Experts: No USPS rate increase could result in customer retention

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Direct mailers are calling the US Postal Service's announcement that it will not raise rates for almost all of its shipping categories next year a welcome surprise, especially considering that many were preparing additional funding for a rate increase.

Jim O'Brien, VP of distribution and postal affairs for Time Inc., said that the decision is “going to have a very positive impact on mailers right now.”

“Most people were budgeting for a modest increase, given the dire financial situation of the Postal Service and the numbers that have been predicted, and now this is going to bring some relief,” he said.

O'Brien explained that his company was “planning for a rate increase, but doing as much as we possibly could to convince the US Postal Service that this shouldn't happen.” Industry groups told John Potter, postmaster general, that a rate increase would hurt them significantly during this period of economic instability, he added.

O'Brien said it was too early to determine how marketers would spend the money they are saving on postal rates. However, he did say that “hopefully people will use this relief to reinstate their mailing programs and give more volume to the postal service.”

Amine Khechfe, VP and general manager of Endicia, a postal and shipping services company, said that the decision not to increase rates may result on marketers considering additional direct mail efforts next year.

“People may think of this as an opportunity to do more direct mailings,” he said. 

The decision comes more than a week after Potter outlined the plight of the Postal Service – its 2009 mail volume is believed to be about 20 billion pieces lighter than that of the year before – and took on proponents of do-not-mail legislation in a speech before the National Press Club. He said that the agency faces annual deficits of at least $5 billion for years to come if it does not change the way it does business.

Despite trimming $6 billion from its expenses and cutting its workforce by about 40,000 positions, the agency lost $3 billion in fiscal year 2009 – the second-largest net loss since it was reorganized in 1971.

With that in mind, many marketers were at least considering the possibility that the USPS would raise commercial rates. John Campo, VP of postal relations at Pitney Bowes, said that the decision “provides a measure of stability for the customers of the postal service and the customers of Pitney Bowes” and hailed “strong leadership” by Potter.

He agreed that most marketers were prepared for a rate increase, as well as other economic issues.

“I think that many people had a contingency plan in place for a potential rate increase, but the reality is that almost every business in America is having some type of economic stress,” he said. “The Postal Service recognizes that increasing rates would possibly facilitate customers looking at alternative forms of communication. So instead of exacerbating the situation, Potter made a good business decision.”

Campo estimated that marketers could save 2% to 3% of their mailing budget because of the decision.

“In terms of a doctor's office or an accounting office, that could be seen as negligible, but in terms of American Express or State Farm, that could be significant,” he said, adding that he's received “very, very positive” feedback from customers and trade associations on the issue.

The announcement was timed for period when many marketers are determining their budgets for the next year, said Gerald McKiernan, USPS spokesperson.

“At the very least, this should give people a respite,” he said. “We are all coming out of a tough time right now.”

McKiernan added that while the agency could have seen some short-term gains with a rate increase, it hopes to see a long-term stabilization in volume and revenue by foregoing one.

“You would have to think that if people increase their use of the mail because of this position, the revenue and volume will be better for us,” he said.

Earlier this week, the USPS narrowed the list of branches it could close to 317 in an effort to further cut its spending. Focusing its effort on urban and suburban branches, the agency is considering the fate of 19 locations in Los Angeles, 16 in New York, 13 in Atlanta and nine in Washington, DC.

The US Congress approved legislation last month that allowed the Postal Service to delay $4 billion in payments to a retirees' healthcare fund. The USPS had been charged with spending $5.4 billion on payments to the fund. Had Congress not passed the measure, the USPS would have lost $7 billion in fiscal year 2009.

And while a rate increase could have helped the Postal Service cut into those deficit numbers in the short term, it may have prevented the further shrinking of its customer base with the move, said O'Brien.

 “I believe that it is a good move because volume is a one-way street. Things that go electronic don't come back,” he said. “And if you raise your rates and drive people out of mail, you may never see them again, and then they're out of your volume base forever.”

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