DHL Case Study Solution

SUBMITTED BY:MANAS BAJPAI 3rd Trimester ICBM-SBE Hyderabad

CASE STUDY - DHL CASE SUMMARYCompany Background and OrganizationDHL Worldwide Express was the worlds leading international express delivery network. It was privately held and headquartered in Brussels, Belgium. The company was formed in San Francisco in September 1969 by Adrian Dalsey, Larry Hillblom, and Robert Lynn. The three were involved in shipping and discovered that, by forwarding the shipping documents by air with an on-board courier, they could reduce the turnaround time of ship in port. DHL comprised two companies: DHL Airways which based in San Francisco and managed all U.S operation and DHL International which based in Brussels and managed all operations outside the U.S. Each company was the exclusive delivery agent of the other. The main reason DHL is involved in domestic shipping within the U.S is to lower costs and increase the reliability of their international shipment. In 1990, DHL accounted for only 3% of intra-U.S air express shipment but 20% of overseas shipment from the U.S. DHL grew rapidly and, by 1990, serviced 189 countries, (from exhibit 1). DHL used a hub system to transport shipment around the world. In 1991 the company operated 12 hubs. Within Europe, the U.S, and the Middle-East, DHL generally used owned or leased aircraft to carry its shipments, while on most intercontinental routes it used scheduled airlines. In 1991, 65% of DHL shipments were sent via scheduled airlines and 35% via owned or leased aircraft. In 1990 DHL had 900,000 accounts of which the top 250 account represented 10% of revenues and 15% of shipments. DHL had only about 10 global contract with customers (represent 1% of revenues), as few multinational corporation (MNC) headquarters had expressed interesting in negotiation such agreements. Most MNCs were decentralized. DHL did have many regional agreements with MNCs as well as contracts in individual country markets. DHL was organized into nine geographic regions. Regions manager oversaw the relevant country managers and/ or DHL agents in their regions and held profit and loss responsibility for performance within their territories. The main function of the worldwide marketing services group were business development, information transfer, communication of best practice ideas, and sales coordination among the country operating units. DHLs worldwide mission statement in its 1990 annual report: DHL will become the acknowledged global leader in the express delivery of documents and packages. Leadership will be achieved by establishing the industry standards of excellence for quality of service and by maintaining the lowest cost position relative to our service commitment in all markets of the world.

DHLs key success to achieve the mission:

Absolute dedication to understanding and fulfilling DHLs customers need with the appropriate mix of service, products, and price for each customer. Ensuring the long-term success of the business through profitable growth and reinvestment of earnings. An environment that rewards achievement, enthusiasm, and team spirit, and which offers each person in DHL superior opportunities for personal development and growth. A state-of-the-art worldwide information network for customer billing, tracking, tracing, and management information/ communications. Allocation of resources consistent with the recognition that DHL is one worldwide business. A professional organization able to maintain local initiative and local decision making while working together within a centrally managed network.

The annual report also stated: The evolution of our business into new services, markets, or products will be completely driven by our single-minded commitment to anticipating and meeting the changing needs of our customers.

The International Air Express Industry: The air express industry offered two main products: document delivery and parcel delivery. Industry revenues were split roughly 75:25 between parcels and documents. In 1989, the parcel sector grew 40% while the document grew 15%. The growth of parcel and document express delivery was at the expense of the air cargo market and other traditional modes of shipping. The total revenues for the international air express industry were approximately $ 3.4 billion in 1989 and $ 4.3 billion in 1990.

Main IssueDHL wanted to make recommendations on pricing strategy, structure and decision making. Whether to use price leadership strategy or market response strategy.

Problem Statement1. Should any difference in price charged for documents and parcels? 2. Should any difference in price across different industries?

Setting the price: A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters bids on new contract work. The firm must decide where to position its product on quality and price. DHL using market skimming as a pricing strategy, because with this strategy it will earn business revenue and market share, usually using this strategy for leaders in their industry. This strategy will work if the market is large enough, if there are enough buyers, if there is high product or service demand, and if the company has a good (and low) cost structure. As we know DHLs price were historically 20% - 40% higher than those of competitors. In most countries, DHL published a tariff book which has updated yearly. Competitors who followed DHL into new markets often pattern their pricing structure after DHLs.

According to Exhibit 10DHL make some attempt to measure their demand curves using statistical analysis by a software package called PRISM (pricing implementation strategy model) which is really sophisticated. PRISM was used for the following purposes: Analyzing the profit impact of possible tariff adjustment, taking into account the competitive intensity of the route. Identifying low or negative margin customers whose yields should be managed upwards. Setting price strategy for different customers segments.

