I think it was always going to be difficult for Virgin to break into that market. Being (mainly) more of a leisure airline it wouldn't have as many customers with airmiles and status than perhaps BA. As BA have been operating the domestics for years, I would hazard a guess that the business traveller is far more likely to have racked up loyalty with BA and would therefore have more of an incentive to continue to use BA.
Virgin would effectively have to rely on people who don't want to fly LoCo but also don't want to fly BA or people who want to fly Virgin domestically because they enjoyed the experience long haul. Now add to that people who want the cheapest option in LoCo and you have a very small customer pool.
Maybe if they had tried Little Red as a budget airline they would have had more success? But then that would go against the ethos.