dhl worldwide

Harvard Business School

1

DHL Worldwide Express

In July 1991, in Jakarta, Indonesia, the shouts of the kaki lima (street vendors) outside didlittle to soothe Ali Sarrafzadeh�s concerns. Sarrafzadeh, DHL�s Worldwide sales and marketingmanager, had spent the previous three days chairing the Worldwide Pricing Committee workshop atDHL�s annual directors� meeting. On the following day, he was to present his recommendations onpricing to the conference�s 300 attendees.

Some of the statements made during the workshop meetings were still ringing in his head:

If I have P&L [profit and loss] responsibility for my region, then I better beable to set my own prices. If not, how am I supposed to impact profits? Bymanaging my travel and entertainment account?

�Jurgsen Beckenbauer Regional Director�Central Europe

Many of our large multinational customers have come to us and told us thatthey want a consistent worldwide pricing structure. . . . If we don�t offer worldwideprices and our competitors do, are we going to lose some of our largest accounts?

�Christine Platine Account Manager, Brussels headquarters

If our pricing structures were consistent across regions, it would be mucheasier to consolidate regional reports. With better reporting, we could gain valuableinformation about our costs. . . . The simpler our pricing structure, the easier it is tomanage hardware and software around the world.

�Adelina Rossi VP Systems, Brussels headquarters

We are the only company which services some regions of Africa. Thus, wecharge premium prices in these markets. If we are forced to charge the same rates asin other regions, we will only lose profits. Sales will not grow with lower prices.

�Aziz Milla, Country Manager� Cameroon, Africa


2

Our prices have always been 20%-40% higher than the competition�s prices.We can command these premium prices by continuing to give more value to ourcustomers. . . . Our pricing must not encourage �cherry picking.� We don�t wantcustomers to just ship with us on routes that are difficult to serve, such as those toand from Africa.

�Bobby Jones, Regional Director�USA

Sarrafzadeh wanted to make recommendations on pricing strategy, structure, and decisionmaking. On strategy, he viewed his options as recommending either a price leadership strategy or amarket response strategy. The former meant DHL would charge premium prices and aim to deliversuperior value-added services in all markets. The latter meant DHL would set prices independentlyin each country, according to customer usage patterns and competitive pressures.

If the principle of standardized worldwide pricing was pursued, what were the pricingstructure implications? For example, should DHL charge a weekly or monthly handling fee (a set feein return for automatically visiting a customer each business day) in all countries? Should the sameprice be charged for shipments between any two cities, regardless of which was the origin and whichthe destination?

Regarding pricing structure, Sarrafzadeh had to address several additional questions. ShouldDHL have different pricing schedules for documents and parcels? Should DHL set different pricesfor different industries? For example, should prices be different for banking and manufacturingcustomers? Should DHL offer special prices to multinational corporations seeking to cut deals withindividual shippers to handle all their express document and parcel delivery needs worldwide?

Another issue was the DHL discount program. Sarrafzadeh had to decide whether DHLshould continue to offer volume discounts. If so, should they be based on units, weight, or revenue?

In addition, Sarrafzadeh wanted to recommend who should hold primary price settingresponsibility. He considered his three options to be a centralized, decentralized, or hybrid approach.A decentralized approach would continue the present policy in which country/region managers setall prices and headquarters offered counsel and support. Under a centralized approach, aheadquarters management committee would set all prices around the world. Country managerswould be responsible for collecting data and making suggestions to headquarters. A third option wasto establish multiple pricing committees, each including managers from both headquarters and theregions and each responsible for setting prices for one or more specific industries.

Company Background and Organization

DHL legally comprised two companies: DHL Airways and DHL International. DHLAirways was based in San Francisco and managed all U.S. operations. DHL International was basedin Brussels and managed all operations outside the United States. Each company was the exclusivedelivery agent of the other. Revenues for 1990 were split: $600 million for DHL Airways, and $1,400million for DHL International. One DHL executive commented, �The main reason DHL is involvedin domestic shipping within the United States is to lower the costs and increase the reliability of ourinternational shipments. If not for our domestic business, we would be at the mercy of the domesticairlines bringing our packages to the international gateways.� In 1990, DHL accounted for only 3% ofintra-U.S. air express shipments but 20% of overseas shipments from the United States.

DHL was the world�s leading international express delivery network. It was privately heldand headquartered in Brussels, Belgium. The company was formed in San Francisco in September1969 by Adrian Dalsey, Larry Hillblom, and Robert Lynn. The three were involved in shipping anddiscovered that, by forwarding the shipping documents by air with an on-board courier, they could


3

significantly reduce the turnaround time of ships in port. DHL grew rapidly and, by 1990, serviced189 countries. In 1990, revenues were approximately $2 billion. Profits before taxes were 4%-6% ofrevenues. (Exhibit 1 summarizes the growth of DHL operations from 1973 to 1990; Exhibit 2displays DHL�s revenues by industry.)

