It is now 1991, DHL has established its role as the industrial leader in internaitonal express courier. However, the environment is changing rapidly. The air express giant is now facing fierce competitions like never before. With main competitors like FedEx, TNT, and UPS trying to acquire capacities and undercut DHL's price, price has dropped 5% each year from 1985 to 1990 by estimation, with extreme drops in some markets. Margins are being squeezed as a result. To maintain its advantage in the market, DHL is facing some important decisions such as price setting strategies and decision structure. Needless to say, DHL is making some crucial choices here. A right step will lead to better profitability but a false one might bring deep troubles.
Currently , DHL is implementing a variety of price discriminations.1st degree discrimination is achieved through price negotiation with large customers. The advantage is very clear: sales reps could customize to the customer's need, and ensure not losing the customer while charging a price as high as possible. 2nd degree discrimination could be found in the usage of monthly handling fees and frequency discounts. The monthly handling fee is charged to customers who want to be included on DHL's daily pickup route. It's a good way to prevent the customers from switching to other companies and enlarge profit. The problem is that it does not relate to a unit of value, therefore its not popular among customers, unless it is properly marketed. On the other hand, the frequency discount was based on total number of documents and parcels shipped. It's an example of block pricing, which intends to maximize producer's surplus. And finally, 3rd degree discrimination came into use when setting prices for different markets with different elasticities. All the three types of price discrimination are excellent ways to increase profits. Theoretically speaking, price discrimination is preferred to uniform pricing. But there have also been some argument against price discrimination.
The first concern is from the Multinational Customers (MNCs). They've been demanding a consistent worldwide pricing structure for their own convenience when keeping track of costs. All of them are large customers with a monthly billing of over $15,000, which seem be quite intimidating at a glimpse. However, if we take a good look at the profile of DHL's USA customer base (Exhibit 8), we can see that the $15,001+ accounts only make up 10% of DHL profits in 1990, which is not as significant as we might think. Also, DHL had only about 10 global contracts with MNCs, representing less than 1% of the revenue. Given these facts, the MNCs don't seems to be worth that much of attention. Price shouldn't be altered due to the pressure from MNCs. Instead, what DHL could do is to negotiate prices with MNCs seeking to cut deals, and agree upon customized prices that would satisfy both the customer and the company itself.
Another argument for uniform pricing is from within the company. Some top executives have suggested that a uniform pricing across regions could lead to better cost control. My view is that, a smarter pricing is way more important than cost reduction. Pricing is going to affect the company's profits most directly and effectively. Cost reduction is a time-consuming process which is best achieved by economies of scale and learning by doing. The profit forgone in implementing uniform price is likely to outweigh the extra gain from cost reduction, hence we should choose price discrimination over uniform pricing. After all, profit is what truly matters.
Up to this point, there should be no doubt about price discrimination. But in order to enforce price discrimination, DHL should provide its sales force with right incentives and resources necessary to carry out the best price. It has came to my attention that some very significant loopholes exist in these aspects.