Omnitel Pronto Report V2

Fall

2014

Omnitel Pronto Italia case study Submitted to: Prof. Gurprit Kindra Course: STRATEGIC MARKETING MANAGEMENT MBA 5320

Submitted By:

Likaa Abu Abbadi (7516538) Ankit Joshi

(7936530)

Omotola Omopo

(7557324)

Vikyath Rai

(7772546)

Obaro Ojarikre

(7449585)

STRATEGI C M ARKETI NG M ANAGEMENT M BA 5320

CONTENTS 1.Introduction: ...................................................................................................................................... 3 2.Basic Case Analysis:.......................................................................................................................... 4 3.Problem Statement: ............................................................................................................................ 4 4.Analysis of Alternatives: ................................................................................................................... 6 4.1 LIBERO: ..................................................................................................................................... 6 4.2 Caio’s plan ................................................................................................................................ 10

4.3 Numerical Comparison Between Two plans. ........................................................................... 12 5. Recommendations........................................................................................................................... 15

TABLE OF FIGURES Figure 1: Expected market share for Omnetil Company in 1998 and 2000 for LIBERO and Caio's proposal............................................................................................................................................... 13 Figure 2: Expected Omnitel's monthly income by the end of ther 1998 and 2000 by following LIBERO and Caio's plan . .................................................................................................................. 13 Figure 3:LIBERO plan SWAT analysis. ............................................................................................ 14

LIST OF TABLES Table 1 :LIBERO monthly revenue in 1996 ......................................................................................... 8 Table 2: Estimated Omnitel’s new subscribers by 1998 with LIBERO ............................................... 8 Table 3:Estimated income with new subscribers by 1998 with LIBERO ............................................ 9 Table 4: Estimated Omnitel’s59 new subscribers by 2000 with LIBERO ........................................... 9 Table 5: Estimated income with new subscribers by 2000 with LIBERO ........................................... 9 Table 6: monthly revenue in 1996 ...................................................................................................... 11 Table 7: Estimated Omnitel’s new subscribers by 1998 with Caio’s plan ......................................... 11 Table 8:Estimated income with new subscribers by 1998 with Caio’s Plan ...................................... 11 Table 9: Estimated Omnitel’s new subscribers by 2000 with Caio’s plan ......................................... 12 Table 10: Estimated income with new subscribers by 2000 with Caio’s plan.................................... 12

2/page Omni tel Pr onto I tali a case study


OMNITEL PRONTO ITALIA 1. Introduction: In 1993, the European commission passed a legislation stating that that all state owned cellular/telephone companies must pave the ways for new companies to venture into the cellular business by January 1998. Omnitel entered the Italian cellular industry in early 1994. Later that same year there were able to successfully obtain their GSM license and enter the Italian cellular industry as the first competitor to the state owned TIM(Telecom Italia mobile) which had the entire monopoly until then in this industry. Omnitel had to obtain license by paying Lit.750 billion, whereas TIM had the license at no initial licensing fee. Due to competition in the industry with the entry of a new company the cellular penetration in Italy was around 7.6% in 1996 and was expected to rise to around 22% in 2000. Once Omnitel entered into the cellular industry, they started offering prices similar to TIM. But they also focused on providing high levels of customer service to their consumer through which they could distinguish themselves from the competition. So the superior customer service quality was the company competitive advantage with the polite operator with personal assistance, minimum customer waiting list, and one-stop calling without transfers. Omnitel had based their strategies to keep a low churn rate, which is a major cost issue for telecom industry. The company's vision was to make cellular phones indispensible like wrist watches. Omnitel in the first 6 months gained a market share of 4% with around 180,000 subscribers. Due to high quality customer service, the customers were very satisfied but the company did not meet the expected market share it targeted.



2. Basic Case Analysis: Omnitel have gained a market share 4%, it had based its strategy on good customer service but hasn't yet been able to come through with sufficient subscribers. Omnitel main focus currently is to differentiate the company in the market and increase both the market share and revenue. Fabrizio Bona, the marketing director has developed an idea based on market research that was conducted among the Italian customers. He developed a strategy to eliminate the monthly fee and only charge subscribers for their calls, while still continuing to provide high customer service. The new proposal put forth was called LIBERO. Bona has to now present LIBERO to his CEO Francesco Caio. However the CEO is contemplating on handset subsidies to subscribers in order to attract new customers who sign contracts for certain period of time by offering same prices or existing plans on tariff. After their initial market analysis, LIBERO proposal has a greater opportunity for Omnitel to differentiate itself in the market and increase its revenue and market share. TIM also might develop a similar plan and hence might lead to riskier option in the long run. Also, Caio Plan of proposal of subsidised handset may not be the right idea, as the Italian demographic may not be enticed to having subsidised phone and they would like to buy the product.