DHL used a hub system to transport shipments around the world. In 1991 the companyoperated 12 hubs (as shown in Exhibit 3). Within Europe, the United States, and the Middle East,DHL generally used owned or leased aircraft to carry its shipments, while on most intercontinentalroutes it used scheduled airlines. In 1991, approximately 65% of DHL shipments were sent viascheduled airlines and 35% via owned or leased aircraft. The other leading shippers also utilizedscheduled airlines but to a lesser extent than DHL. Federal Express relied on its own fleet of planes totransport all its shipments. Pierre Madec, DHL�s operations director, noted:

FedEx has a dedicated airfleet which ties up capital and limits the flexibilityof its operation: express packages are forced to wait until the FedEx plane�s takeoffslot, which at major international airports frequently does not tie in with the end-of-the-day courier pickups. By using a variety of scheduled international carriers, DHLis able to optimize its transport network to minimize delivery times.

DHL was organized into nine geographic regions. Region managers oversaw the relevantcountry managers and/or DHL agents in their regions and held profit and loss responsibility forperformance within their territories. Revenues and profits were recognized at the location where ashipment originated. Only 70 people worked at DHL�s world headquarters in Brussels. The mainfunctions of the worldwide marketing services group, of which Sarrafzadeh was a member, werebusiness development, information transfer, communication of best practice ideas, and salescoordination among the country operating units.

Of DHL�s 60 million shipments in 1990, 50 million were cross-border shipments. DHL�sworldwide mission statement, included in its 1990 annual report, read:

DHL will become the acknowledged global leader in the express delivery ofdocuments and packages. Leadership will be achieved by establishing the industrystandards of excellence for quality of service and by maintaining the lowest costposition relative to our service commitment in all markets of the world.

DHL management believed that achievement of this mission required the following:

• Absolute dedication to understanding and fulfilling DHL�s customers� needswith the appropriate mix of service, products, and price for each customer.

• Ensuring the long-term success of the business through profitable growth andreinvestment of earnings.

• An environment that rewards achievement, enthusiasm, and team spirit, andwhich offers each person in DHL superior opportunities for personaldevelopment 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 oneworldwide business.

• A professional organization able to maintain local initiative and local decisionmaking while working together within a centrally managed network.


4

DHL�s annual report also stated: �The evolution of our business into new services, markets orproducts will be completely driven by our single-minded commitment to anticipating and meetingthe changing needs of our customers.�

The International Air Express Industry

Total revenues for the international air express industry were approximately $3.4 billion in1989 and $4.3 billion in 1990. The air express industry offered two main products: document deliveryand parcel delivery. Industry revenues were split roughly 75:25 between parcels and documents. In1989, the parcel sector grew 40%, while the document sector grew 15%. The growth of parcel anddocument express delivery was at the expense of the air cargo market and other traditional modes ofshipping.

The growth of the air express industry was expected to continue. One optimistic forecast for1992 is presented in Table A. Other observers were concerned that shipping capacity would expandfaster than shipments, particularly if economic growth slowed.

Table A Worldwide International (Cross-Border) AirExpress 1992 Estimated Revenue Growth Rates

Market1992 Estimated

Growth Rate

Europe 28%Asia/Pacific 30United States 25Rest of the world 9

Total 25%

Note: Growth rates are for time-sensitive documents/packages under 30kilograms.

Acknowledging continuing progress toward completion of the European market integrationprogram by the end of 1992, an article on the air express industry in Europe in Forbes (April, 1991)noted:

The express-delivery business in Europe is booming. . . . Measured byrevenues, the European express-delivery business is growing at a 28% compoundannual rate. Big European companies are stocking products and parts in centrallocations and moving them by overnight express, instead of running warehouses ineach country.

Competitors

Air express companies serviced a geographic region either by using their own personnel orby hiring agents. Building a comprehensive international network of owned operations and/orreliable agents required considerable time and investment and, therefore, acted as a significant barrierto entry.


5

DHL�s principal competitors in door-to-door international air express delivery were FederalExpress, TNT, and UPS. (Exhibit 4 provides operational data for the top four competitors; Table Bsummarizes their 1988 market shares.)

Table B International Air Express MarketShares by $ Revenue (1988)

CompanyMarket Share

(%)

DHL 44%FedEx 7TNT 18UPS 4Others 27

Total 100%

Founded in 1973, FedEx focused for many years on the U.S. domestic market. During the late1980s, the company began to expand internationally through acquisitions and competitive pricing,sometimes undercutting DHL published prices by as much as 50%. Between 1987 and 1991, FedExinvested over $1 billion in 14 acquisitions in nine countries: the United Kingdom, Holland, WestGermany, Italy, Japan, Australia, United Arab Emirates, Canada, and the United States. FedEx alsoentered the international air freight business through the acquisition of Tiger International (FlyingTigers), which expanded further FedEx�s global reach in document as well as parcel delivery,particularly in Asia. However, the challenge of integrating so many acquisitions meant that FedEx�sinternational operations lost $43 million in 1989 and $194 million in 1990. Nevertheless, with 45% ofthe U.S. air express market, 7% of the European market, and leadership in value-added services basedon information systems technology, FedEx remained a formidable competitor.

