Virgin America's Customer-Driven Marketing: A Case Study in Airline Differentiation, Essays (university) of Private law

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SCHOOL OF ECONOMICS & INTERNATIONAL BUSINESS

MARKETING ASSIGNMENT

REPORT

Virgin America: Flight Service

for the Tech Savvy

Hanoi, 8th March 2019

Table of Content

• Table of Content
• A. Presentation Content
  • 1/ Introduction of the company
    •  Profile
    •  History
  • 2/ Industrial analysis (Porter’s 5 forces analysis)
    •  Competitive rivalry
    •  Threat of new entry
    •  Threat of substitutes
    •  The power of buyers
    •  Power of suppliers...............................................................................
  • 3/ First part of the marketing process (S-T-P)
    •  The first two steps- Segmentation and Targeting.................................
    •  The final two steps- Differentiation and Positioning.
  • 4/ Second part of the marketing process (Marketing mix)
    •  Products
    •  Price
    •  Place
    •  Promotion
  • 5/ The content of the chapter
    • strategy.  The major steps in designing a customer value–driven marketing
    •  The customer value – driven marketing strategy of Virgin America
• B. Discussion Questions

companies. Thus the airline industry of America actually failed to please their customers. However, Virgin America VP of Marketing & Communications Luanne Calvert emphasises that the goal of Virgin America is to disrupt the industry and differentiate the airline from all others. The way Virgin America prefers to operate differently is to bring-up the level of customer satisfaction and enrich the flying experience which helped the company stand out of its depressed state in the market.

Since launching in 2007, Virgin America has expanded its domestic network to include Las Vegas, San Diego, Seattle, Portland, Newark Liberty, Washington (Reagan National and Dulles), Boston, Chicago, Philadelphia, Fort Lauderdale, Orlando, Dallas-Fort Worth, Austin, Palm Springs, and Anchorage. International service is offered to Los Cabos, Cancún, and Puerto Vallarta, México.

Virgin America’s first cross-border service was from San Francisco and Los Angeles to Toronto in June 2010. Lukewarm demand quickly ended that foray in favor of Dallas/Fort Worth. Texas was added to the map on December 1, 2010.

In April 2011, Virgin America relocated to the remodeled Terminal 2, sharing gates with American. A reservation system outage late in October that year, during a migration to Sabre’s global distribution system, received wide coverage. Besides reservations, the GDS handles the airline’s Elevate frequent flyer program, flight operations data, and crew scheduling.

In 2012, The Virgin America Loft, its first airport lounge, opened in December at LAX Terminal 3, where drinks, snacks, and WiFi are complimentary. Elevate Gold and Elevate Silver members receive a number of complimentary day passes each year, while those flying Virgin America, or an airline partner, can purchase day access.

In a strange dichotomy, Virgin America has become a multi-award winning major airline but has lost around $700 million in the process. During 2013, Consumer Reports named Virgin America ‘Best U.S. Airline’; the Airline Passenger Experience Association (APEX) awarded Virgin America ‘Best Overall Passenger Experience’ and ‘Best Ground Experience’, and Skytrax named it ‘Airline of the Year’. It carries more than six million passengers a year, some 50% of which are on business trips, has three million members in Elevate, and half a million Twitter followers.

In May 2013, the airline converted $290 million of debt and accrued interest (mostly owed to the Virgin Group) into conditional equity that the debt-holders will own after an initial public offering, providing the stock hits predetermined targets. As a result, interest expense declined to $10 million per quarter through

An IPO, considered possible by year-end, would give the Virgin Group and other shareholders a chance to recoup some of their investment and facilitate more favorable aircraft leasing terms. Currently, the company is held by VAI Partners, a consortium of four US-based investor partnerships holding 75%; the balance is held by the Virgin Group.

How does a startup airline break into one of the most competitive industries in the world, notorious for barriers to entry? For Virgin America, the answer is two-fold—by putting customers first and by targeting the right customer segment. Virgin America has withstood seven uncomfortable years of distinguishing itself from competitors with service and in-flight amenities not seen in the U.S. for a decade or more. Against all odds, Virgin America may be poised to vindicate its business mantra of ‘Love your people, love your guests and show that all the time.’

