The European Commission had declared that all member states would have to open their markets and guarantee competition in the telephone markets by January 1998. But the pressure for business interests made the European Commission anticipated the cellular telephony, which started in 1994. However some liberalization was subject to interpretation by the countries involved. The state-owned TIM had had a monopoly over the Italian telecommunications market until that time. But the market changed when the Omnitel started to sell cellular service in 1995.
Omnitel focused on the market in Italy, because cellular penetration was 7.5% by the first quarter of 1996, and it expected to increase to 22.8% by 2000.
Omnitel charged a monthly fee for its costumers, and created some calls plans. The customers were complaining about the minimum monthly fee, but the strategy was to get high-quality customers. Any cut in the monthly fee would make customers just buy the phone and hold on to it without making any calls, therefore attracting low-end customers.
Omnitel acquire new customers offering attractive handset subsidies to customers who sign a contract for a year or two.
TIM's strategy before the entrance of Omnitel was to have exclusive dealers all over Italy that was about 1,500. But after the Omnitel's entrance, TIM became more aggressive in acquiring these dealers. TIM's marketing strategy was to make the cellular phone as a status symbol, making the Italian society willing to buy.
However, TIM planned to launch its first prepaid card in September 1996. This strategy would allow TIM to target low-end customers, who were not qualified to subscription service because of their irregular sources of income or their low credit history.
Omnitel came up with a new proposal focusing in achieve greater penetration by creating customers loyalty. The new marketing strategy was called LIBERO.
LIBERO, which means "free" in Italian, had as a mean goal give the idea of free monthly fee. Eliminating the fee not only the number of subscriptions would increase but also the volume of usage. Fabrizio Bona, Omnitel's marketing director, expected to avoid the price war with TIM making this new proposal and at the same time increase the number of customers. The telecommunication market is very competitive making TIM reacts to the new proposal. In the short-term TIM will react charging no monthly fee to compete with Omnitel, or launching different plans for calls. In case of not doing it, TIM has the risk of lose many clients. Probably TIM's response for Omnitel's new proposal will be to offer the same advantages as its competitor and some additional benefit.
Omnitel have to keep the LIBERO proposal and keep the same price for outgoing and incoming calls, but it has to add some additional service as post-sale, warranty, insurance, customer service. It leads Omnitel in a good competitive position. These changes add value to the product and for the client.
The churn rate across European countries was high because did not exist loyalty from the customers. The price was the only difference from one cellular company to other in the customer's point of view. So the companies reduced a little the price, but the cellular companies were focusing on creating loyalty among their high-end customers through quality service, rather than offering further price reductions to their low-end customers. The low-end customers were much price sensitive, changing subscriptions according to the prices offered. The cellular companies marketed their services directly to the end user through dealers, paying sometimes commission to encourage sales, and offering subsidies on handsets.