Harvard Business School: Federal Express, Early History Case Study

A case study done in a University of Washington undergraduate marketing course conducted by Steven Xu, Brandon Cieu, Jason Trammell, Timothy Kim in Fall 2014

1. Company Analysis

The main strategic objective of Federal Express is to enter the air cargo market. They primarily target the small package shipment market. The Courier Pak brings to light many advantages for FedEx both through profit and space. The actual cost of the Courier Pak is $4.25 compared to $10.60 and $9.21 for Overnight and Standard Air. With that being said the Courier Pak is definitely a profitable and space saving choice to market to the public.

2. Customer Analysis

The major customers in 1976 for Courier Pak (CP) appear to be in the service industry. The “Rush” air market is 15.5 million shipments yearly in 1974, and CP accounts for 1.87% of the current market (1976 market of Rush shipments = (Table A)(155 million *1.2 growth rate = 186 *1.2 )= 223.2 million, (Exhibit 5 Monthly volume of CPs 27958*12.50*12 months)/ 223.2 million = 1.87%)). CP is an economically viable product because the profit attained from each CP is $8.25 (12.50 – 4.25 costs). If we executed a $1,000,000 marketing plan to promote the usage of CP’s then FedEx would have to already increase CP shipments by roughly 25% (1,000,000/8.25 = 121212 CPs annually = increase of 332 CPs daily, current average is 1300) to break even. This breakeven seems reasonable and is doable but at this time it would be unreasonable to think that they could increase usage to 6000 CP’s a day even with an aggressive marketing campaign. Volume of CPs is more important than weight as we have a fleet of jets capable of carrying tens of thousands of pounds of CPs but it’s unreasonable to think that we could even acquire that many CP customers.

3. Competition

Federal Express faces intense competition in the airfreight industry. Competitors include the trucking delivery service Air Cargo Inc., roughly one thousand freight forwarders such as Emery and Schulman, and the U.S. Postal Service. Of the 4 groups categorizing the market for domestic transportation of small packages, Courier Pak falls into the Rush Services category. Therefore Courier Pak’s competitors consist of services that provide overnight delivery. One of such competitors is FedEx’s own Priority One service, which provided overnight shipping more weight capacity but an average cost of $23.56. This might be regarded as corporate cannibalism due to the fact that priority one and Courier Pak compete for overnight shipping. Other companies that offer rush services include many airfreight forwarders, some airlines, and U.S. Postal Service Express Mail.

4. How should FedEx market CP? Which industries should FedEx focus on?

Due to Courier Pak’s low market share of the rush service market and many competitors, an acquisition based marketing strategy would be ideal. Although customer retention has proven to effective and cost efficient in the long run, customer acquisition is easier to measure and more feasible due to the low market share of CP at the moment. FedEx needs to differentiate CP from competitors so that it gives customers more value and an incentive to choose their product. This needs to be strongly and clearly communicated to its target consumers. Given our existing sales promotion force in different major cities, we believe that Fedex should utilize that existing force to promote Courier Pak to specific businesses from a B2B basis. We’ve identified certain industries that would yield the highest rate of Courier Pak usage per account, which will be explained later. The focus on B2B is due to the fact that our major source of Courier Pak users are businesses themselves. We believe that Fedex should focus on office related industries. In terms of potential growth for the Courier Pak service, we have identified Office Equipment and Printing as very strong industries for growth. This notion is brought on by analyzing the usage profile of Courier Pak customers based on different industries. By creating a ratio of the number of Courier Paks used monthly per account in each industry, we have found that the Office Equipment and printing industries have the highest usage of Courier Paks per account. Office Equipment yielded a rate of 46.5 Courier Paks per account and Printing yielded a rate of 19.5 Courier Paks a day. So with such a high Courier Pak usage rate per account, expanding the number of accounts within each of those industries should yield the highest gain in Courier Pak usage.

5. How Should FedEx Prime, Promote, and Distribute CP? Is $12.50 the right price?

Through volume trend analysis we see that the demand for Courier Pak (CP) has averaged at an increase of 36 packages every week since the beginning of 1974. With prices from $5 to $12.50, the demand is still growing at an approximately linear rate. The current price of $12.50 is acceptable as the current profit margin is 294% (12.50/4.25) and is 1% cheaper than Standard Air Service ($12.50 vs $12.62). Therefore any customer wanting to ship anything under 2 pounds will be enticed to use Courier Pak at lower cost and higher utility. With limited historical data based on the $12.50 price, we cannot be sure that the $12.50 price will continue the observed trend for increased demand. If the demand does fall below the average 36 a week increase we should revert to the $10 price point in order to see if demand will continue along the trend line we saw between 1975 and 1976.

In order to promote and distribute CPs our team believes that FedEx should reduce the minimum quantity necessary to place an order. Currently one needs to purchase five or more at a time in advance of shipping, but if we lowered that number to individual packages, more individual customers may appear wanting to ship their items. This allows individual consumers to use the CP system, and we can offer higher bulk discounts when marketing to enterprises to attract high volume orders. The allure of CPs is the speediness of the delivery, and so distribution methods should stay the same. Overnight deliveries are cost effective in terms of the FedEx infrastructure currently, and so we should not explore other options that could potentially slow down the delivery process, e.g. on-the-ground freights and slower flights. The longer delivery is delayed the less our customers will be satisfied.