One of the core values that permeates Virgin America is this: Take care of your people first and profits will follow. In an industry characterized by customer complaints about service, it would seem that a customer-centric approach would be enough to gain a foothold in the market. Therefore, Virgin America found a different competitive hook: by providing exceptional service and amenities that appeal to just a particular slice of airline customers, Virgin America has been able to charge slightly higher fares and still establish a growing base of fiercely loyal patrons.

Indeed, Virgin America has been a hit with fliers. The carrier has won numerous customer-service awards and enjoys a cult-like following in its home state of California, where it has hubs in San Francisco and Los Angeles.

Mirroring the ethos of Branson’s broader Virgin brand, Virgin America brought mood lighting, tech-friendly entertainment and other “hip” features into the mainstream of the U.S. airline industry at a time when most carriers were struggling to survive.

In conclusion, the success of Virgin America is not a surprise, this is the result of drafting a differentiation strategy based on full consideration of the external environment and carefully planning management which has given Virgin America a promising future in US airline industry.

2/ Industrial analysis (Porter’s 5 forces analysis)

Porter’s 5 forces framework is for determining ways to access attractiveness in different organisations. Which includes threat of new entry, the threat of substitutes, the power of buyers, the power of supplier and competitive rivalry (Johnson Scholes Whittington. 2008). Porter’s 5 forces will help Virgin America determine competitive power and maximize profit in the US domestic airline industry.

 Competitive rivalry

Competitive rivalries include different organizations which provide similar products and services in the same market Virgin America mainly focused on domestic market of US, it positioned itself as a low-cost airline, so that the airlines that share a similar positioning became competitors of Virgin America, top three competitors are American Airline, Southwest Airline and Jet Blue Airline. The airline industry involved a high fixed cost, nowadays, passengers are getting more sensitive than before, facing more choices in selecting an airline, since their main competitors are offering low price ticket, there is very little to do to be different. To differentiate itself from other competitors, Virgin America committed high- quality service and it took the first place two times in a row on Airline Quality Rating which means by evaluating the data of flying on time, mishandled baggage, denied boarding and customer complaining, Virgin America has the best performance in last two years.

 Threat of new entry

Opening a new airline needs huge investment capital and strong financial support, a new entrant can be easily caught in a struggled situation of a price war created by experienced airline companies.

Besides, the fact that flight tickets are not cheap, customers tend to prefer the airline company they familiar to, or the company enjoys good reputation for long time in US airline industry.

Moreover, the government set high standards of regulatory barriers for the new entrant. The infrastructure of airports need to meet the standard set by government.

However, Virgin America not only has the strong financial support from Virgin Group and other shareholders, but also carried strong brand awareness as a part of “Virgin Family” when first entered the market is definitely a competitive advantage. Therefore, the threat of new entrant is low.

 Threat of substitutes

Compared with international airlines, domestic airlines suffer more from the threat of substitutes (Airline Industry Analyze, 2015), people who need to travel in domestic areas can choose travel by car, bus, train or even ship. By not choosing airplanes as a travel tool, people are allowed to reduce their carbon footprint and the pollution caused by airplane. But for business travelers, time is money, travel by airplane is way faster and convenient than the others. Virgin America is a business friendly airline, which target market is business travelers, they came up with a set of package, it includes: in-flight wifi, high-quality service, comfortable real leather seat and so on. These factors have increased the threat of substitutes to medium level.

 The power of buyers

In contemporary society, passengers are allow to compare the different prices and amenities offered by different airlines online. Instead of relying on the ticket agency, online ticketing and distribution system made passengers are more independent on choosing their tickets. By selecting a filter, passengers can easily find all the information that concerns them, price sensitive passengers can choose the ticket with a lower price, a passenger who is more concerned on in-flight amenities can choose the airline which offers good amenities, its transparent. By taking American culture into consideration, the low long-term orientation indicates that Americans tend to make a clear definition of what is “good” and “bad”, they are not afraid to speak out, an investigation shows there are 4 out of 19 complains in America are towards airlines.

However, Virgin America provide low cost, high-quality service, from those factors, passengers in US airline industry hold the high power of buyers. it won “Best Domestic Airline” Condé Nast Traveler’s Readers Choice Awards 5 times

40 years old, lives in urban areas, and socializes on the web. The “creative class” encompasses two generational cohorts—the millennials, who were born between mid-1970s and mid 1990s and the Generation X, who were born between mid- 1960s and mid-1970s. Gen X is the main focus of Virgin America because Gen Xers are in a life stage cycle where they travel for work and/or have capital to start entrepreneurial ventures, which require travel. The main reason why its operations are located in San Francisco is to cater to hub of technological start- ups in Silicon Valley.