3. Problem Statement: The basic problems that Omnitel had was that the service offered did not live to its expected level. Hence they decided to conduct a market research in order to understand the customer's needs and opinions about the cellular industry. The research showed that the subscribers were very happy with their customer service. However majority of the subscribers who were involved in the research were unsatisfied with paying monthly fees and call tariff. Hence Bona came up with the new pricing strategy which mainly focuses on terminating monthly fee.



The new proposal named "LIBERO" which means free in Italian. In this plan the subscribers can use their cellular phones and not pay a monthly fee and will only pay as per their usage. The tariff was specified as .Lit1595 during peak hours and Lit.195 during off peak hours. Bona had expected this would lead to an increased usage from 188 min to 193 min per month for a customer. On other hand, it would be really hard for Omnitel to cancel the existing monthly fee due to a few reasons 

Firstly TIM would view this as reduction in price and Omnitel would not want to be involved in any price war with TIM.



Secondly we can't be assured of higher usage from the subscriber once the monthly fee has been cancelled.



Also the dealers would have to be paid in advance, as they were paid from the monthly fee.

In addition to the changes in price, Bona also wanted to have new stores launched in strategic locations. Also he wanted his proposal to be supported with the advertising campaign with budget of Lit.40 billion ($25 million). This is significant as they will use twice TIM's budget during the same time. Francesco Caio, Omnitel's CEO, had an idea of providing handset subsidies to customer in order to sign a contract for a certain period and pay monthly fee based on it. The results of the market research showed that signing of contracts does not assure us of subscriber loyalty and they may just disconnect once the contract is over. Moreover offering subsidies to Italian people is not that attractive. The main point here which of the two options will put the company in right track to achieve their goal.



4. Analysis of Alternatives: To achieve company's vision and goal, both plans should be analyzed carefully and accurately. Also the results of the market research need to be reflected upon for a better understanding of the market. The first plan is LIBERO which has been proposed by Fabrizio Bona, the marketing director. The plan proposes to eliminate the monthly fee. The other plan is proposed by CEO of Omnitel Francesco Caio. This plan simply would provide subsidized handsets to customers to sign a contract with the company but the tariff will remain the same.

4.1 LIBERO:

According to the market research, the majority of the people who participated were unsatisfied by paying the fixed monthly fee and they preferred to be charged whenever they used their cell phones. They are willing to pay up to Lit.200 per minute if the monthly fee was neglected. Moreover, the research showed that the Omintel subscribers are fully satisfied with high quality customer service they are receiving. From these outcomes, Bona developed a plan, LIBERO, based on the idea of no monthly fee with increasing the tariff a little bit within the acceptable range. Therefore, the peak tariff is set to be Lit.1595 instead of Lit.1524 and the off peak tariff will Lit.195 instead of Lit.170. With this plan, the average usage of the cell phone was anticipated to be raised up to 193 minute per subscriber instead of 188 minute per subscriber. In addition to that, Lit.40 billion will be spent on advertisement within three months which is double the TIM’s budge t for the same period of time. However, if LIBERO is to be approved then dealers’ commissions have to be paid in

advance. Beside the Lit.40 billion that will be spent on advertisement, the company had a previous loss of Lit.128 billion. So, a total loss of Lit.168 should be taken in consideration in the calculation.



If we assume, Average monthly usage /customer = 193 min (155 off peak + 38 peak)

So, The revenue of 1 customer / month = (155*195) + (38*1595) = Lit. 90,835 In this case, we can cover up the total loss by obtaining additional 154,130 subscribers for one year. The advertisement expenses will be covered by 36,600 subscribers; 36,700 customer *90,835/subscriber/month *12 months= Lit.40, 003,734,000

And 117,430 subscribers will be covering the previous loss; 117430 customer*90,835/subscriber/month*12 months=Lit. 128,001,048,600.

Or we can repay the total loss within two years by signing 77,065 subscribers for 24 months. 77065 customers* 90,835/subscriber/month*24 months= Lit .168, 004,782,600

In the worst case scenario if we remain with the same customer number (180,000) we will cover up the total 168 billion in about 11 months. 180,000 subscribers*90,835/subscriber/month * 11 months=Lit. 179,853,300,000.

The number of subscribers is expected to be 8,050,000 in 1998 with 14.1% penetration rate and is expected to be 17,350,000 by the year 2000 with penetration rate of 30.4%. The number of customers in the Italian cell phone market by the end of the first quarter of 1996 is 5,220,000 and the penetration rate is about 7.5%. That means the penetration rate will increase by about 22.8% from 1996 to 2000. So, the number of new cell phone subscribers is about 2830000 by 1998 and 12130000 by 2000.



