Federal Express Case
Federal Express Case
In 1971, Mr. Smith started Federal Express, a shipping company that has revolutionized our world. He saw a huge market potential for small package air service. Realizing that there was a need for overnight shipping, Mr. Smith started the company to meet those needs. We can appreciate a huge potential market in Courier Pack. Right now, we are selling 1300 Courier Packs (CP) a day.
While reaching a target of 6000 could seem impossible, we want to show why it is feasible. 1. Courier Pak should be targeted as a long term project for FedEx to be implemented from both the market need and company’s growth perspectives. CP can be used by different industries that have the need to transport confidential documents or exceptionally high-value shipments of small volume. Firstly, the usage profile of Courier Pak customers in 1976 has almost covered all industries ranging from manufacturing, consulting, financial service, to IT and medical supplies, etc. At the same time, the volume of Courier Pak being used kept increasing from 140 packages a day to at most 1304 per day and it is suggested that the market for small items was almost 870,000 pieces per day.
Thus there is huge demand from the market for fast and secure air delivery.
Secondly, Courier Pak is a profitable and achievable service given the company’s current resources and capacity. The variable cost associated with Courier Pak was $4.25, which is much cheaper compared to Priority one– $10.6. Contribution profit made out of Courier Pak is $8.25 per package and if the company increases the daily delivery from 1300 to 6000, profit will increase by $38775 per day, nearly $14 million a year. Given that the maximum weight of Courier Pak is two pounds and the volume of it represented less than 10% of total overnight package volume for Federal Express since 1975, there will be plenty of space for Federal Express to increase its delivery in Courier Pak. Though Courier Pak still has its weaknesses such as the weight limitation of 2 lbs., the advantages outweighs its weaknesses.
2. CP is often used by executives or secretaries of companies to ship documents within two pounds on short notice. Since most of these documents are confidential and important, the way of transporting these documents is crucial– it needs to be fast and secured. CP is an economically viable product that fulfills the requirement. It guarantees overnight delivery anywhere in the system for a flat cost of $12.50 per package, whereas shipping costs per package for Priority-1 or SAS were based on weight and distance, and varied widely.
There are currently three market segments in the air shipping industry: Routine Air, Rush, and Emergency Air.
According to Exhibit 6, the total market size for the Emergency and Rush market segments as of 1976 is 870,000 pieces per day. However, FedEx only handles around 1,300 CPs a day, which represents a major opportunity for FedEx to exploit the unfulfilled potential of CP by increasing that number to at least 6,000 daily. Selling an additional of 4700 CPs a day is achievable. FedEx carries an average daily volume of 19,000 packages of which less than 10% represents its CP product segment. Given that an aircraft has a cargo-carrying capacity of 6,200 pounds, a single aircraft can easily fit in 3100 CPs; delivering 6000 CPs will only take 2 aircrafts. Hence, increasing the daily volume of CP to 6000 packages is doable and beneficial.
3. Compared to other air delivery companies such as USPS, American Airlines Priority Parcel Service, CP has its competitiveness in fast speed and low price. The challenge would come from how to maintain and attract more customers among other airfreight companies. In order to maintain customers, FedEx needs to develop a firm relationship with customers from its high quality service and always be ready to adjust business strategies based on customers’ needs. In order to increase its market share in the airfreight industry, attracting more new customers brings the company higher CLV.
It is mentioned in the case that the industry lack marketing expertise in general, relying heavily on personal selling efforts, which is much less efficient. Thus how to market CP service to targeted customers and make the advertisement stand out and impressive among consumers compared to other airfreight companies will be a challenge for FedEx for future growth.
4. FedEx should focus on the Manufacturing and distribution industry, which accounts for 17.1% of total usage of CP, and market CP extensively to promote its speed and reliability. While its competitor, Emery, enjoyed very high awareness, many people were not aware of the full extent of products that FedEx provides. According to Exhibit 3, 93% of FedEx packages arrived the next day, versus only 42% for Emery, which positioned FedEx firmly against Emery. That being said, FedEx should introduce a new campaign to stimulate awareness of CP and clearly state the values and benefits of using CP, such as: (1). it can be purchased in advance in quantities of five or more at a time, ensuring that customers don’t have to visit the post office each time they need to ship documents.
(2). it costs a flat fee of $12.50, reducing the invoice and cost forecasting process for businesses. (3). FEC’s shipment hubs in Pittsburg and Memphis are precisely selected in regions of constant weather so that weather related delays will be fewer. (4). the unique waterproof and tear-proof envelope provides an extra degree of security to the documents.
5. Price: Besides considering the cost of handling per CP package, FedEx should take the long term volume sales projection into consideration. If FedEx wants to attract more customers in terms of volume, setting the price that generates less profit margin will make it more competitive since more customers will be attracted due to low price, at the same time, our volume of sale increases by huge amount, which brings up our total dollar sales. Promotion: Since experience suggests that the decision to use Courier Pak is often made by executives rather than shipping managers, developing a good relationship with the right person in charge of choosing transportation carrier is of great importance.
Also, keep track of potential customers of Courtier Pak more frequently and send those customized coupons or emails to let them know more about the features of CP service as well as special promotion programs available. Using social media such as TV, Internet and newspaper to advertise CP service and get feedback from customers of what kind of experience they expect from our service. Distribute: CP’s current price of $12.5 is a reasonable price but still can be lowered to attract more customers. Given the fact that the contribution margin per CP package is $8.25, and will become pure net profit once it reaches breakeven point and that envelops must be bought in quantities of 5 at a time, there’s still opportunity for FedEx to make its price more competitive.
6. Firstly, FedEx has specialized in the Emergency and Rush market segments. Therefore, promoting CP is consistent with the company’s product portfolio. Also, CP has been the company’s most profitable product, as shown in Table 1. It has the highest profit margin of 66%, versus 55% for Priority-1 and only 27% for SAS. Lastly, CP with an average weight of just one pound and a consistent size of 12 inches by 15.5 inches is on average much smaller and lighter than Priority-1 or SAS shipments. Because of the size and weight limits of FedEx’s aircrafts,CP would cut down the overall shipping costs for the company, meaning that they will also save some money that can be used in elsewhere, such as advertising.
With an increase in the market for small packages at a rate of 20% per year, we can presume the volumes to grow regardless of advertising. However, FedEx has surplus capacity, and only serves a small portion of the market. That’s why FedEx must take market share from the market leaders, such as Emery by distinguishing itself more trustworthy and efficient than Emery. At a contribution margin of $8.25 per CP sold, it would take approximately 121,212 CPs to break even with a one million dollar marketing campaign. At the current rate of CP sales (1,300 per day), it would take 93.2 days to break even; and at the goal rate of 6000 CPs per day, it would take only 20 days. Therefore we should go ahead with this campaign (See Appendix).
In conclusion, taking into consideration of CP´s competitive advantages, there is a high probability that we can capture most of this developing market segment. By implementing new marketing campaigns, our sales will certainly increase. If FedEx continue to do well in the market, they should consider expanding into more cities since FedEx offers a service that everyone needs. Nevertheless, they should always keep their reliability, in that way they will build stronger customer relationships which will lead to higher retention rates plus showing a strong comparative advantage over their competitors. Appendix