Postal Penance: One year after a disastrous rate hike, the USPS promises predictable pricing and internal reforms

4 Mar

Originally published in Target Marketing’s Tipline E-Newsletter
by Britt Brouse
April 1, 2008

Thanks to U.S. laws banning more than two consecutive presidential terms, in November, there won’t be anyone outside the White House chanting: “Four more years!”. Instead, there is an exciting race for a new candidate to step into office, embodying hope and change.

For years, the USPS has held sovereign control over rate cases, without regulations in place, like the consecutive-term legislation, to protect public interest. “One of the big issues under the old laws was whether the then Postal Rate Commission (PRC) had the authority to look at the size of the piece of pie that the Postal Service was asking for and say, ‘You don’t need that size; you only need this much.’ But, basically, the Postal Service could get pretty much what it asked for,” said Ed Gleiman, consultant to the Direct Marketing Association (DMA) on postal issues, and former chairman of the PRC.

Due to the extremely high May 2007 rate increase, the introduction of shaped-based pricing, rises in production costs and a continued economic downturn in 2007 to 2008, the volume of mail sent dropped significantly, resulting in lower revenues for both mailers and the USPS. On top of this, another rate adjustment went into effect for May 12.

To protect both mailers’ and USPS’ interests, the new Postal Accountability and Enhancement Act (PAEA) has already taken effect and capped the May 2008 rate increases for mail services at or below the Consumer Price Index (CPI). The PAEA is the first major legislative change in USPS history in more than 30 years, and grants the former PRC—now the Postal Regulatory Commission—greater authority. Meanwhile, the USPS has also enacted its Strategic Transformation Plan, a series of internal reforms slated for a 2010 completion, which promote renewed efficiency, accountability, profitability and market compatibility in its system.

With this new legislation and framework built for change, one year after the worst rate case in U.S. postal history, it is again possible to see the goals of the post office and mailers converging.

The New Law vs. the Old Rate Case System

Perhaps the USPS is paying penance for its misdeeds last year, for the proposed rate adjustments for May are unusually benign. Yet, there’s much more to it. “It’s the new law that’s the key to the new rates this year—not anything that transpired in the last six to eight months,” Gleiman stressed.

As a result of the PAEA, the average rate increase for each mail class in 2008 to 2009 cannot exceed 2.9 percent. Mailing services account for 90 percent of USPS revenue, and the general rate increases across each class come in just below the CPI: First Class at 2.89 percent, Standard mail at 2.88 percent, periodicals at 2.71 percent, package services at 2.88 percent and special services at 2.85 percent.

Within the classes, some categories were hit hard while others actually decreased, but none were affected even remotely close to the levels of 2007. “The old system was inconsistent with normal business practices in this country. It’s now predictable—you can track the rate of inflation and the CPI to predict what the new rate is going to be,” said Tony Conway, executive director for the Washington, D.C.–based Alliance of Nonprofit Mailers.

Compared to a traditional rate case, this procedure seems easy. “This is not a lengthy back-and-forth process. There’s no rebuttal. There’s no filing of briefs,” remarked Gleiman, who added that litigating past rate cases not only took up tens of thousands of pages of paper and months of time for numerous lawyers and economists, but cost intervening companies, organizations and citizens millions of dollars.

Looking ahead, the USPS plans to announce every February what the new pricing will be in May. In the interim 90-day period, between the announcement and the new rates, there’s a 20-day comment period where companies and private citizens can file remarks. However, with the CPI in effect, the rates laid out in February are most likely to be approved under the new law without much strife. In 10 years, there will be a review by the PRC to determine whether the PAEA is effective and put forward any changes necessary to achieve any of the law’s original objectives.

Crunching Numbers

Average rate increases convey general costs. But there are different pricing and rate adjustments throughout all classes and levels of destination-entry discounts, drop-shipping, sorting and automation—and differences for piece and pound rates, commingling and container types for periodicals. Therefore, each mailer must crunch its own campaign numbers to determine how to adapt to this and next year’s mailing climate. “Each mailer has to look at his [or her] mail and determine whether or not they want to do more automation, more drop shipping … look at their mailing lists and determine whether they want to go to the next level in prospecting,” Gleiman said.

Assuming that there will be another similar increase in 2009 to 2010, marketers may even want to make projections over the next two years. The full-service printer RR Donnelley, Chicago, has posted a helpful rate calculator on http://www.rrd.com. The DMA also has downloadable Excel files at http://www.the-dma.org, which show current rates, proposed new rates and the percent change for every kind of mail, all in one table. The USPS has the proposed rates on its site at http://www.usps.com/prices.

Some of the rate changes stand out, like the minor increase on flats and a reduced pound rate for flats, both of which will help catalogers and stimulate more volume in flat mail—which has dropped off significantly since last year’s rate case. “Catalogers were hit with a larger increase last year, so we wanted to make sure that they had a lower increase this time [and] that’s well below the 2.9 percent,” said Dave Partenheimer, spokesperson for the USPS.