Thomas Nationwide Transport (TNT) was a publicly owned Australian transport groupwhich had historically concentrated on air express delivery of documents. TNT focused mainly onEurope and had a low profile in North America. To participate in the North American market, TNTheld a 15% stake in an American shipper�Airborne Freight Corporation. This stake could beincreased to a maximum holding of only 25% under U.S. aviation laws. During the late 1980s, TNTbegan to target heavier shipments and bulk consolidations to fuel its growth.

United Parcel Service (UPS) was a privately held U.S. company, most of whose equity wasowned by its employees. UPS had traditionally been known as a parcel shipper that emphasizedeveryday low prices rather than the fastest delivery. Unlike DHL, UPS sometimes held a packageback to consolidate several shipments to the same destination in the interest of saving on costs. UPShad historically tried to avoid offering discounts from its published prices.

UPS�s 1990 annual report proclaimed the company�s strategy as follows:

UPS will achieve worldwide leadership in package distribution bydeveloping and delivering solutions that best meet our customers� distribution needsat competitive rates. To do so, we will build upon our extensive and efficientdistribution network, the legacy and dedication of our people to operational andservice excellence and our commitment to anticipate and respond rapidly tochanging market conditions and requirements.


6

In addition to the industry giants, there were many small shipping forwarders whichconcentrated on a specific geographic area or industry sector. In the late 1980s, many of these smallcompanies were acquired by larger firms trying to increase their market shares. National post officeswere also competitors in air express, but they could not offer the same service and reliability becausethey were not integrated across borders (that is, no national post office could control the shipment ofa package from one country to another). One industry executive commented: �When we haveinternal competitive discussions on international business, the post offices just don�t come up.�

Finally, the regular airlines were minor competitors in door-to-door express delivery. BritishAirways operated a wholesale airport-to-door courier service called Speedbird in cooperation withsmaller couriers that did not have international networks. Swissair serviced 50 countries through itsSkyracer service in cooperation with local agents. In the heavy cargo sector, most airlines were alliedwith freight forwarders who consolidated cargo from different sources and booked space in aircraft.These alliances represented significant competition as DHL expanded into delivery of heaviershipments. Some airlines were reluctant to upset their freight forwarder customers by dealing withintegrated shippers such as DHL.

Competition in the air express industry, aggravated by excess capacity, had resulted inintense price competition during the late 1980s.1 DHL�s chairman and CEO L. Patrick Lupo estimatedthat prices had dropped, on average, 5% each year from 1985 to 1990, with extreme price drops insome markets. For example, in Great Britain, DHL�s list prices for shipments to the United States fellapproximately 40% from 1987 to 1990. Some of the price reductions were offset, in part, by risingvolume and productivity, yet Lupo noted, �There�s no question that margins have been squeezed.�

DHL Services

DHL offered two services: Worldwide Document Express (DOX) and Worldwide ParcelExpress (WPX). DOX offered document delivery to locations around the world within the DHLnetwork. DOX was DHL�s first product and featured door-to-door service at an all-inclusive price fornondutiable/nondeclarable items. Typical items handled by DOX included interofficecorrespondence, computer printouts, and contracts. The number of documents sent to and from eachDHL location was, in most cases, evenly balanced.

WPX was a parcel transport service for nondocument items that had a commercial value orneeded to be declared to customs authorities. Like DOX, WPX offered door-to-door service at an all-inclusive price that covered DHL�s handling of both the exporting and importing of the shipment.Typical items handled by WPX included prototype samples, spare parts, diskettes, and videotapes.

DHL imposed size, weight, and content restrictions for all parcels. The size of a packagecould not exceed 175 centimeters in exterior dimensions (length + width + height), and the grossweight could not exceed 50 kilograms. Further, DHL would not ship various items such as firearms,hazardous material, jewelry, and pornographic material.

1 DHL planes flew, on average, 85% full in 1990. FedEx and UPS planes on international routes were thought tobe achieving only 60% capacity utilization.


7

Table C compares DHL�s parcel and document businesses for 1990.

