The R2000 Rate Change and Its Impact on Direct Mailers

It's that time again. The bad news is that direct marketing professionals are about to find out how much of a postal rate increase they will get next year. The good news is that postal rate turbulence means there's an opportunity for direct marketers to help their customers navigate direct mail's increasingly choppy waters.

R2000 — the U.S. Postal Service's most recent rate increase proposal — was filed in January. Next week, the Postal Rate Commission, an independent body that reviews the USPS operating budget, will make its recommendation to the Board of Governors. Then, the board will make its rate decisions and implement the final rate plan in January.

If recent history is any indication, the USPS may not get all it asked for. Neither the PRC nor the Board of Governors has been shy about changing USPS plans set before it. In the last rate case, which went into effect in January 1999, the USPS got about half of what it wanted, pretty much across the board.

Particularly of note, R2000 contains:

• A $1 billion contingency fund.

• A penny increase, to 34 cents, in regular First-Class letter mail postage.

• An average increase between 8.2 percent and 8.5 percent for automated Standard-A mail.

Let's start with the contingency fund, which is huge by any stretch of the imagination. Supposedly, $1 billion will be used to take care of things that the USPS is unable to forecast. Right now, the smart bet is that this fund probably won't fly, or at least will be significantly reduced. To date, it has fielded criticism from most mailing associations as well as from many consumer advocate groups. As far as I can tell, not a lot of organizations, other than the USPS, support it. Therefore, it's likely we will see it trimmed.

So, how will a likely contingency fund reduction be redistributed throughout the new postal rate structure? This is where a crystal ball would be handy. One remote possibility is that a significant reduction could eliminate the need for the 34-cent First-Class stamp. However, this is unlikely, because the USPS would experience a revenue shortfall. To compensate, Standard-A rates would need a double-digit increase. Obviously, this alternative would be completely unacceptable to the business community.

Another possibility is to increase First-Class postage to 33 1/2 cents. But at this point, it's probably impractical to ask the public to accept a stamp with a fraction of a penny. Even though the integer problem might be addressed in the next postal rate request (either with a fraction or with a new First-Class business rate), for now it's reasonable to assume that the PRC will round up First-Class postage to 34 cents.

Below are four major areas of R2000 likely to be scrutinized by the PRC and the Board of Governors:

• Automation. In R2000, the USPS is asking for rate increases for automated mail of up to almost 15 percent. At the same time, basic mail (which requires the most manual postal effort) is increasing only 2 percent. The logic behind this is that the USPS believes it can automate this mail without a pre-applied barcode. However, this automation disincentive is exactly the wrong message for the USPS to send.

• Drop shipping. In R2000, the USPS “passes through” only 65 percent of Standard-A postal savings generated by drop shipping. This means that a good portion of the projected rate increase could be absorbed by proper recognition of the work-sharing discount. Again, R2000 rewards poor mailing behavior — and this is terrible policy. Automation-friendly mailers that drop ship in order to help the USPS meet its mail delivery obligations should be rewarded with pass-through rates closer to 100 percent. Look for the PRC to make a significant adjustment here.

• Standard-B bound printed matter. The 18 percent to 40 percent postal rate increase for Standard-B bound printed matter whacks mailers dependent on this mail class too hard. The USPS' dilemma is that parcels in the 2-pound to 4-pound range are costly to deliver. Compounding the problem is that zone rates will be eliminated, resulting in a vicious circle where the lack of appropriate drop shipping incentives increases USPS delivery costs even further. Regardless, there needs to be some rate sensitivity applied here.

• Inappropriate rate reductions. For the third time in as many rate increase proposals, the USPS is asking for a rate reduction for mail between 3.3 ounces and 16 ounces. Up to 3.9 ounces, the average rate of increase is 5 percent, but as mail gets progressively heavier, the rate decreases until the 1-pound weight limit is reached. The past two times the USPS asked for similar rate reductions, the PRC threw them out. The good news is that if this rate reduction request is rejected a third time, the additional postal revenues will allow other R2000 rates to decrease.

The Bottom Line

Direct mailing professionals should count on automated Standard-A mail rates to increase between 8.2 percent and 8.5 percent on average. This means you need to get a better bang for your promotional buck and mail smarter with:

• Better targeting.

• Better capturing of automation discounts.

• Better creative.

First, better targeting means improving data collection, analysis and usage. Data-cleansing processes must improve so that more mail gets to the right destinations and is put in the hands of key business influencers. Second, since better targeting usually results in smaller mailings, direct mailers are likely to lose some valuable automation discounts. If your number of mail pieces within a ZIP code drops below 150 addresses, you will sacrifice the favorable five-digit postal rate. Since the gap between the three- and five-digit rates is scheduled to increase a whopping 31.3 percent in R2000, it's more important than ever to commingle mail to achieve maximum postal discounts. Third, your creative work is vital to future success. Use good test-marketing principles before rolling out expensive direct mail campaigns. Commingling test runs with other mail will help reduce your overall mailing costs.

What now? For 2001 budgeting purposes, a reasonable course of action is to start with the proposed R2000 rate filing but make adjustments for rates that will likely change. If you depend on Standard-B USPS bound printed matter postal delivery, be forewarned that your business is in jeopardy of receiving a significant rate increase. If you're a high-volume Standard-A mailer, focus on improving the big three: targeting, automation discounts and creative. Get ready, because in a blink of an eye, R2000 — for better or worse — will soon be reality.

• Ken Boone is president of Harte-Hanks Baltimore, a full-service and high-volume direct mailing company.

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