PRISM was not used extensively by All DHL offices sometimes DHL Estimating demand curves by survey and statistical analysis for simple pricing structure. DHLs base prices were calculated according to the product (service), weight, origin and destination. In all country markets served, DHL followed one of three pricing approaches: monthly handling fee, frequency discount, and loaded half-kilo. A frequency discount structure under which a discount was provided based on number of units shipped. The more often a customer used DHL during a given month, the cheaper the unit shipment cost. DHL sales reps could negotiate discounts from book price up to 35% after calculated fixed and variable costs, net profits by geographic lane and product line, and overall contribution margins. DHL have pricing flexibility. They can customize the table to the customers needs, because this customization is really helps negotiations. Adapting the price: Companies usually do not set a single price, but rather a pricing structure that reflects variations in geographical demand and costs, marketsegment requirements, purchase timing, order levels, delivery frequency, guaranties, service contracts, and other factor. As a result of discounts, allowances, and promotional support, a company rarely realized the same profit from each unit of a product that it sells. In this Analysis, we want to know how far DHL implemented the concept of the price adaptations.

1. Geographical pricing In geographical pricing the company decides how to price its product to different customers in different customers in different locations and countries. As DHL expanded service into new countries, it developed many different pricing strategies and structure. DHL country managers had almost total control of pricing, they typically set prices based on four factors: what the market could bear, price charged by competition (which was often initially the national post office), DHL initial entry pricing in other countries, and DHLs then current pricing around the world. From this strategy, we know that the pricing policy is different in each country, which appropriate with the condition and situation of the country.

2. Price discount and allowances Most companies will adjust their list price and give discounts and allowance for early payments, volume purchases, and off-season buying. Companies must do this carefully or find that their profits are much less than planned. DHL do this concept with pricing structures such as monthly handling fee, frequency discount, and loaded half-kilo. For the allowance concept, DHL also have the other strategy, like negotiations price that make possible to get flexibility price. The strategy which customize the table to the customers needs, and this strategy really help the negotiations. 3. Promotional Pricing Promotional pricing strategies are often a zero-sum game. If they work, competitors copy them and they lose their effectiveness. If they do not work. They waste the money that could have been put into other marketing tools. In this case, DHL did not make a promotional pricing, but to hold out their customer they make a strategy pricing structures. 4. Differentiated pricing Company often adjusts their basic price to accommodate differences in customers, product, locations, and so on. Although FedEx charged the same for parcel and documents, DHL have a differentiation on product basic price, DHL base price were calculated according to product (service, DHL have 2 kind of product services there are worldwide document express and worldwide parcel express), weight, origin, and destination. Prices were often higher for parcel than for documents of equivalent weight due to extra costs for custom clearance, handling, packaging, and additional paperwork.

Initiating and responding to price changes: Companies often face situations where they may need to cut or raise prices. In this analysis, we want to know about DHL strategies in initiating and responding to price changes. 1. Initiating Price cuts Several circumstances might lead a firm to cut prices. One is excess plant capacity: the firm needs additional business and cannot generate it through increased sales effort, product

improvement, or other measures. It may resort to aggressive pricing, but in initiating a price cut, the company may trigger a price war. DHL followed one of three pricing approaches: monthly handling fee, frequency discount, and loaded half-kilo. Monthly handling fee charged to customers who wanted to be included on its regular pickup route. The frequency discount based on the total number of documents and parcels shipped. The loaded half kilo structure used in the US resembled the frequency discount structure. The discount or price cut for the service that have a specific requirements is a company effort to hold out they customer. 2. Initiating price increases A successful price increase can release can raise profits considerably, for example: if the company profit margin is 3 percent of sales, a 1 percent increase will increase profits by 33 percent if sales volume is unaffected. Actually DHL have higher prices than those of competitors (DHL, TNT, FedEx, and UPS), historically 20-40% higher. Although DHL have higher price, DHL is the market leader because the market share is the highest in the world. High price is suitable for DHL, because DHL is a sophisticated company that has a good quality in services. 3. Responding to competitors price changes Any price change can provoke a response from customers, competitors, distributors, suppliers, and even governments. How should a firm respond to a price cut initiated by competitor? In markets characterized by high product homogeneity, the firm should search for ways to enhance its augmented product. If it cannot find any, it will have to meet the price reduction. In this case, DHL not respond the competitor price with price cut but DHL still have a high price for their service. DHL still have a high market share because of the quality of their service, not the cheaper services.