As a marketing strategy, Mr. Cush aligned the product offering with the primary target market. Because Silicon Valley people are computer-savvy, and need to work and multitask during the flight, Virgin America offers in-flight Internet, gaming platforms, and plugs for electronics. Also, the “creative class” will pay for comfort, luxury and high quality service, which is why Virgin America offers customized leather chairs, ample legroom and a friendly staff. Lastly, the Quantcast demographic analysis reveals that Virgin’s target market is: males and females between the ages of 25-44 who are affluent and have at least a college education, which parallels the “creative class” target market description.

 The final two steps- Differentiation and Positioning.

In these two steps, Virgin America must decide on a value proposition—how it will create differentiated value for targeted segments - “creative class” and what positions it wants to occupy in those business travelers’ mind relative to other competing airlines.

If you’ve ever been on a Virgin America flight, you probably clearly remember your first experience. The neon pink and purple lights welcome you inside the very modern cabin, and I’m pretty sure there’s upbeat music playing as you walk to your seat—making you think this is… different.

But the best part is yet to come. You take a seat, buckle in and the safety video starts. This is no regular safety video. This is art.

Virgin America’s “ About Us ” calls out that they’re a “California-based airline that is on a mission to make flying good again, with brand new planes, attractive fares, top-notch service, and a host of fun, innovative amenities that are reinventing domestic air travel. The Virgin America experience is unlike any other in the skies, featuring mood-lit cabins with WiFi, custom-designed leather

seats, power outlets, and a video touch-screen at every seatback offering guests on-demand menus and countless entertainment options.”

But they didn’t have to tell me that. I felt it the moment I stepped foot in their aircraft and I experienced it throughout the duration of the flight. They delivered on their positioning promise. And that’s the goal with positioning. To make it easy for you to find a happy place in the consumer’s brain—without having them read your About Us description.

"Fun" is not a word that's often associated with air travel, but then, Virgin America isn't like any other airline. Founded with the goal of "making flying good again," the company features new planes, attractive fares, top-notch service, and a host of entertaining, innovative amenities. Virgin America differentiates itself from competitors with a unique customer experience and culture that's fun and friendly.

4/ Second part of the marketing process (Marketing mix)

Guided by marketing strategy, Virgin America designs an integrated marketing mix made up of factors under its control—product, price, place, and promotion (the four Ps).

 Products

Virgin America offers low-cost travel with high-quality service, providing premium entertainment and productivity options while being trendy and hip.

To fulfill the low cost brand promise, virgin follows a low-cost airline business model, having only one fleet type, the Airbus A320. And each brand new when it went into service, minimizing the unexpected delays due to maintenance and repairs. Following Southwest, the market leader on low cost, Virgin America uses a point-to- point route networks and doesn’t add many connections.

Travel can be stressful, from making the initial reservations through flying and follow-up. Yet Virgin America goes out of its way to make customer experience excellent. With self-service and assisted service options that instantly alleviate frustration, travel becomes fun – as it should be.

Virgin America offers a 9-inch touch-screen entertainment and productivity platform because, JetBlue, the leader in comfort and premium entertainment offers it. This touch-screen platform uses the Red™ system, which is the most

Main Cabin offers 32in (0.81m) of pitch and 17.7in width with power-ports and adjustable headrests. RED is available with free live satellite television, pay- per-view on demand movies and on-demand television shows, and a small selection of free games (with a larger selection of games for purchase). Passengers may also purchase snacks, meals, and alcoholic beverages from their seats via RED.

Virgin America created a stir in social media outlets last October when it released a new safety briefing video set to song and dance.

Lastly, the flight attendants are meticulously trained to provide a friendly and consistent service.

 Price

Virgin’s pricing is in the lower-end of the spectrum, because its price offering is similar to Southwest, the leader in low-cost air travel. Virgin America offers airlines tickets from San Francisco International Airport to Los Angeles International Airport for $69 dollars.

Also, Southwest offers tickets for the same route at the same price, $ dollars. As we learned in class, the airline industry is characterized by high fixed cost and very low variable cost, which is why airlines aim to maximize revenues by engaging in price discrimination whose main categories are: Main Cabin, Main Cabin Refundable, Instant upgrade to Main Cabin Select, Main Cabin Select, First Class, and Refundable First Class. Virgin America offers fundable tickets mainly for business travelers because this kind of ticket allows for flexibility. This feature appeals to businesses because business meetings are often rescheduled or because other coworker could fly instead. On the contrary, leisure travelers rarely reschedule vacations.

