MGMC01H3 Chapter Notes -Omnitel, Niche Market, Churn Rate

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Published on 26 Nov 2014
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Case 8:
Omnitel Pronto Italia
Abstract
Given market research is successfully conducted, the information is meaningless without
interpretation. Analyzing data is an essential step to develop how companies can apply what
they have learned to business practices. With the appropriate market research, a company can
better define its product positioning, marketing strategy, value creation, segmentation,
competition, and customer satisfaction.
Problem Analysis
The following is a decision case to which Omnitel must determine the best approach in
repositioning and maximizing profits against its major competitor Telecom Italia Mobile (TIM),
whether by eliminating monthly fees and charging full price for handsets or regulating monthly
fees and offer heavily subsidized handsets in exchange for signing a contract for a certain
period. The Italian market has long been established as a monopoly under dominance by TIM
and while Omnitel had attempted to position itself differentially through superior service and
quality, profits were unsatisfactory. To address this, Omnitel must decide if they should pursue
implementing “Libero,” and if so, must reassure that it would not enter a price war with TIM,
would increase Omnitel’s consumer base more than by offering handset subsidies, and would
receive more revenue with minimum monthly fees through overall call volume.
Company Analysis
Since its launch in December 1995, Omnitel positioned itself as a company that provided high-
quality customer service and operated with their competitive advantage being its superior
customer care. However, their strategy was unsuccessful, generating a low market share of 4%,
weak subscriber base of 180,000 individuals, and a net loss of Lit. 128 billion. Omnitel’s
performance was poor for several reasons:
1. As the population of cell phone users are comprised of various age segments and
beliefs, Omnitel focused its resources in targeting the niche market of those sensitive to
service. With reference to exhibit 6 outlining the value-based segmentation of personal
users, the size of the service sensitive segment is the smallest, representing a low 19%.
As well, further evaluating the brand loyal and cost sensitive segment, they have a
notable negative value towards services with -78 and -71, and a minimal 17 for those
prioritizing monthly fees. Thus, by positioning itself to primarily address the concerns of
the service sensitive segment, sales are limited to a minority and sales, as a result of
this, would not perform to company expectations.
2. Furthermore, Omnitel is a young company competing against TIM who had flourished
under a monopoly for years. Offering plans similar to TIM’s, Omnitel is fighting for a lot of
the same consumers with the same products against a well-known brand; Thus,
although Omnitel’s entrance has increased competition and enhanced awareness about
cell phone products among Italians, Omnitel needs to refine its positioning strategy to
offer differentiating services as competing against TIM’s large base with the same
offerings is unprosperous.
3. Omnitel believes in high quality customers as they are valuable over a life time. Knowing
this, Omnitel felt it is worth investing more to acquire these people as it pays for itself
quickly. However, while the idea of nurturing these high quality customers through
superior service is logical, it is inapplicable to the Italian market. The Italian culture is
more impulsive than that of other countries; thus, although this approach may work in
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North America, it is less effective in Italy and Omnitel cannot expect the same results to
be replicated.
Acknowledging its strategic flaws, Omnitel aims to reposition itself to make phones synonymous
with the concept of a wristwatch. With phones as the primary mode of communication, being
personal and indispensable, Omnitel expands its consumer base away from its sensitive service
segmentation and can seek to generate more profit. In creating its next step in the telephone
market, Omnitel should better address its consumers through emphasizing the most profitable
segments by offering differentiated products to steer away from TIM’s monopoly stranglehold.
Omnitel also needs to tailor its plans with the Italian market in mind, understanding what their
needs are to better fulfill them.
Competitor Analysis
Contrasting from Omnitel, TIM’s positioning is more superficial such that the phone is
recognized as a status symbol and demonstrates that you are somebody. Similar to many other
companies, TIM offers a monthly fee service combined with a contract for 1 to 2 years. TIM
possesses a larger consumer base with 4 MM customers offering 2 types of tariffs through the
“Eurofamily” and “Europrofessional” rate. TIM currently retains 97% market share and enjoys
low marketing costs due to lack of competition. A reason for TIM’s power is it’s aggression in
acquiring customers in distributing ordinary shares as rewards to dealers for meeting certain
sales targets. It is evident that Omnitel cannot compete with TIM in several aspects including
lowering prices for their plans or increasing commission to their distributors. Thus, where
Omnitel decides to implement a new strategy, it must not lead to a price war. Omnitel should not
alter its pricing strategy as it would be an unwanted message to TIM, all the while, needs to
create a plan attractive enough to persuade customers to purchase.
Market Analysis
A major concern for Omnitel was its endeavor to maintain a low churn rate of 10% to 15% per
year. Where churn rate represents the annual percentage rate at which customers stop
subscribing to a service, Omnitel was better at retaining its consumers than the rest of Europe.
Omnitel’s success for a low churn rate was as a result of the company’s efforts in bettering
customer service through polite operators, minimized waiting times, one stop calling, and
transfer avoidance. As Omnitel targeted the service sensitive segment, by pleasing their
customers with friendly service, they felt more connected to the company and those individuals
were less likely to leave. Conversely, the general European churn rate is at highs of 30% to 40%
because of the cultural majority being impulse consumers. Impulse consumers are less
committed to a service and switch as they feel to do so; thus, in the event that a better service is
opportune and more favorable at one point, the impulse consumer will stop subscribing and
choose to switch for the one with better perceived value. By Europe’s nature, churn rates are
expected to be higher in most of these countries and Omnitel should address this with their
launch plans accordingly.
The Italy cell phone penetration in 1996 was 7.5% in the first quarter and is expected to reach
up to 22.8% in the next 4 years. Calling trends are increasing because penetration rates are
modest in absolute and relative GDP, the value for money of services are increased because of
reduced costs of services and improved quality, cell operators adopted GSM which allows
customers to use phones throughout Europe and other parts of the world, and with more than 1
mobile operator there is an increased in marketing for cell service to improve customer
awareness and stimulate demand. Therefore, with the prediction growing strong for the Italian
cellphone market, Omnitel can formulate their launch knowing there is likely to be a large influx
in consumer volume and through awareness, a larger demand. Also, where phones are able to
be used virtually without barriers, there is an inclination to meet call rate demands relative to
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