Table C DHL�s Document and Parcel Businesses, 1990

TotalRevenues

Revenues Growth(1989–90)

TotalShipments

TotalWeight

GrossProfits

Document 60% +14% 70% 50% 53%

Parcel 40% +28% 30% 50% 47%

DHL offered numerous value-added services, including computerized tracking (LASERNET),24-hour customer service every day of the year, and proof of delivery service. Customers could alsotap the assistance of specialized industry consultants based in DHL regional offices. Such valueadded services could enhance customer loyalty and increase DHL�s share of a customer�sinternational shipping requirements. However, such services were expensive to provide andcustomers using them were often not always charged extra, particularly since those services were alsooffered by key competitors such as FedEx.

DHL had 20 years of experience in dealing with customs procedures and, by 1990, waselectronically linked into an international customs network. All shipments were bar coded, whichfacilitated computerized sorting and tracking. Thanks to a direct computer link between DHL andcustoms authorities in 5 European countries, customs clearance could occur while shipments were enroute. In addition, DHL�s staff included licensed customs brokers in 80 countries.

DHL had been cautious about differentiating itself on the basis of speed of service, andarrival times were not guaranteed. However, DHL executives believed that their extensive networkmeant that they could deliver packages faster than their competitors. Hence, in 1991, DHLcommissioned an independent research company to send on the same day five documents and fivedutiable packages from three U.S. origin cities via each of five air express companies to 21international destinations (three cities in each of seven regions). Exhibit 5 reports the percentages offirst place deliveries (i.e., fastest deliveries) achieved by each competitor in each region. DHL had thehighest percentage of first place results in six of the seven regions. The research also indicated thatDHL was consistently able to deliver more dutiable items through customs in time for earliestbusiness district delivery (before 10:30 a.m.) than any of its rivals. A similar intra-European studyfound that DHL also achieved the highest percentage of first place deliveries on packages shippedbetween cities within Europe.

DHL also commissioned the independent research company to ascertain how it was rated bycustomers against its key competitors. Table D reports the ratings on the two attributes consideredby customers to be the most important in choosing an international air express service.

Table D Ratings of Air Express Carriers

DHL TNT FedEx UPS

Reliability 8.4 7.7 7.8 8.1Value for money 8.0 7.3 7.5 8.0

Source: Triangle Management Services Ltd. and IRB International Research, 1991.Note: Respondents rated each carrier on a ten point scale (10 = high).


8

The study also asked the customer sample which air express carrier they would turn to first whensending both a document and a parcel to destinations in each of four geographic regions. Results arepresented in Exhibit 6. The results of a comparative study of unaided brand awareness for the majorinternational air express companies are summarized in Exhibit 7.

Customers

In the early years of air express, banks and finance houses were the major customers. Forfinancial institutions, delays in delivery of checks and promissory notes could cause considerablefinancial losses. During the 1970s, most air express shipments were �emergency� in nature.Examples included an urgent contract, a check or note that sealed a financial transaction, a computertape, a replacement part, and a mining sample which had to be studied before drilling could begin.During the 1980s, many customers began to use air express more systematically. For example,companies which operated �just-in-time� inventory systems began to use express delivery services todeliver components.

In 1990, DHL had 900,000 accounts, of which the top 250 accounts represented 10% ofrevenues and 15% of shipments. DHL had only about 10 global contracts with customers(representing 1% of revenues), as few multinational corporation (MNC) headquarters had expressedinterest in negotiating such agreements. Like DHL, most MNCs were decentralized. However, DHLdid have many regional agreements with MNCs as well as contracts in individual country markets.

Exhibit 8 shows how DHL segmented its U.S. customers in 1990 by level of monthly billingsand provides profile information on each segment. Tony Messuri, DHL New England area salesmanager, noted:

There are two principal types of customers. First, there are the people whoknow where they�re shipping. They know where their international offices arelocated and will ask overseas offices for feedback about shippers. These customersselect a carrier that�s well-received and well-respected by their own customers, bothinternal and external.

Second, there are customers who cannot forecast where their futureshipments will be going. They are more price sensitive but they can�t give us enoughinformation to enable us to set their discounts properly on the basis of anticipatedvolume. We are at more risk here of making a poor pricing decision. Sometimes afew months after we and the customer agree on a price and discount, the customerwill conclude that it�s overpaying, then seek more discounts from us or switchshippers.

Customers are very service sensitive. The small customers tend to switchshippers more readily. Often it only depends on which company�s sales rep visitedmost recently.

The parcel market was typically more price sensitive than the document market. For mostcompanies, the total cost of shipping parcels was a much larger line item than the total cost ofshipping documents. Further, the decision-making unit was often different for the two services. Thedecision on how to ship a document was frequently made by an individual manager or secretary. Asone shipper stated, �Documents go out the front door, whereas parcels go out the back door.� Parcelswere shipped from the loading dock by the traffic manager who could typically select from a list ofcarriers approved by the purchasing department. In some companies, parcel shipment decisionswere being consolidated, often under the vice president of logistics. As one European auto partssupplier stated: �We view parts delivery as a key component of our customer service.�


9

As a result, many customers split their air express business among several firms. Forexample, all documents might be shipped via DHL, while parcels might be assigned to anothercarrier. Alternatively, the customer�s business might be split by geographic region; a multinationalcompany might assign its North American business to Federal Express and its intercontinentalshipments to DHL. For the sake of convenience and price leverage, most large customers wereincreasingly inclined to concentrate their air express shipments worldwide with two or threepreferred suppliers.

