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To calibrate the customer -choice sector, GM commissioned a conjoint study to estimate how consumers would respond to different subscription fees, initial costs, and combinations of features (Reibstein and Farris 1995). The sample for the conjoint study was 621 new-car buyers. In the conjoint study, researchers estimated the utility of 13 potential attributes of the OnStar system, including route guidance, remote vehicle diagnostics, traffic information, initial price, and monthly subscription fees.
The study showed that consumers could be divided into six market segments. The segments had different utilities for the service attributes and prices. In the customer acquisition sector, we calculated take rates separately for each market segment.
we used the market study to calibrate the consumer-choice decision. For example, we tested the impact of different attribute combinations and prices on long-term OnStar penetration and profitability. We also experimented with alternative price trajectories, such as skim and penetration pricing. Skim pricing involved installing OnStar on a few expensive GM models, such as Cadillac, and charging a premium price for OnStar. Penetration pricing involved installing OnStar on all GM models and charging a low price that would maximize the take rate.
Vehicle Manufacturer Alliances
The option of offering OnStar to other vehicle manufacturers emerged early in the project. Clearly, enrolling other manufacturers could be beneficial. First, increasing the vehicles in the alliance would create a large OnStar installed base and strengthen positive-feedback processes. Second, GM could collect licensing fees for the use of OnStar. The disadvantage of making OnStar generally available would be that GM would lose a competitive weapon for selling vehicles.
We e-valuated the option of offering OnStar to other manufacturers by including an additional positive-feedback process in the model. Manufacturers had four options in the telematics market: do nothing, start their own services, join the OnStar coalition, or join another coalition. The probability that a manufacturer(other than GM) would choose one of the options was given by
p = f(S, V, T, C, F, M), (3)
where S is the number of subscribers for a specific service(OnStar, Ford, and so forth), V is the number of vehicles that offer a service, T is the take rote for a service, C is the estimated investment cost of setting up a telematics service, F is the fee charged by the coalition for using the service, and M is the manufacturer that sponsors the coalition. In the model, we assumed that the probability of choosing an existing service increased with increases of S, V, T, and C. A large base of subscribers (S) and a high take rate (T) demonstrate that the service is successful and will be more successful in the future. Other manufacturers would prefer to enroll in a successful coalition. In addition, a, high take rate shows that consumers want the service and that manufacturers without a service are at a competitive disadvantage. If the sum of the Vs across coalitions is large, most vehicles offer telematics services and the holdouts are under pressure to join one of the coalitions. A high cost of establishing a service (C) makes it disadvantageous to create a new service and more advantageous, especially for small manufacturers, to join a coalition. High frees (F) for participating in a coalition reduce the probability that an outside manufacturer will join. Finally, some manufacturers will be very hesitant to partner with other manufacturers, such as Ford with GM, so that the identity of a coalition sponsor (M) influences the probability of an alliance.
Original equipment manufacturers (OEMs) benefit greatly by joining an OnStar coalition. First, replicating the GM system would be very costly for auto manufacturers with much lower volumes than GM, especially if GM were able to exploit positive feedback and add high-value services. Second, assuming that consumers find telematics services, attractive (market research supports the conclusion), if several competing OEMs were to join the coalition, the holdout competitor could lose precious market share in the vehicle business. Finally, if OnStar were to build a credible third-party distribution system with the AMIC standard, OnStar would have access to the competitors' cars even if they didn't join the coalition. OEMs could conclude that their best interests lie in joining the coalition and cutting the best deal possible, instead of letting GM capture their customers through the aftermarket.
For each major vehicle OEM, the team considered the costs and benefits of partnering with OnStar from the perspective of that competitor. Our reasoning process was similar to that of estimating competitor payoffs in a game-theory analysis. During each time period, the model calculated the probability that a manufacturer would choose one of the four option; once a manufacturer chose to join a coalition or to start its own service, it could not change its decision.
The alliance decision structure creates another positive-feedback process. Additional partners increase the value of the system through multiple mechanisms, such as word-of-mouth and additional applications. In turn, a more valuable system attracts new subscribers and additional partners. We did not believe that these processes would be so strong as to create a single system for the whole vehicle industry. We acknowledged that some competitive automakers would be so averse to a GM-sponsored system that they would never join an alliance.
Customer Service
The customer-service sector represented demands for customer-service and the acquisition and retention of service capacity. Poor customer service could restrain the long-run growth of OnStar. Rapid subscriber growth increase the demand on the call centers. OnStar must be able to match customer-service capacity to demand or, beyond a point, the quality of its customer service will deteriorate. Common sense suggests and the literature on customer service confirms that customer' poor experiences with service reduce the attractiveness of the service, reduce the firm's acquisition of new subscribers, increase churn, and generate negative word-of-mouth.
A firm can minimize the negative effects of inadequate customer-service capacity by choosing the right customer-service policy. Often, firms run their call centers with a cost mentality. Their objective is to minimize the cost of the call center by paying low wages, limiting the time spent per call, and always running at close to full utilization. The model-based analysis showed that the cost-focused strategy would cause the entire OnStar effort to fail.
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