Omnitel
...ce. 3. What are the economics of LIBERO? No monthly fee; one-time Lit. 10,000 set-up charge; no Handset subsidies and no increased dealer incentives; tariffs of Lit. 1,595 / 195 for peak /off-peak, an increase of 4.7% / 14.7% over previous rate plan. At an average of 193 total minutes per month, this would result in a monthly tariff increase of Lit. 6,543 (90,835 vs. 84,262). However, without the monthly fee of Lit. 10,000, actual revenue per subscriber would decline by Lit. 3,427 (90,835 vs. 94,262). All things being equal, Omnitel would have to increase its subscriber base by 3.8% (6,800 subscribers) just to offset the revenue loss. In addition, Bona wants to spend Lit. 40 billion on an advertising campaign. Omnitel would have to obtain an additional 36,700 subscribers in order to pay back the advertising expense in one year. Omnitel will therefore have to increase its subscriber base to 223,500, or by 24%, to offset revenue loss and recoup the advertising expense (in one year), assuming that no additional capital expenditures or administrative expenses are needed to handle the additional subscribers. With the subscriber base in Italy projected to double to over 8 million by 1998, this seems to be a reasonable and attainable goal. 4. Why is the churn rate so high for many European countries? 1) Handset subsidies give consumers incentive to switch to another carrier in order to get the latest gadget as soon as their contract expires. With the rapid technological evolution of cell phones, obsolescence comes quickly. Two of the countries with the highest churn rates - the UK (28%) and Sweden (20.5%) - offer subsidies; the country with the lowest churn rate – Finland (12%) - does not. 2) Incentivizing dealers to sign up new customers, as opposed to retaining existing customers, (i.e. poaching customers) will increase churn rate. The UK and Sweden both incentivized their dealer network to sign up new customers. Finland did not. 3) Recent liberalization of the telecom industry introduced competition for the first time. 4) Customer switching costs must have been relatively low, or incentives to switch relatively high. 5) Telecoms offer a relatively undifferentiated product/service. New tariff schemes are easily replicated by competitors and all offer the same phones – resulting in low brand-loyalty. 5. Do you expect the churn rate to increase or decrease with the launch of LIBERO? With the introduction of LIBERO, a rate plan targeted at the concerns of cost-conscious / fee-averse customers, many of whom are already dissatisfied with TIM, the churn rate is likely to increase for TIM. Meanwhile, assuming that LIBERO is successful, the churn rate for Omnitel will likely decrease as new customers come in and current customers stay with Omnitel. We expect that Omnitel’s aggressive advertising and distribution campaign will attract relatively more first-time customers to Omnitel rather than siphoning off current TIM customers. In other words it will increase market penetration (currently only around 7%). Because the denominator (avg. customers) will increase more rapidly than the numerator (lost customers), the churn rate for Italy as a whole will likely decrease in the short run. However, we believe that TIM will eventually counter LIBERO with a similar rate-plan to reverse market-share erosion and ‘steal’ Omnitel customers, so that in the long run the churn rate will increase again. 6. What do you learn from consumer research? What do you learn from the results of the Conjoint Analysis presented in Exhibits 5 to 8? Consumer research can lead to the development of effective marketing strategies by uncovering consumer preferences, as well as negative perceptions / objections that could limit a strategy’s effectiveness. Consumer research can further identify unexplored product benefits/features, optimal target markets, and potential product spin-offs/strategies (segmentation/differentiation). Conjoint Analysis allows marketers to gauge the relative importance or utility of a (proposed) product’s attributes and to uncover/differentiate various market segments. Marketing strategies can then be tailored to address the specific needs of these segments and marketing and R&D budgets can be allocated accordingly. Exhibits 5 through 8 indicate that the telecom market is heterogeneous / stratified. In overall terms, Service ranks below Cost/Tariff in relative importance with both Users and Prospects. There appear to be 2 general clusters: Cost-sensitive groups, although they differ in the relative importance they place on Peak/Off-peak tariffs and monthly charges, and Brand/Service-sensitive groups. Of the 8 identified groups (4 ea. Users and Prospects), 3 considered monthly charges to be more important than Peak/Off-Peak tariffs, whereas 5 groups reported the opposite. The market research further indicates different Peak/Off-Peak usage patterns among the groups and various levels of satisfaction / dissatisfaction with TIM. For the Rejecter group, call rate (tariffs) ranked highest in importance, followed by monthly charge and activation cost. This leads us to conclude that rate plans should be tailored to address specific market segments, i.e. Peak vs. Off-Peak users, monthly charge- vs. tariff-sensitive users, frequent vs. infrequent users. Finally, the research shows that the “Prospects” group, representing the largest potential market segment given Italy’s low current market penetration of 6.5% and projected growth to 30% by 2000, is highly driven by cost/special tariff (52%) and service (33%) and is predominantly represented by the 25-54 year age gr...