PRICINGEvaluation of Pricing Policy As DHL expanded service into new countries throughout the 1970s and 1980s. It developed many different pricing strategies and structures. DHL country managers had almost total control of pricing. They typically set prices based on four factors: what the market could bear, prices charged by competition (which was often initially the national post office), DHLs initial entry pricing in other countries, and DHLs then current pricing around the world.

DHLs prices were historically 20% to 40% higher than those of competitors. Competitors who followed DHL into new markets often patterned their pricing structures after DHLs. Since 1987, DHL use PRISM (Pricing Implementation Strategy Model) software to analyze their profitability at the country, customer segment and individual customer level. The inputs to the model were cost data along competitive price information based on historical data which had been consolidated and averaged. However, PRISM could not consolidate the profits of a given customer across countries. PRISM was not used extensively by all DHL offices. Base Prices and Options DHLs base prices were calculated according to product (service), weight, origin, and destination. Prices were often higher for parcels than for documents of equivalent weight due to extra cost for customs clearance, handling, packaging, and additional paper work. Pricing Structures In all country markets served, DHL followed one of three pricing approaches: monthly handling fee, frequency discount, and loaded half-kilo. Under first approach, DHL charged a flat monthly fee to customers who wanted to be included on its regular pickup route. Sarrafzadeh said the monthly fee can work but only if it is properly marketed. Because it does not related to unit of value, customers recent it and salespeople cant defend it. As a result, it has often proved hard to raise the monthly fees as fast as the per-shipment charges. Besides, a frequency discount structure under which a discount was provided based on number of units shipped. The more often a customer used DHL during a given month, the cheaper the unit shipment cost. Sarrafzadeh noted theyre no longer discounts. Though they may sometimes attract the small routine shipper. Its easy for competitors to discover what the discounts are and undercut them. Better to publish only the book prices and apply discounts as needed on a case by case basis. The loaded half kilo structure resembled the frequency discount structure, except that discounts were based on total weight shipped during a given monthly rather than on the number of shipment. Price Negotiations DHL sales reps had significant flexibility when negotiating proposals. DHL senior management typically gave only general direction to sales reps on negotiating discounts.

SALES AND ADVERTISING

DHL had a single sales force which sold both document and parcel services. Sales reps were organized geographically and were evaluated primarily on monthly sales. Typically sales reps had separate monthly sales objectives for international, domestic and total sales and received a bonus whenever they exceeded any one of the tree. Sales managers were evaluated against profit as well as revenue objectives. DHL spent roughly 4% of worldwide sales on advertising. In 1990, DHL launched a new advertising campaign in US with slogan Faster to more of the world.

Conclusion and RecommendationCONCLUSION DHLs profits would be maximized if each country managers simply charged each customer. Sarrafzadeh believed a degree of order and consistency was necessary in DHLs pricing strategy, structure, and decision-making progress. RECOMMENDATION DHL have a good strategy for the pricing policies. Although have a highest price, DHL can hold out the market share by improve the quality of their service, so DHL should continue this strategy. But, DHL still have an attention with the competitor do and to the customer needs. Pricing Strategy Price Leadership

Past and current DHL charge premium price for delivering superior service. Maintain image in the eyes of customers DHL delivers superior value. Decline in price might be seen as decline in quality of service may switch to other provider.

Pricing structure

Difference in price charged for documents and parcels. Should be differentiated because of additional costs incurred for parcel shipping. Difference in price across different industries. Shipping fee should be the same for customers across different industries.Offer special price for Multinational Corporation seeking to cut deals if they allow DHL to handle all of their express shipping accounts.

Should be exercised and must help retain and gain large accounts for DHLs marketing team.

EXHIBIT ANALYSIS (except 10, discussed earlier in case summary)EXHIBIT 1 DHL grew rapidly & by 1990 serviced 189 countries. As per exhibit the following points: As delivery by the shipment is main business of DHL, there is enormous grew seen from 1973-1990 i.e., 2000000 to 6000000. Due to unique service and pricing strategy, its a leading logistics & courier service company among all others. Till 1973 DHL dont have any hub but due to successful in market, it have 12 hubs & 150 aircraft in 1990. DHL operations performance due to compliance with various pricing strategies, they never declined.

EXHIBIT 2 As given, the revenue of DHL in 1990 was $ 2 million (Approx.). Due to 4% - 5% of revenues, DHL shows the improvement in field of shipment by implementing various pricing policies.

Its a diversified company, by conglomeration like generate heavy revenue compare to other operations, uses of leased aircraft for shipment i.e. 10%. DHL generated about 32% of total revenue from other activities like banking, importexport, high technology etc. In 1990, DHL have done 60 million consignments which show soundness of business which shows increase of revenue.

