Will the Postal Service Protect Its Core?

First-Class mail is the U. S. Postal Service's most important product line. In Fiscal Year 1998 ending Sept. 30, total USPS revenues were $58 billion. First-Class mail accounted for $34 billion, or 58.6 percent of the total.

The second greatest source of revenue was Standard A mail, primarily advertising, accounting for $13.8 billion, or 23.8 percent of total postal revenue. To put it simply, First-Class mail produces about two and a half times as much revenue as the second greatest source. However, based on USPS advertising campaigns, you'd never know First-Class mail existed.

Perhaps the Postal Service believes that First-Class is relatively safe from competition and not in need of protection. But we know that's not the case. First-Class is under critical attack from alternative media. The impact on growth has been dramatic. While Standard A mail is growing at about 7 percent per year, First-Class growth has slowed to about 1 percent.

Most knowledgeable observers believe that a movement of some advertising mail into First-Class is masking the increasing volumes of financial transaction mail moving into electronic form.

My own anecdotal experience and observations demonstrate these electronic financial transactions. Some examples:

* In New York City, Citibank and Fleet Bank are involved in a giveaway war. Citibank began by offering $25 to anyone opening a PC account and paying two bills through an electronic funds transfer. Fleet raised the stakes by offering $50 for a new account and two electronic bill payments.

* Bell Atlantic has an electronic payment option on its residential telephone bill statements. My sources tell me that consumer acceptance has, to date, been slow, but it's growing.

* We are all familiar with the deregulation taking place in the electric utility industry. I live in New York City and just received a promotional mailing from Con Edison, our local utility. If I were to sign up with Con Edison Solutions, the deregulated unit of Con Ed, to supply my electricity, I would have my monthly electric usage charged directly to my American Express card and I would be enrolled in their Membership Rewards program.

One clear conclusion is that big players are making attractive offers for consumers to enroll in electronic bill payment.

What is the Postal Service doing about these attacks on its most important product? In my view, not much. What could it do? Let's hold that question for a while, and look at the actions the Postal Service is taking to expand other lines of business.

Let's start with advertising. Quite often, when I open up a copy of the New York Times or the Wall Street Journal, there is a full page USPS-sponsored advertisement for Direct Mail. Some time ago I responded to one of these advertisements. Soon after I received a loose-leaf binder containing successful case histories on direct mail marketing. I even received a free copy of Lester Wunderman's book “Being Direct — Making Advertising Pay,” with a retail price of $25.

Now, we don't know how much of advertising mail's 7 percent growth in each of the last two years is caused by USPS advertising, but it surely didn't hurt.

On another front, the Postal Service has been particularly aggressive in its international mail developments. With great fanfare and advertising the Postal Service introduced Global Package Link, an attractive international mail and package service. In support of its international mail efforts, on March 2 the USPS announced an alliance with DHL. As a result of this alliance, the Postal Service will offer guaranteed two-business-day service between 11 major U.S. cities and any address in 18 foreign countries.

While we don't know if these efforts will be successful, they are certainly aggressive actions.

The postal service has taken similarly aggressive actions with Priority Mail. It has outsourced processing to Emory Air. It has just introduced delivery confirmation. And we are more than familiar with the vast amount of advertising that has been expended on Priority Mail. I suspect that advertising accounted for some of Priority Mail's 24 percent growth over the last two years.

Now let's get back to First-Class mail. What actions has the Postal Service been taking to support or grow First-Class mail?

Recently, the Postal Service has developed mailing online and PC metering to increase First-Class mail usage in the small-office, home-office market.

In MOL the user can compose a First-Class or Standard A letter, transmit it via the USPS to a service bureau for printing, inserting and mailing. This project, which is in a test phase, is before the Postal Rate Commission for rulings on price and USPS applicability.

PC metering is in beta testing with four vendors. In this process the PC acts as the meter with the indicia printed by either a laser or ink jet printer attached to the PC. Money (postage) is downloaded to the PC, depending on the system, via a postal security device attached to the PC or via the Internet.

Mailing online is causing much controversy among the postal vendor community because the service provided is available today via the private sector. Perhaps more importantly, testing has gone slowly, with very few customers signing up and actually using the service.

PC metering has generated much interest among the traditional meter vendor community and, as the postal service hoped, has attracted nontraditional vendors with more of a software orientation. However, it's too soon to determine if the PC user will be interested in this service. PC users are quite comfortable in the fairly unregimented way they can work today. It's not clear if they will flock to a process that contains more than a smidgen of postal regulations.

Considering the threats to First-Class mail and the efforts being expended on other mail classes, it does seem that the actions being taken to support the postal service's primary revenue source are relatively minor.

What can the postal service do? First, they need to provide first-class service. Recent service measured through the TTMS (transit time measurement system), which measures end-to-end processing — that is, in the collection box to in the mail box — was well below postal service objectives. First-Class mail service performance, according to TTMS, for overnight service was at 93 percent of the commitment. Unfortunately, two-day service was only at 83 percent, while three-day service was only at 81 percent of the service commitment. In my view, all three service levels need to get to at least 95 percent, and quickly.

It's interesting to note that the postal service, in its 1999 Annual Performance Plan, assumes that the expenditures it makes to enhance service will adversely impact productivity. It's my guess that to get from their current service levels to 95 percent, it will need to eliminate double and mishandling of mail. In my view, these actions will ultimately increase productivity, not reduce it.

The next actions that the Postal Service needs to take pertain to postage rates. I believe at least two things should be done. First the postal service needs to file a special rate case to provide a drop ship discount for First-Class mail. I know this is under consideration for inclusion as part of the next general rate case, likely to be filed in 2000. I don't think the postal service can wait that long. A special rate case filing with the Postal Rate Commission in 1999, for a drop ship discount, would send the message that the postal service intends to aggressively defend First-Class mail.

A second postage rate change I propose is volume oriented, and would provide discounts for mailers that guarantee that they will meet or exceed their current First-Class mail volumes. Perhaps a sliding discount, that increases as volume increases should be considered. Volume oriented discounts may require legislative changes, but since rapid decreases in First-Class would prove disastrous for all mail users, these changes should be made.

Lastly, I can't imagine a business, with its primary product line under attack, not supporting that product line with advertising. Surely postal staffers and their advertising agencies can develop an ad campaign to extol First-Class mail and encourage its use.

The postal service often reminds us of their commitment to maintain universal service. Unless First-Class mail remains a vibrant and high volume product, their commitment may not remain priced at a level that would keep universal service meaningful.

Carey H. Baer is a New York-based direct marketing consultant and chairman of the Advertising Mail Marketing Association.

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