The result of the conjoint analysis indicated that 30% of the prospects customers are concerning about the cost and they strongly agree on having cellular phone to be reached all the time. The service was the most important category for 33% of the prospects customers and they are unsatisfied by the telecom fixed. Both 30% and 33% have a good attitude toward private operator. If we assume that 70% of the 33% who are service sensitive customers will subscribe for Omnitel and 40% of the 30% who are cost sensitive customers will join Omnitel as well. This way, it is expected to have 993,330 new customers by the end of 1998 and 4,257,630 new customers by 2000. Therefore, the market share is anticipated to be 14.57% in the year 1998 and 25.57 % in the year 2000. Table 1 shows the monthly revenue in LIBERO in 1996. Table 2 and table 3 show the expected calculations of the year 1998. Tables 4 and 5 show the estimated calculations for 2000. Table 1 shows the monthly revenue in LIBERO in 1996. Table 2 and table 3 show the expected calculations of the year 1998. Tables 4 and 5 show the estimated calculations for 2000.

LIBERO Plan:

Currently No. of Customer

Peak hour 1595 25 13 38 0 180000

Avg. monthly bill/ Customer

90835

Calling Time Price Avg. Min (incoming) Avg. Min (outgoing) Total Monthly Fee

Off Peak 195 75 80 155 4% of the Market share

Table 1: LIBERO monthly revenue in 1996

Estimates (End 1998) Estimated Subscribers Growth New Subscribers to the market 33% care about the Service 30% have cost sensitive

8,050,000 2,830,000 933,900 849,000 Total

Total No of Subscribers

Omnitel conjoint

653,730 339,600 993,330 1,173,330

Table 2: Estimated Omnitel’s new subscribers by 1998 with LIBERO



Estimates months

the income (End 1998) 19 Total/19 months


90,835


1,173,330

Avg. Total/month

2,025,009,180,450

106,579,430,550

Ads. Cost

40,000,000,000

2,105,263,158

Total incoming

1,985,009,180,450

104,474,167,392

Table 3: Estimated income with new subscribers by 1998 with LIBERO

Estimates (End 2000) 17,350,000 12,130,000 Omnitel conjoint 4,002,900 2,802,030 3,639,000 1,455,600

Estimated Subscribers Growth New Subscribers to the market 33% care about the Service 30% have cost sensitive

Total

4,257,630


4,437,630

Table 4: Estimated Omnitel’s59 new subscribers by 2000 with LIBERO

Estimates months

the income (End 2000) 34 Total/34 months


90,835


4,437,630

Avg. Total/month

13,705,132,115,700

403,092,121,050

Ads. Cost

40,000,000,000

1,176,470,588

Total incoming

13,665,132,115,700

401,915,650,462

Table 5: Estimated income with new subscribers by 2000 with LIBERO

In addition, the conjoint analysis illustrated that the monthly cost was the reason for 33% of the rejecters who are not subscribed to any cell phone service. In this case, LIBERO plan can be appealing for them and it can be a great opportunity to increase the number of Omnitel’s customers.

Assuming that LIBERO is successful, the churn rate of Omnitel is likely to decrease as new customers come in and current customers stay with the company. Meanwhile TIM’s churn

rate will increase as some of their customers will join Omnitel. Also, Omnitel’s huge advertising campaign will attract more new customers to the company. However, TIM will most likely fight back by either reducing its prices or offering similar services or promotions, and the handset subsidies incentives will disappear. So, the churn rate might increase in the long term. 9/page Omni tel Pr onto I tali a case study


4.2 Caio’s plan

Omnitel’s chive executive officer, Francesco Caio, is partial to the idea of providing handset

subsidies to customers in order to attract them to sign contracts. By doing that, the monthly fee will cover up the dealers’ commissions, which is Lit.40, 000 per subscriber, and monthly

revenue is guaranteed. The average cost of the handset subsidies is Lit.700, 000 to Lit.1.2 million. By following this plan, Average monthly usage /customer = 188 min (150 off peak + 38 peak)

The revenue of 1 customer / month = (150*170) + (38*1524) + 10, 000 monthly fee = Lit. 93,412

The revenue of 1 customer / year = (93,412 monthly revenue*12 months) – 40,000 dealer commission – 700,000 handset = Lit.380, 944

Thus, Having 336,007 customers in one year will cover up the total loss of Lit.128 billion. Or in two years, we have to obtain168, 004 customers. In the worst case scenario if we remain with the same customer number (180,000) we will cover up the total 128 billion in about 8 months. As it mentioned in the previous section, the number of subscribers is expected to be 8,050,000 in 1998 with 14.1% penetration rate and is expected to be 17,350,000 by the year 2000 with penetration rate of 30.4%. The number of customers in the Italian cell phone market by the end of the first quarter of 1996 is 5,220,000 and the penetration rate is about 7.5%. That means the penetration rate will increase by about 22.8% from 1996 to 2000. So, the number of new cell phone subscribers is about 2,830,000 by 1998 and 12,130,000 by 2000.



