Wednesday, July 14, 2010

Why Offer 30% Discounts on a 'Money-Losing' Product? Tough Question #3 For USPS

The Postal Service claimed once again last week that it loses money on Standard flats mail, just five days after kicking off a huge discount program on – guess what? – Standard flats mail.

The claim that Standard flats is "under water" was repeated in the USPS’s request for “exigent” rate increases: “To fully close the coverage gap, Standard Mail Flats prices would need to increase by 16 percent,” wrote James M. Kiefer, a USPS pricing economist, in a statement submitted to the Postal Regulatory Commission.

The discounts – up to 30% for some pieces sent by large mailers – are part of the second annual Summer Sale on Standard mail. The sale's discounts are the same for Standard flats -- mostly catalogs and retail circulars that are not in carrier-route bundles -- as for "profitable" categories like Standard letters.

The Postal Service decided to take “a cautious approach” and only increase Standard flats rates by 5.1%, Kiefer said, because “increasing postage prices too much at this vulnerable point could force catalog mailers to cut their customer lists.” Some mailers in the category (especially low-volume mailers of lightweight pieces), however, would get rate hikes rivaling the 8.0% average for Periodicals.

In any case, how can the Postal Service claim on one hand that rates for Standard flats should be raised at least 16% while on the other hand justifying temporary discounts of up to 30% on that same type of mail?

The Summer Sale is based on sensible and well-researched analysis showing that additional Standard flats mail is profitable for the Postal Service even when heavily discounted.

Postal Service Bloat
The contention that Standard flats are unprofitable is based on a completely different accounting system that improperly assigns the cost of “automation refugees” and other symptoms of Postal Service bloat to flats processing, which makes both Standard and Periodicals flats look unprofitable. The Postal Service’s supposed costs for handling flats have skyrocketed the past few years even though flats are being mailed more efficiently than ever.

In reality, according to Time Inc’s Jim O’Brien, the Summer Sale analysis suggests that the Periodicals class is covering its “short-run attributable costs” – that is, that the Postal Service is more profitable with Periodicals than without.

But the Postal Service is using Periodicals’ supposed lack of cost coverage as an excuse to jack up the class’s rates by more than 8%, which comes out to 9% for some of the most efficient mailers. And though Standard flats are getting a pass this time around, postal executives have painted a target on that category for future increases.

“Clearly, we cannot continue to price Standard Mail Flats below costs for an extended period of time,” Kiefer wrote. “The Postal Service may have to adjust Standard Mail Flats prices at above average rates at some point, but now is not the time.”

But before the Postal Service gets approval for any rates based on lack of cost coverage, it needs to explain how its accounting systems conclude that Standard flats lose money when they pay their normal rates but are profitable when discounted by 30%.

For more information on related subjects, please see:
Previous articles in the "tough questions" series:
Next in the series: Is the Periodicals Class the Postal Service's Washington Monument?


    Anonymous said...

    Why the discount? Postal management can bully carriers some more, and report Pay-for-Performance numbers for their bonuses. And the public just believes 60 year old stereotypes about easy government union jobs. So, USPS managment ignores the union contract and bullies workers.

    Anonymous said...

    Please, please, please change the colors back. It is difficult to read.

    Anonymous said...

    WHY????? Do companies still mail anything is beyond me. You can just about email ANYTHING paper related. If the customer wants a copy let us print it. HECK I save things to disc and throw out the paper. I do not have any bills comming to me via paper,nor do I pay any by "check" I epay. Magazines- nope I signup online, the only thing I need the PO is for packages I order nothing else. The PO should worry about packages because when our kids grow up they will not depend on paper like us old folks, just look at them on texting, facebooking and instant messaging. Your kids my kids and the PO kids. They are the future, they are NOT going to be mailing anything. So don't worry the PO won't last long anyway.

    Anonymous said...

    I have to agree about the color scheme. I am distracted by it and can't wait to finish reading the article so I can close the window. Probably not the effect you are looking for.

    droggen said...

    Due to a digitized global economy the usps has been reduced to an inconsequential institution that is no more than workfare. Sad that so many jobs are being made obsolete. The only hope is to privatize and end this political football charade.