MARKETING MANAGEMENT

CASE 2
DHL Worldwide Express

Ardya Listyanto Prabowo

(08/279812/PEK/13271)
Arief Suripto
(08/279814/PEK/13273)
Arif Prasetyo Wicaksono
(08/279816/PEK/13275)
Ayu Suryani
(08/279818/PEK/13277)
Brando Lubis
(08/279820/PEK/13279)
Dyah Ari Roesmanita
(08/279825/PEK/13284)
D. Denny K
(07/266113/PEK/12022)

Master of Management
Universitas Gadjah Mada
2009
A. Case Summary
Company Background and Organization
DHL Worldwide Express was the world’s leading international express delivery network. It
was privately held and headquartered in Brussels, Belgium. The company was formed in San
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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 2,000,00 5,400,00 12,400,00 60,000,00
0 0 0 0
Customers 30,50 35,00 250,00 900,00
0 0 0 0
Personnel 40 6,50 11,30 25,00
0 0 0 0
Countries 20 65 120 189
served
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.

DHL’s 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.
DHL’s key success to achieve the mission:

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• Absolute dedication to understanding and fulfilling DHL’s customer’s 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?

D. Analysis of Solution Alternatives

Setting the price
A firm must set a price for the first time when it developes a new product, when it introduces
its regular product into a new distribution channer 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 DHL’s 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 DHL’s.
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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.

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.

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PRISM was not used extensively by All DHL offices sometimes DHL Estimating demand
curves by survey and statistical analysisfor simple pricing structure. DHL’s 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.

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DHL have pricing flexibility. They can customize the table to the customer’s 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, market—segment 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 (Cash, Countertrade, Barter)
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
DHL’s then current pricing around the world. From this strategies, 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 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.

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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 an 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 have a good quality in services.

3. Responding to competitor’s 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.

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),
DHL’s initial entry pricing in other countries, and DHL‘s then current pricing around the
world.
DHL’s prices were historically 20% to 40% higher than those of competitors. Competitors
who followed DHL into new markets often patterned their pricing structures after DHL’s.
Since 1987, DHL use PRISM (Pricing Implementation Strategy Model) software to analyze

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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

DHL’s 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 can’t 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 they’re no longer discounts. Though they
may sometimes attract the small routine shipper. It’s 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”.

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E. Conclusion and Recommendation

CONCLUSION
DHL’s profits would be maximized if each country managers simply charged each customer.
Sarrafzadeh believed a degree of order and consistency was necessary in DHL’s pricing
strategy, structure, and decision-making progress.

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.

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 DHL’s marketing
team.