Pricing

Evolution of pricing policy As DHL expanded service into new countries throughout the 1970sand 1980s, it developed many different pricing strategies and structures. DHL country managers hadalmost total control of pricing. They typically set prices based on four factors: what the market couldbear, prices charged by competition (which was often initially the national post office), DHL�s initialentry 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. (Exhibit 9provides sample prices for DHL, TNT, FedEx, and UPS.) In most countries, DHL published a tariffbook which was updated yearly. Competitors who followed DHL into new markets often patternedtheir pricing structures after DHL�s.

DHL had developed a sophisticated, proprietary software package called PRISM to analyzeprofitability. A PRISM staff officer at each regional office advised and trained country operatingunits on use of the software. The program could calculate profitability by route or by customer in agiven country. However, PRISM could not consolidate the profits of a given customer acrosscountries. (Exhibit 10 provides a fuller description of PRISM.) All profitability analyses had to bebased on average costs due to the variability in costs associated with transporting a shipment. Forexample, a package from Perth, Australia, to Tucson, Arizona, might be consolidated seven to eighttimes in transit and travel on five to six planes. Further, every package from Perth to Tucson did notnecessarily travel the same route. (Exhibit 11 shows the revenues and costs associated with twosample lanes to illustrate the significant impact of geographical differences on costs and profitability.)

PRISM was not used extensively by all DHL offices. As one country manager put it: �We andthe customer both want a simple pricing structure. PRISM just provides more information, adds tocomplexity, and takes time away from selling.�

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 equivalentweight due to extra costs for customs clearance, handling, packaging, and additional paperwork.FedEx charged the same for parcels and documents. Shipment weights were computed in pounds inthe United States and in kilograms in all other countries. Moreover, weight breaks varied amongcountries. For example, in Hong Kong breaks were every half kilogram, and in Spain, every twokilograms. Some DHL executives believed that, for the sake of simplicity, DHL�s weight breaksshould be the same worldwide. (Table E gives examples of base prices on routes from London.)


10

Table E DHL Sample Prices, 1990

From LondonFirst

1/2 Kilo

EachAdditional

1/2 Kilo

Document:to New York £24.50 £1.60to Switzerland £26.00 £2.20to Japan £26.50 £2.50

Parcel:to New York £27.00 £1.60to Switzerland £32.00 £2.20to Japan £34.00 £2.50

Pricing structures In all country markets served, DHL followed one of three pricing approaches:monthly handling fee, frequency discount, and loaded half-kilo.

Under the first approach, DHL charged a flat monthly fee to customers who wanted to beincluded on its regular pickup route. DHL automatically visited such customers once each businessday without the customer having to contact DHL for pickup. The purpose was to motivate customerusage of DHL�s services and encourage customers to process all their shipments through DHL.Customers who elected not to be on DHL�s regular route could either call for shipment pickup ordrop off a shipment at a DHL office. Customers who called for pickup were charged a nominalpickup fee. Under the monthly fee structure, customers did not receive volume discounts.

Sarrafzadeh summarized his views on the problems with this approach:

The monthly fee can work but only if it is properly marketed. Because itdoes not relate to a unit of value, customers resent 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.

In some markets, including Great Britain, DHL offered a frequency discount structure underwhich a discount was provided based on number of units shipped. The more often a customer usedDHL during a given month, the cheaper the unit shipment cost.

The frequency discount was based on the total number of documents and parcels shipped.For example, if a customer purchased 10 document and 20 parcel shipments in a given month, itreceived a discount of £10 per shipment. Under the frequency discount structure, a customer did notpay a standard monthly route fee and DHL visited the account only upon request.

The per-shipment frequency discount was retroactive and was computed for each customerat the end of the calendar month. Conversely, FedEx�s discounts were based on forecast demandrather than past performance and on revenues rather than unit shipments. FedEx monitored a newaccount�s actual shipments for six months before the account qualified for a discount and thenadjusted the discount upward or downward based on quarterly shipment data and shipmentdensity.2

2 Shipment density referred to the number of items picked up per stop. The more items collected per stop, thelower the pickup cost per unit. DHL�s information systems did not permit it to award discounts based onshipment density.


11

Sarrafzadeh noted:

Once you publish your frequency discounts, they�re no longer discounts.They�re expected. Though they may sometimes attract the small routine shipper, it�seasy for competitors to discover what the discounts are and undercut them. Better topublish only the book prices and apply discounts as needed on a case-by-case basis.