The result of the conjoint analysis indicated that 33% of the prospects customers are concerning about the service and 22% are concerning about the special tariff. Let’s assume that 70% of the 33% who are service sensitive customers will subscribe for

Omnitel and 40% of the 22% who are concerning about special tariff will join Omnitel as well. This way, it is expected to have 902,770 new customers by the end of 1998 and 3,869,470 new customers by 2000. Therefore, the market share is anticipated to be 13.45% in the year 1998 and 23.34% in the year 2000. Tables 6 to 10 show the monthly revenue in 1996 and the expected calculations of the years 1998 and 2000.

Caio’s Plan :

Market Size in June 1996

Peak hour 1524 25 13 38 10000 180000 5220000


93412

Calling Time Price Avg. Min (incoming) Avg. Min (outgoing) Total Monthly Fee Currently No. of Customer

Off Peak 170 75 75 150 4% of the Market share

Table 6: monthly revenue in 1996

Estimates (End 1998) 8,050,000 2,830,000 Omnitel conjoint 933,900 653,730 622,600 249,040

Estimated Subscribers Growth New Subscribers to the market 33% care about the Service 22% care about special tariff Total

902,770


1,082,770

Table 7: Estimated Omnitel’s new subscribers by 1998 with Caio’s plan

Estimates the income ( End 1998) 19 months

Total/19 months

Avg. Total/month 101,143,711,240 33,259,947,368 1,900,568,421 65,983,195,451


93,412


1,082,770

1,921,730,513,560

Avg. Handset price/New cus.

700,000

631,939,000,000

Dealer’s share/ New Cus.

40,000

36,110,800,000 1,253,680,713,560

Total incoming

Table 8: Estimated income with new subscribers by 1998 with Caio’s Plan



Estimates (End 2000) 17,350,000 12,130,000 Omnitel conjoint 4,002,900 2,802,030 2,668,600 1,067,440

Estimated Subscribers Growth New Subscribers to the market 33% care about the Service 22% care about special tariff Total

Total

3,869,470


4,049,470

Table 9: Estimated Omnitel’s new subscribers by 2000 with Caio’s plan

Estimates months

the income ( End 2000) 34 Total/ 34 months


93,412


4,049,470

12,861,149,115,760

Avg. Handset price/New cus.

700,000

2,708,629,000,000

Dealer’s share/ New Cus.

40,000

154,778,800,000 9,997,741,315,760

Total incoming

Avg. Total/month 378,269,091,640 79,665,558,824 4,552,317,647 294,051,215,169

Table 10: Estimated income with new subscribers by 2000 with Caio’s plan

On the other hand, it is stated that the Italian market is different than other markets in Europe. Since the Italians are willing to pay full price in order to get the most fancy expenses technologically advanced handset available, the idea of providing handset subsidies in order to attract them might be not the best in the Italian market

4.3 Numerical Comparison between Two plans.

Based on the calculations that have been made, If we go ahead with Bona's Plan then the market share is anticipated to be 14.57% in the year 1998 and 25.57% in the year 2000. Caios' plan on the other hand will have a market share of 13.45% and 23.34% in the year1998 and 2000 respectively.



Market size 30.00

25.00

e 20.00 g a t n 15.00 e c r e 10.00 P

Caio's Plan LIBERO

5.00 1998

2000

YEAR

Figure 1: Expected market share for Omnitel Company in 1998 and 2000 for LIBERO and Caio's proposal.

Expected Omnitel's monthly income in the last month of 1998 and 2000 by following LIBERO and Caio's plan

450,000,000,000

e m400,000,000,000 o 350,000,000,000 c n i 300,000,000,000 y 250,000,000,000 l h t 200,000,000,000 n 150,000,000,000 o m100,000,000,000 l 50,000,000,000 a t o T

Caio's Plan LIBERO

1998

2000

YEAR

Figure 2: Expected Omnitel’s monthly income by the end of the 1998 and 2000 by following LIBERO and Caio's plan.



According to the numbers and results, Omnitel will be more successful and have higher monthly income and market shares if it go with LIBERO plan. The figure below show a SWAT analysis for LIBERO plan.

Figure 3: LIBERO plan SWAT analysis.



5. Recommendations a) Caio’s plan seem not be the best: 1. Most Italians are willing to pay full price for their handsets 2. Two other European countries offering subsidized handsets has the highest churn rates. UK – 28%, Sweden – 20.5%.while Finland doesn't offered subsidies, the churn rate is low 12%.

b) Special tariffs for students/ Government employees, long distance and international calls. c) Offer certain minutes free after usage of 200 mins (off peak + peak hours) d) Offer special tariff to favourite telephone number or to a specific number e) Continuous improvements of high quality customer service. f) Reduce the advertising budget to Lit.20billion. g) Enter into strategic alliances with other cellular companies across Europe.


Omnitel Pronto Report V2

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