Adjustments to flats were especially clement toward nonprofit mailers, which saw a decrease of 1.2 percent; again, this will help counteract the hit this class took last spring. “Flats from a marketing standpoint are more effective because they have more real estate, so I’d like to think that this decrease will be an inducement to help folks that were on the fence in terms of getting out of flats completely,” said Conway.

Introduced last year at an already high cost, the non-flat machinable category was hurt with a 9.7 percent average increase—7.6 percent for nonprofits. It is unlikely, however, that mailers will reconsider use of any up-front freemiums, which make envelopes lumpy and unable to go through the USPS sorting machines.

Generally, the new rates will spur more testing of new formats and strategies. “I suspect there will be a little bit less prospecting, with efforts to create some new packaging which will move folks into a lower rate category. I think everybody is scurrying around to try to find a way to put pieces together that will fit their business model for selling the products they’re selling and, at the same time, will also help them out with the ever-increasing rates that they have to pay for postage,” Gleiman commented.

The USPS Plan

The four main goals stated in the USPS Strategic Transformation Plan are to generate revenue, reduce costs, improve service and achieve results with a customer-focused, performance-based culture. Integral to these goals are some innovations, including Intelligent Mail (IM) and a Flats Sequence System (FSS); when fully adopted, both will greatly improve commercial mail.

During the Board of Governors meeting in January, USPS Postmaster General and CEO John E. Potter likened IM to having a GPS system for mail. That’s because IM barcodes, when applied to mail and mail containers, will allow for continuous tracking and access to real-time data—an invaluable quality to mailers and to the USPS for highlighting opportunities for improvement within its own network.

For marketers, the IM barcode leaves more space available on the outer envelope for valuable marketing messages, electronically automates address verification and sorting, and promises faster service and improved deliverability. These factors also result in reduced costs and increased efficiency for the USPS. By the end of 2007, there were IM barcodes on more than 530 million mail pieces, and this number will continue to grow as IM is set to become an industry standard by the end of 2009.

In 2007, the USPS handled 52 billion pieces of flat mail—approximately 25 percent of its total mail volume. Yet, with only 60 percent of flat mail automated, the manual process is still exceedingly expensive, and those costs are passed on to mailers. That’s why the USPS plans to implement its FSS throughout 2008 and work[s] to achieve greater automation and lower rates within flat mail. “It will be an extreme help in streamlining our operations and increasing efficiency, so that’s all part of our overall objective of taking costs out of the system and becoming more efficient,” Partenheimer said.

In the interests of catalogers, newspapers, periodicals and other marketers who favor flats, the application of FSS technology is vital. “The only way we can keep rates affordable, and keep rates at or under the rate of inflation with the new law, is to continue to apply technology and process in order to keep delivery costs down,” stated USPS Deputy Postmaster General and COO Patrick Donahoe at a recent postal symposium. By this summer, a total of 33 facilities will have the flat-sorting machines, and the service is expected to expand thereafter. Other noteworthy USPS goals outlined in the plan include reducing costs by $1 billion annually, reducing energy use in its facilities by 20 percent within five years, and adopting more recycled and recyclable products. There are also plans to improve online services, like the online change-of-address form, and to cut in half by 2010 the amount of undeliverable-as-addressed mail—which costs $1 billion a year to process.

Glass Half-Full or Half-Empty?

The PRC’s 20-day commenting period closed in March, and the proposed rates were approved without argument in May, as various experts predicted. Yet, some struggle with the details of the new laws, such as the USPS’ right to roll over unused percentage points. “The law allows the Postal Service to bank unused percentage points to be built into the future rate cases. A 0.1 percent differential per class, that’s not a great big deal, but over time, if they continue to bank fractional points, it could continue to add up to some real money,” Conway warned.

In his study of the proposed rates, Gleiman expressed concern with customers receiving enough of a rate savings for their efforts to automate and streamline mailings. “One of the issues is whether or not the Postal Service has passed through the costs that they are able to avoid as a result of mailer work-sharing. If the Postal Service avoids a penny per letter, and it only gives a quarter of a cent discount, that’s probably something that we would want to look at,” he said.

The bottom line is to strive for efficiency and lower costs. “What’s best for the Postal Service and the business mailing community is to assure that we achieve the lowest combined costs in getting a piece of mail from point A to point B,” Gleiman stated. He surmised that, by and large, mailers fared reasonably well within the recent adjustment. But an increase is still an increase, and though small, these changes are going to be painful. “It just squeezes everybody a little bit more,” he concluded.

In the next 10 years, USPS reforms may help alleviate some of the annual increases, but in order to fulfill the market’s needs, the USPS must become a competitive and, someday, profitable institution.

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