Omnitel Case Study

Executive Summary

Omnitel Pronto Italia (Italy’s second mobile phone service provider) is faced with an opportunity to introduce a new market driven strategy. One problem it faces is in differentiating itself from Telecom Italia Mobile (TIM), a state owned and operated provider who until Omnitel’s entrance into the market had a monopoly over the Italian telecommunications market. The second issue is implementing a pricing strategy and plans that TIM will not view as price cuts, ultimately setting off a price war.

In an effort to propose a pricing strategy that will create value at the corporate, product and executional levels, Team N has been asked to assess a wealth of market research and data. After thorough evaluation, the team has concluded that the best way for Omnitel to distinguish itself from TIM without creating a price war would be to continue to maintain and increase its level of customer service, not subsidize its handset, direct efforts to alter customer perception around the cell phone and finally, modify its strategy to target the middle to middle/upper class, leaving TIM its existing high-end customer base. This paper will summarize findings from recently conducted market research and recommend a strategy that will help meet these objectives.

Introduction

Omnitel entered the Italian communication market in February 1995. It offered plans similar to TIM’s. In the hopes that superior customer care would be its competitive advantage, Omnitel focused on high quality customer service. However, after several months’ data proved that although customers were pleased with the quality of service, the strategy did not result in a corresponding increase in market share. Only 4% of the market was gained as a result of this initiative. In January 1996, Omnitel reported 60,000 subscribers (its first month of service) and by May, their coverage had extended to 50% of the territory.

Omnitel charged customers a monthly fee in addition to charging for calls made during peak and off-peak hours. Customers also paid a set-up fee per call. Omnitel handsets were sold through 2,000 shops. Similar to its competitor, Omnitel paid the cell phone distributors a commission for each account they activated and made no profit from the sale of the handset.

By July 1995 TIM diverted from Telecom Italia. By the end of its first quarter, they had over 4 million customers. TIM’s marketing strategy was to cater to the upper class of Italy, advertising the cell phone as a status symbol and an item of indulgence. TIM offered two types of tariffs. The first, Eurofamily, charged a very high rate per minute

during peak hours, but very low rates during off-peak; there was also a monthly fee charge. The second targeted business customers, Europrofessional. It had a complicated structure with many different rates over five small periods and also charged a monthly fee. Up to this point TIM enjoyed a monopoly over the Italian telecommunications market; its distribution included a chain of stores with 20 TIM-owned shops, 150 Telecom Italia stores and 1,500 exclusive dealers all over Italy.

Market Research

An interview of more than 5,000 current and potential customers revealed that customers were very happy with Omnitel’s customer service. However, the majority of them:

пÑ"Ñ* Wanted a service that had no fixed monthly fee and allowed a customer to pay when he/she actually uses the service.

пÑ"Ñ* Perceived the cell phone as a status symbol

To uncover customer preferences for product designs and pricing options a conjoint analysis was performed. It revealed that customers in the market fell into 4 value-based segments:

пÑ"Ñ* Loyal to brand

пÑ"Ñ* Sensitive to service

пÑ"Ñ* Sensitive to cost and,

пÑ"Ñ* Sensitive to monthly charges and peak rates

Analysis of mobile trends in Europe revealed that:

пÑ"Ñ* Penetration rates were low

пÑ"Ñ* Strong growth was predicted in the European Cellular market for the next several years

пÑ"Ñ* Several pricing strategies and trends were emerging in the mobile phone market.

Option Analysis

Team N has been asked to consider 2 options that might build Omnitel’s market share through segmentation and pricing innovation. The options are to eliminate the monthly fee but charge full price for handsets or offer a heavily subsidized handset, have customers sign a contract in exchange and continue to charge a monthly fee. Of course both options produce a number of pros and cons.

The first option to eliminate the monthly fee but charge full price for the handset would certainly address Omnitel’s challenge to differentiate itself in the market, especially since both players charged monthly fees in the past.

Eliminating the monthly fixed fee could possibly reduce Omnitel’s churn rate. Something the company made every effort to do. Hopefully, by rewarding the market with what it wanted, Omnitel would gain customer loyalty. Charging full price for the handset would be a low issue, since the Italian market was currently conditioned to pay the full price for a handset. This option also afforded Omnitel the opportunity to create an innovative pricing strategy with plans that could not only compete with fixed line rates, but change costs and fixed fees that concerned both prospective and existing customers. Plans could be targeted to “high end” customers as well as those at the lower end. If this option increased the customer’s desire to own an Omnitel phone, it would spark interest among distributors prompting them to