Tuesday, August 4, 2009

Can the Postal Service Still Afford Periodicals?

With the U.S. Postal Service struggling to make ends meet, could it cut its losses by getting rid of the money-losing Periodicals Class or at least by jacking up Periodicals rates?

No. USPS is better off with Periodicals than without. And a radical increase in Periodicals rates to make publishers pay their “fair share” of postal costs would probably deepen the Postal Service's financial losses.

USPS recently provided some insights into its cost structure that help explain how the Periodicals class is both officially unprofitable and a contributor to the Postal Service’s bottom line. In explaining its “Summer Sale” on Standard mail, USPS noted that the cost of additional mail during the summer is tiny because low mail volume leads to idle equipment and under-worked employees.

“The general implication of excess capacity . . . is that temporary additions to volume can be worked through the network without generating very much or any additional attributable cost. Rather, unused or underused capacity can be employed to handle any temporary increases in volume,” USPS told the Postal Regulatory Commission.

Although the Postal Service was referring to the slow summer months, declining mail volume has left USPS in a “permanent summer” – with significant and increasing overcapacity regardless of the season.

Consider this factoid from the Postal Service analysis: The “temporary short-run attributable cost” (Postalspeak for variable cost) of a Standard carrier-route piece this summer averages 7.9 cents, but the revenue averages 24.1 cents. The vast majority of Standard carrier-route pieces are “flats” (such as catalogs, as opposed to letters) dropshipped to an SCF; such a piece would have to weigh about a quarter of a pound to cost the mailer 24.1 cents.

For a similar Periodicals piece (a flat weighing ¼ of a pound and entered at an SCF), a Periodicals mailer typically pays about 20 cents. If we can assume that the Postal Service’s costs for handling a magazine are the same as for a catalog with similar characteristics, the Postal Service’s contribution – revenue minus variable cost – would be 12.1 cents (a hefty 60% contribution margin) on the Periodicals piece.

So what’s with all the talk about the Postal Service losing several hundred million dollars a year on Periodicals?

The Postal Service is like an airline that is unprofitable because it is flying a lot of half-full planes. The average cost of a passenger includes many expenses that remain fixed regardless of the number of passengers. You can’t fly with fewer pilots or reduce the jet’s depreciation just because you have fewer customers on board.

Are the low-fare passengers paying less than the average cost of a passenger? Yes.

Would the airline be better off without them? No way. Having one less passenger only saves the airline a bag of pretzels, half a can of soda, and a maybe a couple of gallons of jet fuel -- far less than the revenue it gets from even the cheapest fare.

When people say that Periodicals revenue doesn’t cover the class’s costs, they are referring to average costs, which include a lot of allocations for vehicles, equipment, and labor that would not disappear if Periodicals mail went away. In Accountingspeak, the low-fare passengers and Periodicals pieces are said to have a positive contribution (to the bottom line) or to be profitable at the margin even though some accounting methods would label them as unprofitable.

(There is strong evidence that the Postal Service’s cost-allocation system is unintentionally biased against the Periodicals class, as explained in For Periodicals, The Postal Service’s Math Doesn’t Add Up. The Periodicals rate structure is also biased against dropshipped, finely sorted mail and encourages publishers to mail in less-than-efficient ways.)

The money-losing airline knows that its path to profitability is either getting more BIS (Butts in Seats) or decreasing the cost of flying – not getting rid of low-fare passengers. If prospects for attracting new customers are limited, the airline will either run fewer flights or switch to smaller airplanes.

With its current structure, the Postal Service’s main problem is not that it doesn’t charge enough for mail pieces but that it doesn’t have enough mail pieces to charge for. With limited prospects for growth, USPS must reduce its cost structure, not jettison customers, to get its financial house in order.

Congress members and other government officials give lip service to the Postal Service’s need to economize but then block it every step of the way and prevent it from offering a meaningful early-retirement program. The cost of such denial is dysfunctionality. Rather than being able to thin its ranks rationally and humanely, USPS sometimes ends up transferring employees hundreds of miles from their homes, without relocation assistance, when their current positions are eliminated.

Some have suggested that Periodicals rates need to be increased by 17% or more to get the class to break-even status. But such a “rate shock” would only spur publishers to shift more of their business to digital and other non-mail alternatives, as happened a couple of years ago with lightweight catalogs.

Fortunately, by introducing programs like the Summer Sale and declaring that "exigent" rate increases are a last resort, postal officials seem to understand that they must attract new mail volume and not price USPS out of the market.


Anonymous said...

Your article on Periodicals makes some very valid points. Here's one additional item that needs to be considered in the discussion:

Periodicals generate mail in other, more profitable classes. If you subscribe to a magazine you receive invoices (first class mail), renewal notices (standard mail), and premiums (parcels). All of these pieces yeild substantial margins for the Postal Service. In addition, magazine publishers frequently rent their subscriber lists to other direct mailers, thereby generating even more mail. The USPS and/or Postal Regulatory Commission should do a study to evaluate the overall net value of magazines which includes the total margin generated by Periodicals and their associated mail.

Sent by a magazine publisher

Anonymous said...

The more relevant question is whether publishers of periodicals can still afford the postal service!

Anyone who has purchased magazine subscriptions knows she is lucky if the post office delivers 25% of her paid-in-advance (on good faith and in contract with the publisher) annual subscription. To inflame the already aggregious situation, the subscriber will find the issues that do arrive are rarely in the condition the publisher both intended and manufactured - though the use of plastic wrappers does decrease the damage (only to increase the damage to the environment, however).

In contrast, retail sales of periodicals guarantee what the postal service also guarantees, in part: receipt of intended excellence. When a consumer purchases a periodical from a retail outlet, she knows she is receiving what she has been promised by the publisher, with no risk of damage or other compromised product due to accident, negligence, incompetence or fraud along the delivery chain.

Postal delivery has simply become far too high risk, from a subscriber perspective, to be worth even considering as an option anymore. Who wants to knowingly waste one's money? We live and we eventually learn.

Resources currently devoted to subscription solicitations could be spent more intelligently by publishers. Forget the postal service. It's time the industry accepted this and moved on to more productive activity that directly contributed to their survival and the health of our world and future.

Sent by a magazine aficionado (with significant industry call centre experience who can attest to the alarming rate of botched mail delivery across the nation - beginning with standard letter mail).