The loaded half-kilo structure used in the United States resembled the frequency discountstructure, except that discounts were based on total weight shipped during a given month rather thanon the number of shipments.

Price negotiations The largest customers sought one- or two-year deals with shippers to handletheir transport needs. Typically, when a current agreement was nearing its end, the customer put itsbusiness up for bid and solicited proposals from interested shippers. Proposals incorporated thefollowing information: transit times, overhead rate structures, rates for specified countries, trackingcapabilities, sample tracking reports, sample annual activity report, and a list of international stations(indicating which were company-owned versus run by agents). Most bid requests were made by thepurchasing manager, yet the decision-making unit was often a committee comprising managers fromthe traffic, sales and marketing, customer service, and purchasing departments. The decision wascomplicated because the major shippers were organized into different regions and lanes, therebyhindering direct comparisons among proposals. Sophisticated accounts typically calculated thebottom-line cost of each proposal, while unsophisticated accounts based their decisions oncomparisons on a few �reference prices� (e.g., New York-London).

The average term of shipping agreements was two years, with almost all ranging betweenone and three years. Fifteen percent of DHL agreements involved formal contracts, while the other85% were �handshake� agreements. Some customers tried to renegotiate prices in the middle of anagreement, though most Fortune 2000 companies abided by their deals.

DHL sales reps had significant flexibility when negotiating proposals. For example, the repcould tailor discount rates by lane such that an account would obtain large discounts on its mostfrequently used routes. DHL senior management typically gave only general direction to sales repson negotiating discounts. For example, senior management might advise, �Hold price on Asia, yetyou can give some on the United States and Europe.� Most proposals associated a monthly minimumlevel of billings (adjusted, if necessary, for seasonality of the business) with the offer of any discounts.

DHL sales reps could negotiate discounts from book prices up to 35%. District salesmanagers could approve discounts up to 50%, while discounts above 50% required the approval of aregional sales director. Further, discounts over 60% required approval from the vice president ofsales. For all discounts over 35%, a sales rep had to submit a Preferred Status Account (PSA) report,which included a detailed analysis of the profitability of the account. As shown in Exhibit 12, thePSA used a computer model to calculate fixed and variable costs, net profits by geographic lane andproduct line, and overall contribution margins. When deciding on the discount, managementconsidered not only the financial implications of the discount but also competitive and capacityfactors.

Tony Messuri, DHL New England area sales manager, stated:

It is good to have pricing flexibility. Managers at most companies are justlooking for justification to use us. But they and DHL upper managers both know thatwe�re not the only game in town. . . . We can sit down with a customer and build ourown rate table leaving the book prices aside. We can customize the table to thecustomer�s needs. This customization really helps negotiations.


12

Sales and Advertising

DHL had a single sales force which sold both document and parcel services. Sales reps wereorganized geographically and were evaluated primarily on monthly sales. Typically, sales reps hadseparate monthly sales objectives for international, domestic, and total sales and received a bonuswhenever they exceeded any one of the three. Sales managers were evaluated against profit as wellas revenue objectives.

When a new account called for a pickup, that account was assigned an account number thenext day and was called upon by a DHL sales rep within a week.3 At large companies, sales repstargeted the traffic, shipping and receiving, and purchasing departments, while at small companies,they focused their efforts on line managers such as the vice president of marketing or vice presidentof International.

Prior to 1984, DHL headquarters developed global advertising campaigns which the regionsand countries could adopt or not as they saw fit. After 1984, each country operation could contractwith its own local advertising agency. Headquarters approval of locally developed commercials wasnot required, though standard guidelines on presentation of the DHL name and logo had to befollowed worldwide. In addition, headquarters marketing staff disseminated to all DHL officescommercials that had worked especially well in a particular market that might be worth extending toothers.

DHL spent roughly 4% of worldwide sales on advertising. In 1990, DHL launched a newadvertising campaign in the United States based on the slogan: �Faster to More of the World.� Thiscampaign, inspired by the fighter pilot movie �Top Gun,� featured flying DHL delivery vans. (SeeExhibit 13.) In the United States, the objectives of DHL�s advertising campaign were threefold. First,DHL wanted to raise brand awareness. Second, DHL aimed to explain that shipping overseasrequired different capabilities from shipping within the continental United States. Third, DHL soughtto convince consumers that DHL was the best at shipping overseas because of its experience,network, worldwide scope, and people.

DHL advertising in Europe used the slogan: �You know it�s arrived the moment it�s sent.�(See Exhibit 14.)

