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LETTER OF TRANSMITTAL

24 April, 2011.

Md. Ziaul Hoq


Faculty of business studies,
American International University of Bangladesh (AIUB)
58/B, Road#21, Kemal Ataturk Avenue
Banani, Dhaka

Subject: Letter regarding submission of Report on “Pricing Strategy of DHL”.

Dear Sir,

It’s a great pleasure for us to have the opportunity to submit a report on business analysis on
“Pricing Strategy of DHL” which had been a great experience for us to work with such a
practical & real life issue to analyze with. We tried utmost to make & let it look like a
professional one. Any shortcomings are expected to have a kind view for our encouragement.

Thank you for your sincere & honest try to let us make easy & get familiar with the terms &
facts of “Pricing Strategy of DHL” as well as about business analysis to help us make the
paper a successful one.

Our efforts will be valued, if this report can serve for what it’s been meant for & our
assistance will be there for any queries.

Sincerely yours

Md. Tanjil (08-11016-2)


Table of Content

Subject Page No

Letter of Transmittal
Acknowledgment
Executive Summary
1. Introduction
1.1 Purpose and Scope
1.2 Limitations
1.3 Assumptions and Methods
2. Brief History of DHL
3. Company Background and Organization
3.1 Introduction
3.2 Price

3.3 Pricing Strategy


3.4 DHL’s key of success
3.5 Setting the price
3.6 Adapting the price
3.7 Geographical pricing
3.8. Price discount and allowances
3.9 Promotional Pricing
3.10 Differentiated pricing
3.11 Initiating Price cuts
3.12 Base Prices and Options
3.13 Pricing Structures
3.14 Sales and Advertising
4.0 Conclusion
5.0 Recommendation

Acknowledgment
All praises to almighty Allah for enabling me to complete the report on an overall study on
“Pricing Strategy of DHL”
We are very happy prepare and present this report. First of all we express my gratitude to my
respectable teacher and supervisor Md. Ziaul Hoq lecturer & our honorable course teacher
AIUB. We are pleased to him for his worm hearted supervision, advice and suggestion in the
service marketing course.

We would like to give special gratitude to our group member, who creates lots of opportunity
to collect information to make this report.

Finally and most importantly we feel the pleasure to convey my gratitude to all officials for
facilitated my work by providing their assistance. And we would like to pray my apology if
you find any unwilling mistake in this report.

1. Introduction
1.1 Purpose and Scope:
Md. Ziaul Hoq, Our respectable course instructor, has assigned us to
prepare this report. This report is a part of the curriculum of the course
“service marketing” and it is based on the Business analysis on “Pricing
Strategy of DHL”. Its due submission date is 24th April, 2011.

1.2 Limitations:
• Our knowledge is limited in this field for performing analysis. That is
why this Report deals mainly with findings rather than
recommendation.

• Most of the employees found most of the related topics as


“confidential.”

• Time limit

• Lack of information

1.3 Assumptions and Methods:


Through this report our objectives are following

 To find out the current business Pricing Strategy of DHL.

2. Background

Through this report we make an effort to understand the Pricing Strategy of


DHL. The research is done by using scientific method. Collecting
information and organizing. The area has been chosen for this research on
the “Pricing Strategy of DHL”.
Brief History of DHL:
By bus, boat, or bicycle, from Albania to Kyrgyzstan, Qatar to Zimbabwe,
DHL Worldwide Express delivers. The company is the world leader in
cross-border express deliveries, ahead of FedEx and UPS. Overall, DHL
links 120,000 destinations in about 230 countries and territories. The
company has about 4,000 offices worldwide, and it operates a fleet of
more than 250 aircraft. Affiliate DHL Airways provides air cargo services
in the US.

In 1969 Dalsey, Hillblom, and Lynn developed a way to decrease


turnaround time in the shipping business by flying bills of landing to port
ahead of time. DHL started out moving documents between San Francisco
and Honolulu; the process soon evolved into an international door-to-door
express mail service throughout the Pacific. Within a few years, DHL
began expanding its service to the Philippines, Japan, Hong Kong,
Singapore and Australia. The company started to serve Europe in 1974,
the Middle East in 1976, Latin America in 1977, and Sub-Sahara Africa in
1978.

The company did not begin developing a network within the United States
until 1983, when it established a hub at the Cincinnati/Northern Kentucky
International Airport. That year the company also became the first to
offer international service to Europe's Eastern Bloc. In the years to follow,
DHL would also be the first to include Vietnam and the People's Republic
of China in its delivery network and the first to reestablish service to
Kuwait following the Gulf War. More recently, DHL was the only company
to continue air express service in Indonesia - despite the civil unrest in
that country during May 1988.

In December 1998, DHL was named the "World's Most Global Company"
by Global Finance Magazine, based on criteria including global reach,
sales, assets, and profits. Featured alongside companies like Reuters,
Citibank, and Shell, DHL was specifically cited for its practice of
establishing "its own, rather than agent, operations overseas" and for
employing "as many local staff as possible." To bolster its international
influence, DHL has expanded its interests in Asia, Australia, and South
America since summer 1999.

In looking at DHL and its place in the overnight shipping industry, I


plan on focusing in on the overnight operations based out of the
Cincinnati hub, located at the Cincinnati/Northern Kentucky International
airport.
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

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

Introduction:

Price:
Price is the sum of all values that customer give in order to get the benefit

To establish a selling price for a product:

No matter what type of product has to sell, the prices have to charge the
customers or clients will have a direct effect on the success of your
business. Though pricing strategies can be complex, the basic rules of
pricing are straightforward:

 All prices must cover costs and profits.

 The most effective way to lower prices is to lower costs.

 Review prices frequently to assure that they reflect the dynamics of


cost, market demand, response to the competition, and profit
objectives.

 Prices must be established to assure sales.

Pricing Strategy:
Pricing strategy refers to method companies use to price their products or
services. Almost all companies, large or small, base the price of their
products and services on production, labor and advertising expenses and
then add on a certain percentage so they can make a profit. There are
several different pricing strategies, such as penetration pricing, price
skimming, discount pricing, product life cycle pricing and even
competitive pricing.
DHL’s key of success:
 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.

 A working environment that rewards achievement, interest, 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.


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.

DHL’s prices 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.

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 segment.

PRISM was not used extensively by All DHL offices sometimes DHL
Estimating demand curves by survey and statistical analysis for 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.

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.

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 DHL’s 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

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 customer’s needs, and this strategy
really help the negotiations.

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.

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.

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

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. A
point noted they’re no longer discounts. In spite of 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”.

CONCLUSION
DHL’s profits would be maximized if each country managers simply
charged each customer.

We believed a degree of order and consistency was necessary in DHL’s


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 DHL’s
marketing team.