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 a 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 has 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.