Sunday, January 3, 2010

A Bad Move for Small Mailers: Postal Expert Questions Move Update Surcharge

Despite price caps and promises of a rate freeze, the U.S. Postal Service is about to implement a new form of price gouging that will hit small organizations especially hard.

As guest columnist Robert W. Mitchell (pictured at right) explains below, Standard-class mailings that are not Move Update-compliant are slated to pay a surcharge of 7 cents for something that costs the USPS barely a penny.

Large mailers will presumably have the expertise to avoid the surcharge, which takes effect tomorrow, by complying with Move Update – though a PostCom podcast indicates that even sophisticated mailers may unwittingly run afoul of the new regulations.  (The USPS also has a Web site explaining Move Update.)

The main victims are likely to be small businesses, local non-profit groups, churches, and the like, who in many cases won’t learn of the surcharges until after their mailings have been printed and prepared.  Mitchell points out that the surcharge is immense relative to costs and is out of line with the principles of efficient rate setting.

Mitchell knows whereof he speaks.  First as a Postal Service employee, then as Special Assistant to the Postal Rate Commission, and now as a consultant on postal-rate issues, he has played a major role in such innovations as Standard-class workshare discounts and the move toward cost-based rates for Periodicals. He can be reached at

By Robert W. Mitchell

For a number of decades, mailers wishing to send at Standard rates have engaged in preparation activities. In the spirit of worksharing and cost recognition, many of these have been optional, which, without causing harm to the Postal Service, has allowed mailers to choose what is best for them. Observers, including the Postal Service, have pointed often to increases in efficiency thus brought about. Examples have included ZIP + 4 coding, presorting, prebarcoding, walk sequencing, and dropshipping. Cost differences among letters, flats, and parcels have been recognized in the rate structure as well.

When Move Update services became available, another workshare option could have been arranged. That is, based on lower costs to the Postal Service, a discount for Move Updating could have been offered. Then mailers could have weighed the costs and the benefits, as they saw them, and Move Updated whenever advantageous. That would have allowed mailers the option of purchasing UAA (Undeliverable As Addressed) services at an appropriate price. And UAA services, which the Postal Service has spent years developing, would be put on par with its other services, which include sorting, transporting, and delivering.

However, the Postal Service did not take that course. It chose instead to make Move Updating a requirement for all Standard mailings, no alternatives allowed. Its justification appears to be its analysis that its costs will be lower and that the most advantageous course for each mailer is to finance and follow through with Move Updating. It is inefficient, however, for the Postal Service to substitute its judgment, by regulation, for that of mailers, and it is a mystery why the Postal Service should be opposed to offering its UAA services, as an option, at a fair price.

For Standard mailings that are not Move Updated, if such mailings could still be called “Standard mailings,” the Postal Service took the position that the only rates available would be the rates for Single-piece First-Class, now 44 cents for the first ounce, if letters. The attendant rate increases would be quite large, and particularly so for nonprofit mailers. For example, a 1-ounce nonprofit letter, sorted to 5 digits and entered at a destination SCF, would see an increase of 394.4%. Even higher increases would exist for heavier pieces and flats. When a Federal Register process drew comments that the mailers bearing the increases could well be “small local businesses and nonprofit organizations,” the Postal Service brushed off the possibility of a burden by saying that it “feels that there are many methods mailers can use in order to qualify and make this fit any business model.” [Federal Register, Vol. 72, No. 188 (Friday September 28, 2007), p. 55056].

The Postal Regulatory Commission made it clear in November that noncompliant mailings can remain Standard mailings and that the applicable rates are the reigning Standard rates plus a surcharge. The order also approved a proposal to set the surcharge at 7 cents, which is a smaller penalty than the Postal Service had in mind. But that does not make the rates efficient or fair.

The cost justification behind the surcharge, as provided by the Postal Service, is that a Standard piece intercepted as UAA (and then discarded) costs the Postal Service, on average, 5.2 cents more than a Standard piece that receives ordinary delivery. That gives rise to several important questions:
  1. Why is the 7-cent surcharge so much higher than the 5.2-cent cost? A surcharge may at times be more than 100% of the cost underlying it, but not often when it is first introduced.
  2. Why should each piece in a mailing pay the surcharge, when only a few pieces would be expected to require UAA treatment? If, on average, 20 percent of the pieces in noncompliant mailings receive UAA treatment, and the markup to 7 cents were taken as appropriate, common ratesetting practice would set the each-piece surcharge at 1.4 cents (0.20 times 7 cents).
  3. Why should letters and flats pay the same surcharge, when the UAA cost for letters is undoubtedly lower than the UAA cost for flats? When rate differences are not based on corresponding cost differences, inefficient signals are sent to mailers and inefficient behavior can be expected.
  4. Is the 5.2-cent cost net of any costs avoided by not have to complete delivery on pieces that are intercepted? It is not apparent that the cost study nets these costs out. If it does not, mailers would be in the position of being double charged.
For all of these reasons, the surcharge of 7 cents would seem to be an immense overcharge. Aside from suggesting that the Postal Service does not want to make its UAA services available on reasonable terms, it will drive some mailers to leave the Postal Service, perhaps finding that email will work just fine. These mailers will not come back.


Anonymous said...

Fine, Don't come back. Your mailings have turned the mailstream into a stream of unwanted junk.

