Rate increases may permanently damage mail industry

The Governors of the U.S. Postal Service have approved the Postal Regulatory Commission’s proposed 7.6 percent average rate increase. The PRC’s recommendation was one of its first acts under its new mandate. However, the rate increase has the possibility of doing permanent damage to commercial postal users and therefore the U.S. Postal Service itself. The commissioners and their staff just don’t understand the damage they may have done to the postal service and the direct mail industry.

The part of the PRC recommendation that gathered the most publicity was the authorization of the postal service’s usage of a “forever stamp.” This is a stamp that will have limited distribution and will be usable for the basic First Class rate during periods of rate change. The stamp will have no effect on the long-term health of the postal service. But what will have an impact is the damage that has been done to Standard mailers from the rates that have been approved.

First, let’s start with some basic understanding about the future of mail volume. First Class mail has begun a slow but steady decline. There is also general agreement that the future of the postal service will require a continuation of the robust growth of Standard (advertising) mail.

Second, there is a history of price elasticity statistics demonstrating that First Class mail is relatively inelastic. That is, volume is relatively unaffected by price changes. On the other hand, Standard mail volume growth is affected by price changes.

Given this economic background, what has the commission chosen to do to First Class postage rates? Today a First Class stamp costs 39 cents. The postal service proposed an increase to 42 cents. But the PRC reduced the increase by a penny to 41 cents. The impact of a one-cent reduction will be a negligible change in mailing plans for users of First Class mail. However, the change may reduce postal service revenue by several hundred million dollars.

The second major change to First Class rates had to do with the rate for heavier weighted mail. Today, the rate is 24 cents. The postal service proposed a decrease to 20 cents. But the PRC increased the reduction even further to 17 cents. The major beneficiaries of this reduction will be banks, insurance companies, brokers and telephone companies. They use First Class to send multi-paged, heavier weighted First Class mail. They will save millions from this reduction. This group has made ongoing attempts to move these mailings to the Internet. A reduction of a few pennies in postage will not affect their plans to move online, but it will remove further millions in revenues from the postal service.

Unlike First Class, Standard mail demonstrates quite an elasticity of demand. That is, higher prices reduce volume growth while lower prices increase mail volume growth.

The postal service’s financial health depends on a growing volume of Standard mail. That is particularly important, given both new reform legislation and recent labor contract settlements.

The new craft unions contracts provide no layoff clauses, and the reform legislation puts limits on the postal service’s ability to raise rates. This will put added pressure on productivity improvements and a continued high level of Standard mail growth. Yet the PRC really whacked Standard mail rates. Increases greater than 10 percent are the norm. Many see increases of 20 percent. Some small parcels are seeing rate increases of 50 percent.

I hope this outcome has taught mailing industry leaders a lesson. They must get involved in the selection process for regulatory commissioners and Governors to the postal service board. And they must be involved in the Senate’s approval process if nominees are found to be wanting in requisites and the understanding the industry considers necessary.

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