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CASE 2
DHL Worldwide Express
Master of Management
Universitas Gadjah Mada
2009
MARKETING MANAGEMENT Case 2
A. Case Summary
Company Background and Organization
DHL 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, as shown in exhibit 1.
1973 1978 1983 1990
Shipment 2,000,000 5,400,000 12,400,000 60,000,000
Customers 30,500 35,000 250,000 900,000
Personnel 400 6,500 11,300 25,000
Countries served 20 65 120 189
Hubs 0 2 5 12
Flights/ day 14 303 792 1,466
Aircraft 0 5 27 150
Vehicles 300 2,235 5,940 7,209
Exhibit1. The Growth of DHL operation from 1973 to 1990
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.
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MARKETING MANAGEMENT Case 2
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.
B. Main Issue
DHL wanted to make recommendations on pricing strategy, structure and decision making.
Whether to use price leadership strategy or market response strategy.
C. Problem Statement
1. Should any difference in price charged for documents and parcels?
2. Should any difference in price across different industries?
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.
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MARKETING MANAGEMENT Case 2
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.
DHL 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.
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MARKETING MANAGEMENT Case 2
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.
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MARKETING MANAGEMENT Case 2
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 adjust 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
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MARKETING MANAGEMENT Case 2
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 an company effort to hold out they customer.
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 have a good quality in services.
PRICING
Evaluation 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.
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MARKETING MANAGEMENT Case 2
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.
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.
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RECOMMENDATION
DHL have a good strategies 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.