Anonymous said...

The only thing I would change about this article is that I would take away the "S" in Small - this surcharge is a Bad Move for ALL Mailers, large and small. It's as if the USPS rhetoric about wanting to reduce undeliverable as addressed mail is insincere at best - it seems that they WANT mailers to fail so they can collect the income off the fines. Speeding ticket quotas, anyone?

postalprofessor said...

good article. 6 biggest (actually the only biggest) mailers in the country freely mailed millions upon millions of direct mail pieces without move-update compliance prior to last years requirement. They always "felt" that the amount of mail that didn't make it to its destination (USPS wastes non-deliverable Standard Class) was won over by the percentage that did. They played and "died" by the numbers. (30% of all quick printers out of business in 2009. - and one or two large mail houses no longer in business).

That kind of backwards thinking worked in better economic climates. Wouldn't you agreed? Kind of like the Ponsi schemes of Wall Street, only in Postal Standard format.

I agree with the USPS. Unwittingly they have produced a requirement that will benefit the economy at large, and small mailers to boot.
twitter: @postalprofessor

david stover said...

It is an interesting question whether UAA services should be put "on a par" with traditional worksharing-related subservices (sorting, barcoding, delivery). Sortation, barcoding, and delivery are mandatory for every piece in every mailing. The issue for the rate designer therefore is how to scale the discount for the mailer who performs these functions. The "efficient" answer, as the PRC has said more than once, is to price the nonmonopoly subservice (e.g., sorting) at average incremental cost, so that only mailers who can perform it more cheaply than USPS will do so. That implies, ideally, a 100 percent passthrough of the avoided cost. But UAA service is (let us hope!) not required for every piece in every mailing. Hence the problem is not one of allocating a mandatory piece of work to the low-cost provider but simply of getting (more) people to use Move Update. There is no a priori reason to think the discount, if there is to be one, has to equal 100 percent of the avoided cost (presumably, in this case, the average per piece cost of forwarding or return, for First Class, or of discard for Standard). What is relevant is what it takes to motivate that behavior - not the USPS's avoided cost.

This is of course not, or not centrally, relevant to the discount vs. penalty question, but may be worth considering all the same.

Reality Check said...

Worksharing-related subservices are a thing of the past. There is no need for the USPS to offer any such discounts. (Especially for junk mail.) The degree of automation now used by the post office makes presorting, etc. absolutely unnecessary. All mail types are run through the machines together. The USPS loses millions on these corporate welfare giveaways.

MMFallon said...

Complying with Move Update isn't expensive and makes sense for ALL mailers. The rule has been out for over a year, allowing plenty of time for mailers to become compliant.

The level of complaining from the Direct Mail community on this issue is sad and unprofessional. Instead of helping mailers become more efficient and effective, editorials like this actually encourage mailers to be less efficient and less effective. And this is why your mail is considered Junk.

PS - I'm not a USPS employee, but a mailing professional.

Anonymous said...

Why do postal employees regard junk mail so negatively. Isn't it all just volume that has been paid for and is helping to ensure your future employment?

Off topic but I'm seeing references to it around and I'm curious as to the logic of these statements.

Anonymous said...

I didn't see any comments by postal workers calling advertising mail "junk" - if it is deliverable.

What do you call undeliverable as addressed mail? (Postal employees call it waste.) And why there is so much of it?


Katie Watts said...

As a mid sized printer and mailhouse, the Move Update requirement doesn't bother me. It helps mailers reach their audience and not waste postage on pieces that go in the trash. It's also a green effort. That said, the penalty of .07 across the entire mailing quantity is outrageous. Being in sales, I know you should not have policies that make your customers feel like they are being punished for giving you work. These fees come across as punishment to me. It is a blatant and excessive effort at capturing more revenue since they are so far in the red.

Robert Mitchell said...

MAILER: Please do your best to take these pieces to these people at these addresses. I accept that you will waste the piece if you think the person has moved.

USPS: We believe you should have Move Updated your list. Because you didn’t, and you admit it, we are going to charge you an extra 7 cents for every piece in your mailing.

MAILER: Will you save 7 cents if I Move Update?

USPS: No, we will save about a penny (based on our analysis that it costs us more to-not-deliver than to-deliver). The problem is that you are not behaving the way we want you to behave. We must find a penalty big enough to get you to change, no matter how Draconian.

Something is wrong here, particularly since the mailers involved may be among the smallest, and may be nonprofits (including churches). The mailers are doing nothing wrong, and nothing different from what they have been doing for years. They are willing to pay appropriate rates. Commenter Stover is concerned that we may know the extra cost of the mailing, but not of a particular piece. That is interesting, but it is not a problem. Commenter Watts, from Boise Idaho, sees the issue clearly.

That Move Update services are available is laudable. It may be profitable for nearly all mailers to use them, assuming technical adeptness. But the idea of giving mailers a choice and a rate that is not outrageous, to use Ms Watts’s term, is not a difficult one.

Robert W. Mitchell

Anonymous said...

Everyday our custodians dump a minimium of fifty tubs of undeliverable bulk mail into recycling dumpsters. The Post Office is happy, they collect on both ends. Bulk Mailing companies are happy, they were paid for every piece. The loser is the SMB or Non-Profit that paid full price to reach 70% of it's market.