The Economic Case Against an Exigent Postage Increase

Sep 23, 2013 10:35 AM  By

The Board of Governors of the USPS may vote this month on an exigent postage increase.  The law requires that an exigent price increase requires “extraordinary circumstances” and be based on economic analysis.  The requirement for economic analysis should be a high bar to be overcome in justifying a postal price increase because the majority of catalog mail is profitable for the USPS.

The economic case for catalog mail needs to include the following:

What is the price elasticity of catalog mail?  If prices are increased, what will be the effect on catalog volume?  Given that volume will decline immediately, what will be the revenue and the profitability of catalog mail after the combined effects of a price increase and a volume decline?

What historically has been the volume decline for catalog mail after a price increase?  Has a valid set of assumptions been used to model the effects of a price increase on revenue, volume and profitability?

What are the short term and the long term effects on catalog volume if postal costs increase?  Does it make sense to look for short term revenue increases from bulk mailers at the potential for a long term decrease in volume and existential threat of rising postal costs putting an entire series of industries (catalogs, periodicals, direct mailers, etc.) at risk?

If the USPS has studied the economic ramifications of potential price increases, the USPS should share those studies before they use those studies as rationale for a postage increase.

The USPS needs to study the potential for increased work sharing savings.  Work sharing has created an entire profitable industry of “co mailing” catalogs.  One objection to increased work sharing is that it would shift work away from the postal workers (who can’t perform the work at a profit) to the printing and co mail industry that can do the logistics and transportation profitably.  One way to look at the various potential savings would be to look at the postal union objections and examine those areas for potential savings.

The USPS also needs to look at the cost benefit of further cost cuts, consolidations and internal solutions to handling bulk mail more efficiently.  The reasons raised against further internal efficiencies are not that they are uneconomic but that further cuts are opposed by the unions.

One easy work sharing solution would be to drop the carrier route bundle size from 10 pieces to 6 or 7 pieces which would significantly increase the volume of mail qualifying for carrier route savings.

Catalogers used to make their circulation decisions based on breakeven analysis and the business model was to mail all circulation that responded above breakeven.  So estimating the fall off in circulation from a cost increase used to be a straightforward calculation.  If a 10% increase in postage made 5% of the circulation slip from profitable to unprofitable, then catalog press runs would drop 5%.  Now the business model has changed and catalogs are not only working with mailing diminished quantities because of increased cost but catalogs are competing against other forms of multichannel marketing including e-mails, digital ads, virtual catalogs and an ever increasing range of web marketing.

The USPS needs to examine the success of the various promotional programs they have run over the past several years to promote more bulk mail.   Crafting programs to promote more catalog mailings has good short term potential.  But the programs need to fit the needs of catalogers.  The various USPS promotions have a range of value or usability among catalogs and some of the programs have been actionable and some have been not well thought through.  Creating strong promotional programs should be a win / win for the USPS and the catalog industry.

The USPS is looking at the potential package volume coming from filling catalog orders over the next decades.  The USPS needs to consider that these small packages deliveries won’t happen if catalogers go out of business because their postage costs are too high!

The USPS needs to look at the potential for raising overall revenue and profitability by actually lowering the rates for catalogs and periodicals!  Just as raising rates lowers volume, lowering postage costs will increase volume.  Knowing the volume, revenue and profit implications of lowering catalog postage is a vital piece of economic knowledge that the USPS needs to examine and understand.

As a potential exigent postage increase is explored as a short term band aid for the USPS’s losses, the law requires underlying analysis to justify an increase.  In the past the USPS’s economic analysis has been lacking.  The economic assumption behind the catastrophic 2007 increase was that volume wouldn’t change in spite of a huge postage increase.  That assumption was shown to be wrong, volume declined dramatically and volume has never recovered.

The USPS needs to protect its core profitable business as first class mail volume continues to evaporate.  The key for catalogers is for the USPS to find ways to increase catalog volume and decrease costs.

Looking at the profitable core business of bulk mail as a potential short term revenue boost is a deeply flawed economic perspective.  The potential for short term revenue increases from catalogers shouldn’t be used as a rationale for an exigent increase.

The PRC and the courts won’t buy short term economic arguments because the arguments to raise catalog postage rates are economically flawed.  The USPS has a lot of work to do to understand the economics the catalog industry.  Their perspective needs to be to find ways to build a long term viable business model using bulk mail volume.

Jim Coogan is president of catalog consultancy Catalog Marketing Economics.