cents per minute, while all five other competitors charge three cents.

Possible Answer:

First, ask the candidate to calculate VoiceDirect’s percentage price premium

(5 cents – 3 cents)/3 cents ~= 67%

The price premium is equal to 67%

The candidate should first draw a diagram to understand the market. The cellular market in the U.S. is divided into Contract (or pay after usage) and Prepaid minutes. We are not analyzing the “Contract” market segment. The competitors’ strategy is to sell their excess capacity to the prepaid market. In light of current economy conditions and with the assumption that people who rely on prepaid cards are mostly those who have difficulty getting Contracts due to a bad credit history, this segment is growing.

The candidate then should ask what is the excess capacity for VoiceDirect (we can assume near infinite capacity) as well as demonstrate understanding that the marginal cost for providing this capacity is zero.

At this stage the candidate should try to evaluate the issues behind the loss of market share. After computing the client VoiceDirect’s price premium (67%), the candidate should establish three hypotheses.

• There is no differentiation that justifies the price premium, technological (quality of the wireless signal), geographical (geographic availability), customer service, etc.
• There is differentiation but it is not perceived by the market.
• There is differentiation, the market perceives it but because of its place on the low end of the segment, people are not willing to pay for it.

For scenarios (1) and (3), a possible strategy would be to match the competitors’ prices, go from five cents/minute to three cents/minute. At this point, the candidate should argue that if the client VoiceDirect’s prices for “Contract” cellular service are larger than 3 cents/minute, there is the possibility of cannibalization of their customer base.

For scenario (2), the candidate should suggest possible marketing initiatives (a test to the candidate’s creativity). Possible examples are:

• joint campaigns with powerful brands offering prepaid phone cards (remember the marginal cost is zero);
• offering phone cards with a free cellphone, offering supplemental “Contract” phone cards;
• two-for-one campaigns;
• offering prepaid phone cards in exchange for competitors’ cards (but need to check if it is possible in light of regulatory restrictions)

At this point the interviewer should ask the candidate for other possible strategies (restart the top-down process)

Can we enter into a contract at a set price to provide minutes to major prepay providers? The answer is no, Virgin Mobile already has an agreement with one of our competitors. The rest of the market is very fragmented.

Can we vertically integrate and repackage the minutes ourselves, creating our own prepay brand? Or, is Virgin Mobile’s presence too strong to compete?

Does the price premium reflect down to the consumer level, or do the repackagers (gas stations, Wal-Marts, etc) eat the price delta? Would it make sense to renegotiate with repackagers to lower their margins?

Quantitative Analysis

• Price premium percentage (67%).
• The marginal cost of providing extra minutes (it’s zero)

Key Takeaways

Even though five cents versus three cents seem small, the resulting 66% price premium becomes a major issue as purchase volumes go up. It costs VoiceDirect nothing to provide more minutes, as capacity is unlimited. Providing that there will be no cannibalization of their postpaid customer base, there is only upside in matching the competitors’ prices.

Recommended Conclusion

The client should immediately cut their price to at least the competitor level for repackaging purposes. Assess whether it will be effective for VoiceDirect to go into prepay repackaging market. This is important since people with bad credit and people under age 18, for example, cannot enter into Contracts with VoiceDirect.

At this point, if there is still time, ask the candidate to estimate the impact of his or her recommendation, in percentage changes in demand. Tell the candidate that elasticity for these type of products is approximately -1.25. The candidate should explain what Elasticity is and why it is negative. Elasticity ε= (ΔDemand/Demand) / (ΔPrice/Price)