Conclusion

As he pondered DHL�s pricing options, Sarrafzadeh recalled the old adage: �The value of athing is the price it will bring.� Perhaps DHL�s profits would be maximized if each country managersimply charged each customer �whatever the market could bear.� However, from a headquarter�sperspective, Sarrafzadeh believed a degree of order and consistency was necessary in DHL�s pricingstrategy, structure, and decision-making process. In particular, he wondered how pricing policycould enhance customer relationships, help to retain customers, and minimize their tendency to splittheir shipments among several air express carriers. Further penetration of existing accounts whereDHL carriers were already making pickups and deliveries would, he was convinced, result inincreased profits.

3 In the United States, prospective accounts with less than $500 in annual express shipment expenditures werehandled by DHL�s telemarketing center in Phoenix.


13

Exhibit 1 DHL Operations Statistics, 1973�1990

1973 1978 1983 1990

Shipments 2,000,000 5,400,000 12,400,000 60,000,000Customers 30,500 35,000 250,000 900,000Personnel 400 6,500 11,300 25,000Countries served 20 65 120 189Hubs 0 2 5 12Flights/day 14 303 792 1,466Aircraft 0 5 27 150Vehicles 300 2,235 5,940 7,209

Note: Shipments included both documents and parcels. Hubs were major shipment sorting centers. Aircraft and vehicledata included both owned and leased equipment.

Exhibit 2 DHL Worldwide Revenues by Industry,January-June 1991

Conglomerates 10%High technology 8Import-export 8Banking 7Transport 7Heavy engineering 6Chemicals 5Precision manufacturing 5Professional services 4Foodstuffs 4Textiles/leather 4Other 32


14

Exhibit 3 DHL Hub System


15

Exhibit 4 Major Air Express Competitors, 1988

DHL FedEx TNT UPS

International Air Express revenues(in $ millions) $1,200 $200 $500 $100

International Air Express employees 23,000 5,000 10,000 3,000

Countries covered 184 118 184 175

Total service outlets 1,427 1,135 800 1,700

Service outlets outside United States 1,207 278 750 465

Ratio of Owned: Agent country operations 2.00:1 0.53:1 0.77:1 0.36:1

Owned aircraft 49 38 17 3

Years of international experience 20 5 17 3

Document: Parcel revenues 65:35 20:80a 50:50 20:80

aAfter FedEx’s 1989 acquisition of Tiger International, Inc., its document:parcel revenue ratio remained relativelyunchanged as Tiger concentrated on heavy air freight. However, post-acquisition, document and parcel combinedrevenues represented a smaller portion of total revenues.

Exhibit 5 Shipment Delivery Speed Tracking Study: Fastest Delivery, 1991

DHL TNT FedEx UPS Airborne

Western Europe 39% 34% 4% 26% NAEastern Europe 42 16 14 28 1%Southeast Asia 34 16 18 6 27Far East 56 11 21 3 9Middle East 70 6 16 2 7South America 28 10 32 9 21Africa 62 9 13 10 7

All documents 55 15 13 13 6All parcels 40 14 21 11 14

Notes: To be read, for example: Of the packages shipped on the five carriers to Western Europe, 39% of the packagesthat arrived first at their destination were shipped by DHL.

Some rows do not sum to 100% due to ties.


16

Exhibit 6 Sample Customers� First Choice of Air Express Carrier by FinalDestination, 1991

DHL TNT FedEx UPS

Documents

Europe 32% 7% 8% 5%North America 38 10 10 4Middle East 35 14 6 5Australia 38 10 7 5Other 40 14 6 6

Parcels

Europe 28% 5% 7% 7%North America 32 7 12 8Middle East 33 13 6 7Australia 27 9 10 9Other 32 10 4 9

Source: Triangle Management Services Ltd., and IRB International Research, 1991.

Exhibit 7 Sample Customers� Unaided Brand Awareness for International Carriersof Documents and Parcels, 1991

DHL TNT FedEx UPS

Documents

All countries 87% 50% 23% 16%France 77 27 20 20Germany 90 71 25 20Italy 91 45 19 15United Kingdom 85 67 37 22

Parcels

All countries 72% 58% 28% 29%France 58 40 14 10Germany 67 76 28 46Italy 75 62 23 27United Kingdom 72 58 43 35

Source: Company records


17

Exhibit 8 Profile of DHL�s U.S.A. Customer Base (1990)

Customer Segment: Level of MonthlyBilling, International

Percent ofTotal

Accounts

PercentTypicalSales

PercentDHL Profits

PercentUsing

Discount a Penetration b Only DHL c

$ 0 - $ 2,000 15% 5% 45% 10-35% 70% 95%

$ 2,001 - $ 5,000 40 15 20 30-40 70 80

$ 5,001 - $15,000 35 30 25 40-50 60 60

$ 15,001+ 10 50 10 45-60 35 35

100% 100% 100%

Source: Company records

aThe exact discount was negotiated between DHL and the account. Percentages represent discounts off the published DHLtariff.

bPenetration means the percentage of all accounts in the segment that used DHL for at least some of their internationalshipping needs.

cTo be read, percent of DHL customers who use only DHL for international shipping.