Also, there is three price points: Main Cabin, Main Cabin Select, and First Class, which correspond to three different locations in the airplane and an increasing amount of amenities. For example, the Main Cabin offers for-pay entertainment, for-pay food and drinks, and no free luggage check in. In contrast, First Class has exclusive reclining chairs, and unlimited free entertainment, food, drinks, and checked bags.

 Place

Virgin America started its flight operations on August 8, 2007 with an aim to provide low-cost travel with high-quality service between major cities across the east and west coasts, such as New York City, San Francisco and Los Angeles.

By 2012, Virgin America has expanded its travel destinations to 13 cities in the U.S., such as Seattle, Portland, Dallas, and Philadelphia. The reason why Virgin flies to these destinations is because these destinations are major metropolitan cities where the target audience, the “creative class”, frequents for business purposes.

As of April 24, 2018, prior to the airline's merger with Alaska Airlines, Virgin America served 30 destinations, consisting of 27 domestic destinations and three destinations in Mexico.

Virgin America’s old website features a clean look, with cool purples and reds as its main colors (similar to those you will find inside and outside of the company’s airplanes). Whether you are looking to book a flight, check in, or manage your account, you can quickly get to where you want to go.

However, because of being bought out by the Alaska Air Group, all Virgin America routes and services were integrated into Alaska Airlines in 2018. April 24 is the last day fliers can book flights on Virgin America’s site. Starting on April 25, customers will be redirected to Alaska’s site, and all flights will be booked as Alaska ones.

 Promotion

Because Virgin America’s target market is the “creative class”- young, urban, tech-savvy professionals using smartphones to frequent social media sites, such as Twitter and Facebook—the best place to reach them is online. For promotions and advertising, Virgin America is mainly active in social networking sites: Twitter and Facebook. Twitter is the main promotional vehicle for Virgin America. It aims to attract new customers in the tech-savvy market with Promoted Tweets, which are advertisements that appear in the feed of people who aren’t following Virgin. This is a good strategy because even though Virgin America has over 300,000 followers, it can increase its revenues via more customers. Moreover, Virgin did a Twitter promotion through Promoted Tweets called “Fly Forward, Give Back”, which resulted in the fifth most successful day in ticket sales.

 The major steps in designing a customer value–driven marketing strategy.

A customer value–driven marketing strategy begins with selecting which customers to serve and determining a value proposition that best serves the targeted customers. It consists of four steps:

 Market segmentation is the act of dividing a market into distinct groups of buyers who have different needs, characteristics, or behaviors and who might require separate marketing strategies or mixes.

 Once the groups have been identified, market targeting evaluates each market segment’s attractiveness and selects one or more segments to serve.  Differentiation involves actually differentiating the market offering to create superior customer value.  Positioning consists of positioning the market offering in the minds of target customers. A customer value–driven marketing strategy seeks to build the right relationships with the right customers.

a. The major bases for segmenting consumer and business markets:

There is no single way to segment a market. Therefore, the marketer tries different variables to see which give the best segmentation opportunities. For consumer marketing, the major segmentation variables are geographic, demographic, psychographic, and behavioral:

 In geographic segmentation , the market is divided into different geographical units, such as nations, regions, states, counties, cities, or even neighborhoods.  In demographic segmentation , the market is divided into groups based on demographic variables, including age, life-cycle stage, gender, income, occupation, education, religion, ethnicity, and generation.  In psychographic segmentation , the market is divided into different groups based on social class, lifestyle, or personality characteristics.  In behavioral segmentation , the market is divided into groups based on consumers’ knowledge, attitudes, uses, or responses concerning a product.