EXHIBIT 3 DHL uses hub system for the delivery of consignment. Hub System means a system of air transportation in which local aircrafts offer air transportation to a central airport where long distance flights are available.

In 1991, 65% of consignment sent by scheduled airlines & 35% from owned & leased aircrafts. Acc. to DHL organized 9 regions in the world, it shows company is diversified. Due to Hub System, DHL control the market of Asia Pacific in 1992 compared to Europe, U.S. and had a growth rate of 30%.

EXHIBIT 4 DHLs Principal Competitors in door to door international air express delivery were Federal Express, TNT, & UPS. DHL had maximum international air express revenue i.e. $ 1200 million & document: parcel revenue was 65:35 in 1988. After the investment of $ 1 billion for acquisition FedExs had lost $ 43 million in 1989 & $ 194 million in 1990. TNT was publicly owned by Australian transportation group, which mainly focus on European market & lower concentrated in North America. For control over North American Market TNT held 15% stake in an American Shipper. United Parcel Service (UPS) is privately held by U.S Comp. UPS hesitate to give proper discount from its published price, this shoed the less revenue i.e. $ 100 million from DHL, FedEx, TNT, UPS had i.e. 1700 in 1988.

EXHIBIT 5 DHL provide 2 types of services: Worldwide Document Express (DOX) Worldwide Parcel Express (WPX) DOX offered documentary delivery & WPX offered non-documentary deliveries which help to make fast service delivery throughout the region. DHL has recorded for the fastest delivery as a Middle East i.e. 70%. DHL was consistently delivered the dutiable goods through customs as a earliest business district delivery before 10 am than its rivals. Service differentiation & pricing Structure makes DHL the market leader in terms of documents and parcel delivery. EXHIBIT 6 Customers are divided in 4 regions about document & parcel by air express carrier helps to know about the market potential of product & services. DHL has No. 1 position in sample customers in Europe in document & parcel i.e., 32% & 28%. DHL is leader because they send both documents & parcel.

EXHIBIT 7

Study of unaided brand awareness for the major international air express companies. DHL shows higher %ages of brand awareness in delivering value like: Documents - 87% Parcel 72% For TNT had highest %age of brand awareness in Germany i.e. 76%. EXHIBIT 8 DHL segregated its U.S customers in 1990 by the level of monthly billing & provides profile information on each segment. DHL generated highest profit of 45% in billing pattern of $ 0000 - $ 2000 in 1990. Maximum %age of discount offered if bill is above $ 15000. Fixation of price or pricing strategy may come under risk in case of price sensitive buyer. Parcel Market was more price sensitive to document market. EXHIBIT 9 Pricing policy of DHL expanded their service area in different countries by develop various pricing strategy & price structure. DHL charged highest price for 1kg from London to New York i.e. $ 51 in 1990. TNT charged highest price for 2kg from Brussels to Hong Kong i.e. $ 143 in 1950. Tariff book was Published by DHL was updated every year.

EXHIBIT 11

DHL charged $ 24.76 and $ 34.15 per shipment for document and parcel from U K to U.S, with margin of 4.1% and 6.4% respectively. Total number of shipment was 231139 and 68580 of document and parcel. In Belgium to Hong Kong route, $ 30.21 and $ 60.25 per shipment was charged by DHL, with margin of 8.1 % and 10.5%.

EXHIBIT 12 Fixed and variable cost also consider in detail to find out the net margin of profit. Preferred status account report shows the margin of profitability as per lane and product line.

Document service generated positive margin in all segments except in C Europe and D Europe that is -2.1% and -11.1%. Parcel service generated positive margin in only B Europe that is 23.6% and rest showed negative margin.

Reason behind the failure of parcel service was high shipment cost. Margin by product line shows positive margin in document service that is 9.7% and negative margin in parcel service that is -7.0%. As per variable and fixed cost report document service had positive profit margin that is 9.7% because of fixed cost is lower than the gross margin or contribution.

EXHIBIT 13

DHL started by three members but now DHL become identity of 23700 members, who worked as employees in DHL. Services of DHL available for those company whose important documentation is necessary to transfer and they can afford any charge for such transition. A new advertising campaign in United States based on slogan, Faster to more of the world. It represent since last 21 years DHL provide faster service in all over the world and flying higher than ever. EXHIBIT 14 In the market there is many company who provides services regarding transformation of documents and parcel, but only DHL service is reliable to meet the parcel and documents in destination at right time. DHL having 25000 employees and provide training to learn 100 different languages which help them to serve the customer and create sound relationship with customers. DHL regular update their service system to run parallel with globalization.