Friday, January 16, 2009

Postal costs to go up less than 4% -- maybe

So now it’s official: If you use Periodicals, Standard, or First Class postage, your mailing costs will rise by just under 4% in May, right?

That’s not a safe bet. It’s true that the average change in rates for those “market-dominant” classes will be 3.976% for Periodicals, 3. 862% for Standard, and 3.814% for First Class. That’s based on the announcement today that the average monthly Consumer Price Index in 2008 rose by 3.8% over 2007, plus a smidgen of “unused rate authority” from last year’s rate increases. (See “Who’s it gonna be, me or the PRC” for a further discussion of how the rate cap is determined -- and Dead Tree Edition’s prediction that the rate cap would be below 4%. Nyah, nyah, told you so!)

With last year’s rate increases, all mailers in the market-dominant classes got virtually identical increases in costs. But don’t count on that happening this time around. Here are factors that could cause some mailers to get large increases and perhaps help others decrease their postage costs:

  • A little gift from the Postal Service: USPS is undertaking a massive consolidation of carrier-route boundaries early this year, though it's unclear how many fewer routes there will be. Here’s how these consolidations will help mailers: Suppose your Periodicals-class publication has five copies going to one carrier route and four going to another and that the two routes are merged: Now those copies will move from a 5-digit bundle to a carrier-route bundle, saving you at least 10 cents per copy. The biggest benefit will probably go to Periodicals mailers that already have 25% to 75% of their pieces in carrier-route bundles. For those mailers, a 10% decrease in the number of carrier routes could boost their carrier-route sortation by 5 percentage points, yielding savings of about a half-cent per piece -- typically 1% to 2% of total postage. The savings would be lower for Standard mailers because their carrier-route incentives are smaller.

  • What the Postal Service giveth, the Postal Service can taketh away: Here’s a scary thought for Periodicals mailers, especially for those benefiting the most from the consolidation of carrier routes: There is apparently nothing in the new postal law preventing the Postal Service from increasing the minimum number of pieces in a carrier-route bundle. To get the money-losing Periodicals class closer to breaking even, USPS might increase the minimum size of a carrier-route bundle from six pieces to 10 to bring it into line with Standard flats, one industry expert speculated. That would increase some mailers’ costs by two cents per copy.

  • Be careful what you wish for: Efficient Periodicals mailers, led by Time Inc., tried for years to have the Postal Service’s transportation costs fully reflected in Periodicals rates, instead of having dropshipped publications subsidizing non-dropshipped publications. The Postal Service resisted that approach as unfair to small publications. (Not true. It only hurts the small publications that mail nationwide on their own rather than in freight pools.) The resulting Periodicals rates are a patched-together Frankenstein’s monster that no one likes – and that decreased many publishers incentives to dropship. Time Inc. advocated BMC discounts, which would have especially helped small publications, but the BMC discount that ended up in Periodicals rates is virtually meaningless. USPS officials reportedly recognize that the lack of dropship incentives for publishers has caused them to scale back dropshipping, thereby increasing the Postal Service’s costs.

  • Sacks suck: Also in the category of the Postal Service being careful what it asks for is the matter of Periodicals sacks. Time Inc. and the other advocates of cost-based Periodicals rates proposed that USPS’s full costs of handling sacks be reflected in Periodicals rates, rather than having palletized publications subsidizing sacked publications. Again, USPS resisted, so the resulting rates have publishers bearing only a small portion of the Periodicals sack-handling costs. With the Postal Service in the red and realizing more than ever what a pain in the P&DC sacks are, cost-based rates are looking much more attractive to postal officials. Look for the new rates to be less accommodating to inefficient Periodicals mail. And don’t be surprised if Standard mailers start getting charged for sacks as well.

  • Squishing the flats: Postal officials reportedly realize that the huge 2006 rate increases for Standard flats (which are mostly catalogs) have contributed to a rapid decline in volume. Especially hard hit were the kind of lightweight catalogs typically used for prospecting. (Dead Tree Edition pointed out a cheaper alternative for catalog prospecting, but Google Analytics tells me the article wasn’t exactly a big hit – even though L.L Bean continues to use the method.) The Postal Service may charge Standard letters (direct mail) a larger-than-average increase so that it can give lightweight Standard flats a break.

  • Death of the SCF: The Postal Service’s efforts to consolidate its dropship network has been quiet for a few months, but roll-out of the Flats Sequencing System and cost pressures will ensure that more locations get consolidated. Such consolidations make it easier for mailers to increase their dropship discounts without spending more on freight.

    Here’s a little suggestion for postal officials trying to tweak the Periodicals rate structure. (I know they’re reading Dead Tree Edition at L’Enfant Plaza because sources tell me that postal officials have been complaining about my recent Intelligent Mail barcode post, though none have had the cahones to issue a written rebuttal.) Create meaningful BMC discounts for Periodicals to entice small mailers to start dropshipping and large mailers to do more dropshipping. There are reasons not to put Periodicals into bulk mail centers, but there is a way around that: Designate certain large ADCs as “Periodicals BMCs.” For example, make the Pittsburgh P&DC a Periodicals BMC and assign it the ZIP codes served by the Pittsburgh Bulk Mail Center; then watch as Periodicals mailers ship publications for the tiny, hard-to-reach Clarksburg, WV ADC to Pittsburgh (as Standard mailers already do) instead of mailing them from printing plants halfway across the country.


Anonymous said...

I hope you are wrong about the Postal Service choosing to give flats (catalogs) a relatively small increase and letters a relatively large increase. Flats are being handled below cost and letters have a very high markup. There is no justification of any kind anywhere for doing this. It is contrary to efficient, cost-based ratesetting. It is wrong to ask letters to subsidize flats to try to make an FSS investment look good.

Anonymous said...

If the PRC and USPS had decided to pass through 100% of the bundle and container costs instead of 40%, you would see Periodicals Mailers working a lot harder to increase drop-shipping and presort levels. Instead of shipping small Periodicals to BMC's, the USPS needs to reintroduce the concept of a transfer hub. These were a dozen or so facilities throughout the country that provided transportation to the SCFs and BMCs. All they need to do is put a bundle sorter in each facility and they would be all set. The Periodicals class problems are not insurmountble but, as you say, the USPS needs the cahones to tackle them.

D. Eadward Tree said...

Great point about the transfer hubs. Why not designate the transfer hubs as "Periodicals BMCs"?