Exhibit 9 Sample Published List Prices on Selected Routes (1990)

Service DHL TNT FedEx UPS

1 kilogram documentLondon – New York $51 $47 $50 $44

2 kilogram documentBrussels – Hong Kong 131 143 118 97

2 kilogram parcelSingapore – Sydney 120 120 39 34


18

Exhibit 10 Development and Description of PRISM

DHL local management was judged on revenue and controllable costs. The contribution ofeach local operation was calculated by subtracting local costs from revenue. This measure ofperformance did not, however, consider the costs to other country operations of delivery and whetherthe selling price was sufficient to cover the cost of pickup, line haul, hub transfer, delivery, andheadquarters overhead and management costs.

In 1987, all countries and regions analyzed their costs and provided DHL headquarters withdetailed delivery, pickup, hub, and line haul costs. Using these data, headquarters developed thePRISM (Pricing Implementation Strategy Model) software package. The inputs to the model were costdata along with competitive price information. PRISM costs were based on historical data which hadbeen consolidated and averaged.

Country organizations were provided with the PRISM software which enabled them toanalyze their profitability at the country, customer segment, and individual customer levels. Themethodology was refined further to take into account the scale economies large shippers provided toDHL.

PRISM was used for the following purposes:

• Analyzing the profit impacts of possible tariff adjustments, taking into accountthe competitive intensity of the route.

• Identifying low- or negative-margin customers whose yields should be managedupwards.

• Settling price strategy for different customer segments.

Country and regional managers were still measured on local contribution (local revenuesminus local costs). They were, however, encouraged to analyze profitability by account whendeveloping their annual budgets and use PRISM when considering price revisions. The level of use ofPRISM varied by region and country.

Source: Company records.


19

Exhibit 11 Revenue and Cost Lane Examples: DOX and WPX

DOX (Document) WPX (Parcel)

U.K. to United States (1990)

Revenue $5,723,000 $2,342,000

Outbound costHub costLine haula

Delivery

2,392,915596,608

1,121,8821,376,953

667,712490,436647,915386,049

Margin 234,642 149,888

Margin % 4.1 6.4

Shipments 231,139 68,580

Revenue/shipment $24.76 $34.15

Belgium to Hong Kong (1990)

Revenue $13,800,000 $6,660,000

Outbound costHub costLine haulDelivery

6,341,1001,138,1462,926,6622,276,292

1,837,7331,181,4001,767,7331,180,134

Margin 1,117,800 693,000

Margin % 8.1 10.5

Shipments 456,802 109,544

Revenue/shipment $30.21 $60.25

aLine haul refers to the air segment of the shipment.


20

Exhibit 12 Sample DHL Preferred Status Account Report

PSA Analysis for: Plasmo Systems

No. of Pickup Sites: 1

Stops per Month: 20

Origin Station: Boston

Model Date: 1/31/90

Costs Date: 4/7/89

Margin by Lane (Note: not all lanes included)

Service Lane RevenuePickupCosts

ShipCosts

WeightCosts

NetProfit

%Profit

DOC A Europe 45.89 3.12 24.02 7.62 11.13 24.3%DOC B Europe 48.02 3.12 28.72 7.66 8.70 18.0DOC C Europe 31.99 3.12 24.59 4.94 −0.66 −2.1DOC D Europe 23.17 3.12 20.46 2.34 −2.75 −11.9DOC E Latin Am 38.01 3.12 20.92 4.32 9.65 25.4DOC F MidEast 40.79 3.12 22.08 7.26 8.33 20.4DOC G Caribbn 31.32 3.12 21.29 3.76 3.15 10.1WPX A Europe 44.95 3.12 38.61 4.44 −1.22 −2.7WPX B Europe 73.25 3.12 47.36 5.49 17.28 23.6WPX D Canada 25.49 3.12 29.24 3.51 −10.38 −40.7

Margin by Product Line

Service Revenue Pickup Cost Ship Cost Weight Cost Net Profit % Profit

DOC 743 46 535 90 72 9.7%WPX 214 12 196 21 −15 −7.0

Fixed/Variable Cost Report

Service RevenueVariable

CostGrossMargin

FixedCost

U.S.Cost

Int’lCost

NetProfit

%Profit

DOC 743 476 267 195 494 177 72 9.7%WPX 214 173 41 56 180 49 −15 −7.0

Exh

ibit

13

Por

tion

of

a Sa

mp

le U

.S.A

. Ad

vert

isin

g Fl

ying

Van

Exh

ibit

14

Par

t of

a S

amp

le A

dve

rtis

emen

t: E

uro

pe