pricing strategy- Implementation and Consequences of Hertz


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pricing strategy- Implementation and Consequences of Hertz

  1. 1. Case Overview The case is on the pricing strategy- Implementation and Consequences of Hertz: A car rental company. The Company had been the market leader of the car rental industry; however, it witnessed a drop in the corporate accounts. This happened due to raised pricing of the company (25% increase in the profit margin) and because of the reduced pricing offered by the competitors- National, Avis and Budget. Objectives Hertz Corporation is, Market Leader in the rental car industry, has adopted a price cutting strategy. The case clearly highlights the major objective that the organization is witnessing – Whether this pricing is sustainable or not and will it generate expected returns. According to Harold Bingaman and Craig Koch are of the opinion that there has been a sudden increase in the demand of the cars since the new program has been implemented The major concern of Bennet E. Bidwell is that the company has witnessed a fall in the market share (40% during the first half of 1980 to 38% in the second half of 1980), whether adopting the Pricing Strategy that is being followed by the leader will guarantee returns or is it just a fad? Company background The Hertz Corporation, founded in 1924, was a $1.3 billion company referred to by one industry source as “Far and away the most profitable car rental firm in the world.” Headquartered in New York City, Hertz was a wholly owned subsidiary of RCA Corporation. Hertz was principally in the business of renting and leasing the automobiles and trucks to customers in the United States (81% of the business) and in more than 100 foreign countries. Other activities included – sale of the used vehicles, rental, lease and sale of construction and materials handling equipment The rental operations were conducted primarily at major airports and at downtown locations. As of 1981, Hertz had approximately 4,300 rental and leasing car locations worldwide- 75% were company owned and the 25% licensed independently. A consistent public image and flexibility in implementation of the corporate policy changes were observed by most of the licensees. Industry Analysis The automobile rental industry was valued at $2.5 billion and the markets were segmented intoLeisure Users- that represented a 35% of the market share; Business Users- 65% of the market share. Both Segments were catered to with different selling techniques. Leisure Customers were catered through intermediaries- Travel Agents; Advertising and Promotional Events. Business Users were initially consulted through their Purchasing agents and later directly- A sales force that contacted the Individual Purchasing Agents and then contacted Individual Employees.
  2. 2. Key Competitors Hertz corporation witnessed competition from major 4 national car rental companies-Avis, National Car Rental and Dollar apart from the smaller regional players Total1978 Hertz Avis National Budget Dollar All Other Total1979 1st Half- 2nd Half- Total1980 1980 1980 Jan.1981 40.5 26.9 19.4 9.4 3.3 .5 40.3 27.7 18.6 9.4 3.2 .8 40.6 27.3 18.1 9.8 3.4 .8 38.9 24.1 20.1 12 3.7 1.2 38.4 26.1 196 11.2 3.9 .8 39.5 26.7 18.8 10.5 3.7 .8 Certain Key points about the Competition are as follows: Hertz and Avis enjoyed fierce competition Avis captured a good portion of airport business with the advertising theme National competed with Avis for the second position and stressed on the quality and service Budget had the highest Return on Equity and the fastest rate of growth in Volume and in bottom line than the other Companies Corporate Policy was to price lower than Hertz in every market Key Customers Hertz market comprised of – Large and Small Corporate Accounts and Individual Business Customers % of car rental % of car rental % of car rental % Under revenues units profit Contract with Hertz 36 33 25 and 40 Small Individual Business Large Business 35 42 25 50 Weekend All other 3 22 5 17 7 35 -
  3. 3. New Pricing Plan In June 1980, the company had raised its commercial account contract rates by approximately 25% this gave the other competitors, that already priced lower than Hertz, an opportunity to significantly raise business by cutting the cost. The Competitors like National and Budget also increased their advertising revenue that helped them to pull some corporate accounts from the Hertz. Avis and National had come up with a No Mileage Pricing moves with certain conditions attached - Avis lowered the price for commercial accounts whereas National offered a new flat rate program for smaller commercial accounts. Hertz had conducted a survey in the second half of the 1980 that witnessed Hertz- being mentioned less than other major car rental companies. In another study, only 55% of the users believed that hertz provided – “Value for Money” The management at Hertz believed in innovatively combating the situation. They came up with increased advertising and sales promotion and strategic selling for the small business accounts. The result of the management’s Innovative Approach was that the company came up with the no mileage charge for cars in all the markets The new pricing offered the customer a flat rate based on the number of day the car would be used and a flat charge for the one way rental which would be based in the differential between the renting and check in cities The advertising campaign – “We are number one for everyone” focused at stressing the importance that the company is catering to all the market segments Pros and Cons Mar ketin g Impl eme ntati on Is e xc el le nt P o o r Appropriate Strategy is In appropriate
  4. 4. The organization has changed the strategy altogether, the new strategy is catering to all the segments in the market with a flat rate. The market penetration strategy may leave the company at a doubtful future. The margins have shredded for the top business accounts There have been a spurt in the current and the management is able to take care of the sudden increase The increase in demand should also match with the increase in the supply of fleets and distributors, etc so as to ensure the implementation does not fall Thus, as we can see from the above conclusion, firstly the strategy has been inappropriate for the organization as it is wiping out the profit margin for the company and at the same time it is also began to focus on all the segments. Thus in the short run the company reaped the benefits because of the efficient execution. The key concerns remain are of the sustaining this growth which may not be possible in the long term with the current capacity of the company, as shown in the diagram. Therefore, the company needs to come up with a strategy that helps it improve the quality and the value it offers to its customers but not at the cost of the price it charges across segments,