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)
Shaymaa Slangor: 6707192
Vignesh Rajagopalan: 7575750

STRATEGI C MARKETI NG MANAGEMENT MBA 5320

2/page
Omnitel Pronto I talia case study

CONTENTS
1.Introduction: ...................................................................................................................................... 3
2.Basic Case Analysis: .......................................................................................................................... 4
3.Problem Statement: ............................................................................................................................ 4
4.Analysis of Alternatives: ................................................................................................................... 6
4.1 LIBERO: ..................................................................................................................................... 6
4.2 Caios 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 Omnitels new subscribers by 1998 with LIBERO ............................................... 8
Table 3:Estimated income with new subscribers by 1998 with LIBERO ............................................ 9
Table 4: Estimated Omnitels59 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 Omnitels new subscribers by 1998 with Caios plan ......................................... 11
Table 8:Estimated income with new subscribers by 1998 with Caios Plan ...................................... 11
Table 9: Estimated Omnitels new subscribers by 2000 with Caios plan ......................................... 12
Table 10: Estimated income with new subscribers by 2000 with Caios plan.................................... 12


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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.


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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.

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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.


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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 TIMs budget 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.


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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.


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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.

Table 1: LIBERO monthly revenue in 1996
Table 2: Estimated Omnitels new subscribers by 1998 with LIBERO
LIBERO Plan:

Calling Time Peak hour Off Peak
Price 1595 195
Avg. Min (incoming) 25 75
Avg. Min (outgoing) 13 80
Total 38 155
Monthly Fee 0
Currently No. of Customer 180000 4% of the Market share
Avg. monthly bill/ Customer 90835

Estimates (End 1998)
Estimated Subscribers Growth 8,050,000
New Subscribers to the market 2,830,000 Omnitel conjoint
33% care about the Service 933,900 653,730
30% have cost sensitive 849,000 339,600
Total 993,330
Total No of Subscribers 1,173,330

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

Table 4: Estimated Omnitels59 new subscribers by 2000 with LIBERO
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
Omnitels 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 TIMs churn
rate will increase as some of their customers will join Omnitel. Also, Omnitels 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.
Estimates the income (End 1998) 19
months
Total/19 months Avg. Total/month
Avg. monthly bill/ Customer 90,835
Total No of Subscribers 1,173,330 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
33% care about the Service 4,002,900 2,802,030
30% have cost sensitive 3,639,000 1,455,600
Total 4,257,630
Estimates the income (End 2000) 34
months
Total/34 months Avg. Total/month
Ads. Cost 40,000,000,000 1,176,470,588
Total incoming 13,665,132,115,700 401,915,650,462

10/page

4.2 Caios plan

Omnitels 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.

11/page

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.
Lets 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.
Caios Plan :

Calling Time Peak
hour
Off Peak
Price 1524 170
Avg. Min (incoming) 25 75
Avg. Min (outgoing) 13 75
Total 38 150
Monthly Fee 10000
Currently No. of Customer 180000 4% of the Market share
Market Size in June 1996 5220000
Avg. monthly bill/ Customer 93412

Table 6: monthly revenue in 1996
33% care about the Service 933,900 653,730
22% care about special tariff 622,600 249,040
Total 902,770
Table 7: Estimated Omnitels new subscribers by 1998 with Caios plan
Table 8: Estimated income with new subscribers by 1998 with Caios Plan
Estimates the income ( End 1998) 19 months Total/19 months Avg. Total/month
Avg. Handset price/New cus. 700,000 631,939,000,000 33,259,947,368
Dealers share/ New Cus. 40,000 36,110,800,000 1,900,568,421
Total incoming 1,253,680,713,560 65,983,195,451

12/page

33% care about the Service 4,002,900 2,802,030
22% care about special tariff 2,668,600 1,067,440
Total Total 3,869,470
Table 9: Estimated Omnitels new subscribers by 2000 with Caios plan
Table 10: Estimated income with new subscribers by 2000 with Caios 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.
Estimates the income ( End 2000) 34
months
Total/ 34 months Avg.
Total/month
Avg. Handset price/New cus. 700,000 2,708,629,000,000 79,665,558,824
Dealers share/ New Cus. 40,000 154,778,800,000 4,552,317,647
Total incoming 9,997,741,315,760 294,051,215,169

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

Figure 2: Expected Omnitels monthly income by the end of the 1998 and 2000 by
following LIBERO and Caio's plan.
-
5.00
10.00
15.00
20.00
25.00
30.00
1998 2000
P
e
r
c
e
n
t
a
g
e

YEAR
Market size
Caio's Plan
LIBERO
-
50,000,000,000
100,000,000,000
150,000,000,000
200,000,000,000
250,000,000,000
300,000,000,000
350,000,000,000
400,000,000,000
450,000,000,000
1998 2000
T
o
t
a
l

m
o
n
t
h
l
y

i
n
c
o
m
e

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

Caio's Plan
LIBERO

14/page

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.


15/page

5. Recommendations

a) Caios 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.

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