Real Postal Reform May Be on the Way

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Real postal reform may be on the way. I'm not talking about the so-called postal reform bill moving through Congress. That's not reform. All it does is make it easier for the U.S. Postal Service to raise rates. It contains no incentives for performance, and it includes no meaningful ways for the USPS to reduce its cost structure.


What it does do is remove significant financial obligations that the postal service should not have had to pay anyway. Indeed, Board of Governors chairman Jim Miller released a statement concerning the pending legislation saying in part that it " ... gave the board very limited authority to govern the organization as an efficient business enterprise."


The real postal reform is being generated internally at the USPS. It concerns the most recent negotiated service agreement proposed by the postal service. It's an agreement between the USPS and Bookspan, a direct marketer of general-interest and specialty book clubs. Bookspan is jointly owned by Bertelsmann and Time Warner. The NSA approves additional postage discounts to Bookspan for mailings above certain minimum levels that solicit membership to Bookspan book clubs from individuals who are not current members of the club being promoted.


Let's review some background. The postal service long relied on First-Class mail as the engine that let it provide universal delivery service nationwide. However, for various reasons including e-mail, fax, electronic bill payment and the consolidation of credit cards, First-Class mail probably has begun its long-expected slow but steady decline.


In response, the postal service has entered into a number of NSAs with financial institutions. Those NSAs nominally were set up to keep some First-Class mail from being diverted, but are actually justified through savings in address forwarding and address quality requirements. Yet these programs, though well intended, are just stopgap efforts.


The long-term First-Class trend is clear. It seems the postal service has concluded that its future growth depends on the health and growth of advertising mail. And the growth of ad mail depends on the ability of mailers to prospect cost-effectively for new customers. And though the USPS has a monopoly over the mailbox, it is in a very competitive environment with advertising alternatives including TV, radio, Internet, newspapers and newspaper inserts.


In that light, this proposed NSA, which needs approval by the USPS regulator, the Postal Rate Commission, makes a lot of sense. In general terms, the NSA provides Bookspan discounts of 1 to 3 cents per piece if it annually mails letter (not catalog) format solicitations to non-subscribers of 87 million to 150 million pieces. In the past three years Bookspan mailed an average of 87 million solicitations to non-subscribers. The deal provides a modest, one-time penalty of $200,000 if Bookspan doesn't mail at least 73 million letter mail solicitations in the first year of the agreement.


Undoubtedly, part of the postal service's equation for providing this mailing incentive is that more solicitations will result in more Bookspan customers, buying more products delivered by the USPS, possibly paying for those products via the mail and probably receiving additional solicitations for other Bookspan products.


In other words, the postal service aims to grow its business by reducing its customers' cost of prospecting for new business. It seems to me that this is real reform. It's the USPS acting like a normal business that needs to compete for customers. The other interesting aspect of this NSA is that it would appear very easy for other companies to ask for a similar deal. I imagine that if the PRC approves this NSA, a flock of companies will say, "Me, too."


So the ball will be in the PRC's court. It's interesting to note that some years ago a former PRC commissioner, when questioning a senior USPS official during a postal rate case proceeding, told the official that "trees grow and grass grows but mail doesn't grow." It will be interesting to see whether this group of commissioners will agree with the USPS and Bookspan that given the proper pricing incentives, mail can grow.


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