2) "Virgin Mobile USA: Pricing for the Very First Time Consider a Virgin Mobile customer on a 180-minutes-per-month prepaid plan, priced at $0.20 per minute. Based on its differentiated offering, Virgin Mobile has estimated it will be able to aca 1.5 million subscribers in its first year. Customer surveys suggest the level of satisfaction with Virgin Mobile's offering will be high. As a result, Virgin Mobile's monthly churn rate for the pre plan is expected to be 3.596. a % of its handset cost, Virgin Mobile has decided that its subsidy rate will be 3/4 the subsidy rate. All other relevant numbers are as stated in the case on this plan. Wh ne a carrier's "subsidy rate" as its handset subsidy expressed as . Calculate the LTV of a custome at is the time required for Virgin Mobile to break even on its acquisition cost? Calculating Lifetime Value (LTV) for Cellular Subscribers Exhibit 11 In general, lifetime value (LTV) for a customer is calculated as follows: where N = the number of years over which the relationship is calculated M- the margin the customer generates in year a the retention rate (r-is the survival rate for year a) i- the interest rate AC the acquisition cost Source: Adapted from "Customer Profitability and Lifetime Value, HBS Note 503-019 In the cellular industry, margin is relatively fixed across periods. Therefore, one can simplify the above expression by assuming an infinite economic life (ie, letting N-), which leads to: M LTV = Monthly Margin-average revenue per unit per month (ARPU)-monthly cost to serve (CCPu, or cash cost per user) The components of AC were advertising per gross add, the sales commission paid per subscriber, and the handset subsidy provided to the subscriber CCPU consisted of customer-care costs, network costs (the cost of using Sprint's network), IT costs, and overhead. Industry analysts estimated that Virgin Mobile's CCPU would be constant at 45% of revenues during its first year of operations, since most of Virgin's costs were variable. Monthly churn was estimated to be 2% for customers under contract and 6% for prepaid customers." Interest rates were 5%. "Numbers disguised for competitive reasons 2) "Virgin Mobile USA: Pricing for the Very First Time Consider a Virgin Mobile customer on a 180-minutes-per-month prepaid plan, priced at $0.20 per minute. Based on its differentiated offering, Virgin Mobile has estimated it will be able to aca 1.5 million subscribers in its first year. Customer surveys suggest the level of satisfaction with Virgin Mobile's offering will be high. As a result, Virgin Mobile's monthly churn rate for the pre plan is expected to be 3.596. a % of its handset cost, Virgin Mobile has decided that its subsidy rate will be 3/4 the subsidy rate. All other relevant numbers are as stated in the case on this plan. Wh ne a carrier's "subsidy rate" as its handset subsidy expressed as . Calculate the LTV of a custome at is the time required for Virgin Mobile to break even on its acquisition cost? Calculating Lifetime Value (LTV) for Cellular Subscribers Exhibit 11 In general, lifetime value (LTV) for a customer is calculated as follows: where N = the number of years over which the relationship is calculated M- the margin the customer generates in year a the retention rate (r-is the survival rate for year a) i- the interest rate AC the acquisition cost Source: Adapted from "Customer Profitability and Lifetime Value, HBS Note 503-019 In the cellular industry, margin is relatively fixed across periods. Therefore, one can simplify the above expression by assuming an infinite economic life (ie, letting N-), which leads to: M LTV = Monthly Margin-average revenue per unit per month (ARPU)-monthly cost to serve (CCPu, or cash cost per user) The components of AC were advertising per gross add, the sales commission paid per subscriber, and the handset subsidy provided to the subscriber CCPU consisted of customer-care costs, network costs (the cost of using Sprint's network), IT costs, and overhead. Industry analysts estimated that Virgin Mobile's CCPU would be constant at 45% of revenues during its first year of operations, since most of Virgin's costs were variable. Monthly churn was estimated to be 2% for customers under contract and 6% for prepaid customers." Interest rates were 5%. "Numbers disguised for competitive reasons