In early June 1996, Fabrizio Bona , Omnitel’s marketing director, prepared for h
ID: 465887 • Letter: I
Question
In early June 1996, Fabrizio Bona , Omnitel’s marketing director, prepared for his meeting the nextmorning with Francesco Caio, Omnitel’s CEO, to discuss his proposal for a new pricing strategy for taly’s second mobile phone service provider. He leafed through the folder containing the results of Omnitel’s recently conducted market research. The survey indicated that customers were very happy with Omnitel’s customer service. The results had also overwhelmingly indicated that the Italian consumers viewed the monthly usage fee as a tax and resented it deeply. They did not even want to pay an activation fee. Instead, they wanted to pay a fee only when they used the phone. The results not only excited Bona but also made him a little nervous. On this basis, he had drawn up an innovative but radical proposal that he felt would enable Omnitel to compete effectively with Telecom Italia Mobile (TIM). The state-owned and operated TIM had had a monopoly over the Italian telecommunications market until Omnitel’s February 1995 entrance into the market. Bona’s plan, christened “LIBERO,” eliminated the monthly fee completely from “free time” and let customers pay only when they used their cell ular phones. The plan would charge Lit. 1,595 ($1=Lit. 1,603) for calls made during peak hours and Lit. 195 for calls made during off-peak hours. Bona anticipated average usage to be 193 minutes per month, consisting of 93 minutes of outgoing calls (13 minutes at peak and 80 minutes at offpeak) and 100 minutes of incoming calls (25 minutes at peak and 75 minutes at offpeak). The total revenue per customer per month would also include the setup charges, which amounted to Lit. 10,000. Bona realized that his new proposal was radically different from anything that had been offered previously, not only in Italy but also in the rest of Europe. Enticing customers with hi ghly subsidized handsets in exchange for their agreeing to sign a contract for a year or two seemed to be the accept ed method for acquiring new customers, especially in countries that had more than one cellular phone operator. In fact, in 1995, dealers in the United Kingdom had been very successful in acquiring new customers (an increase in the customer base of almost 2 million from the previous year) by offering attractive handset subsidies to their customers when they signed up for access to cellular service. But the customers were required to pay a minimum monthly fee for a fixed period of time. Bona wondered how he could convince Caio to continue to sell phones at full price but drop themonthly fee. Describe Bona's marketing strategy and the role that multipart pricing played in that strategy. Defend the new strategy versus the old.
Explanation / Answer
As per the market research that was conducted, customers were willing to pay for only when they use the cell phone. That is
Pay when
- There is outgoing call
- There is incoming call
Do not Pay
- Any fixed monthly fees
- Taxes applicable on fixed monthly basis
Based on the results of the market research, Bona wants to offer exactly what the customer wants and make the marketing strategy accordingly.
Bona's Marketing Strategy
- To align with the marketing requirement by offering exactky what market wants (that is aboloshing the fixed monthly cost) and ask customers to pay for what they use.
- To have different Tarrif for different Load Hours. That is higher cost per call during peak hours and less cost per call for off-peak hours.
- This will get higher revenue during the peak hours for the Business class people (commercail use) and assets will be utilized with low Tariff (by personal useres) during off-peak hours.
- Company also wants to offer Handsets, to the customers and get into al long term aggrement. Bona wants to drop the momthly fees, and do not discount the price of handsets.
- This will also align with the customer's requirement of no monthly fees and only for what they use.
Comparison with Old Strategy
- The Old strategy have a single pricing, which do not encourge the customers to make call during off-peak hours.
- Customer have to pay fixed monthly fees, irrespective of their usage.
Bona can convince Caio by showing the numbers of revenue and profit that can be generated with new strategy. Also alignment with customers requirement will help create bigger market share for the company.