Business marketers use many of the same variables to segment their markets. But business markets also can be segmented by business demographics (industry, company size), operating characteristics, purchasing approaches, situational factors, and personal characteristics. The effectiveness of the segmentation

analysis depends on finding segments that are measurable, accessible, substantial, differentiable, and actionable.

b. Identify attractive market segments and choose a market targeting strategy

 Firstly , to target the best market segments, the company evaluates each segment’s size and growth characteristics, structural attractiveness, and compatibility with company objectives and resources.  Secondly , it have to choose one of four market-targeting strategies—ranging from very broad to very narrow targeting. The seller can ignore segment differences and target broadly using undifferentiated (or mass) marketing. This involves mass producing, mass distributing, and mass promoting the same product in about the same way to all consumers. Or the seller can adopt differentiated marketing—developing different market offers for several segments. Concentrated marketing (or niche marketing) involves focusing on one or a few market segments only.  Finally , micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. Micromarketing includes local marketing and individual marketing. Which targeting strategy is best depends on company resources, product variability, product life-cycle stage, market variability, and competitive marketing strategies.

c. Differentiate and position products for maximum competitive advantage.

Once a company has decided which segments to enter, it must decide on its differentiation and positioning strategy. The differentiation and positioning task consists of three steps:

 Identifying a set of possible differentiations that create competitive advantage  Choosing advantages on which to build a position  Selecting an overall positioning strategy

The brand’s full positioning is called its value proposition—the full mix of benefits on which the brand is positioned. In general, companies can choose from one of five winning value propositions on which to position their products:

 More for more

 More for the same

 The same for less

 Less for much less

 More for less

Differentiation involves actually differentiating the firms’ market offering to create superior customer value. And Virgin America did great job in this part of the strategy.

Offering unique amenities in the airline business is a challenge for any company. But from the beginning, the Virgin America experience was designed with its target customer in mind. Custom-designed leather seats are roomier and more comfortable than average coach seating. And that mood lighting? Not only does it bathe the aircraft cabin in an appealing purplish glow, it automatically adjusts to one of 12 different shades based on outside light.

To appeal to tech gurus, Virgin America focused on equipping its planes with the latest hardware and software. From day one, Virgin was the only domestic carrier to offer fleetwide in-flight Wi-Fi—a distinction that it maintains to this day, even as it has stayed ahead of the competition by upgrading the network to ensure the fastest in-flight speeds available. Every seat has its own power outlet, USB port, and 9-inch video touchscreen with a QWERTY keyboard/remote control.

That touchscreen provides access to the most advanced entertainment and information system in U.S. skies. Virgin America’s proprietary Red system allows each guest to choose on-demand movies, TV programs, music, or video games. Red also allows patrons to track their flight on interactive Google Maps, engage in seat-to-seat chat with other customers, and order food and drinks for themselves or anyone else on board. It’s a system designed to give passengers a feeling of control during an experience that is otherwise mostly out of their control.

Virgin America was also one of the first to truly jazz up its safety video, with competitors following suit when they realized it was the best way to actually get people to take notice of it. When the company started operations, it delighted customers with a safety video like none other—an animated short featuring a techie nun and a matador with his bull. Posted online as well, the video racked up millions of views and cemented Virgin America’s image as a company that could find creative alternatives to just about anything, even a federally mandated reminder to wear seatbelts.

With topnotch guest service, beautifully-designed cabins and three classes of service including an international grade First Class cabin, the airline offers

business travelers an "office in the sky," that allows them to stay connected, productive, comfortable and “fly like a boss every time they travel."

B. Discussion Questions

7-19. Using the full spectrum of segmentation variables, describe how Virgin America segments and targets the market for airline services

Virgin America segment and target the market for airline services by using the four approaches to market segmentation:

 Geographic factors:

They next targeted a specific client by geography, specifically the tech consumer in Silicon Valley and San Francisco. That is the reason why the company’s headquarters are located in Burlingame, California, just a few short miles from San Francisco airport.

 Demographic and psychographic factors:

Virgin America narrowed in onto a specific demographic, tech-savvy professionals with age ranges from 25 to 40 years old who are affluent, live in urban areas, have at least a college education and use smartphones and laptop frequently.

To appeal to this demographic they equipped their planes with the latest hardware and software to keep the techy entertained. To do this, they provide their clients with in-flight wifi, a USB port, and nine-inch video touchscreen with a remote. Those both go hand in hand with a psychographic target method Virgin uses.

 Behavioral factors:

Virgin America targeted a segment of fliers who are usually busy and travel on plane for the purpose of business trips, so they are willing to pay more for exceptional service and amenities to feel more relax and comfortable or to close a deal, meet a deadline or just catch up on email while flying. That is the differentiated benefit that this kinds of customers seek.

7-20.Which market targeting strategy is Virgin America following? Justify your answer.