USPS Proposal Could Spread Pain to Catalogs

Comail is working. But in Postal Land, no good deed goes unpunished.

Like lashing two water-tight boats to a sinking vessel.

The good news — for mailers, printers, and the U.S. Postal Service — is that flat Standard Mail is being sorted far more efficiently than it was just two years ago. 

The bad news is that the trend is prompting postal officials to consider a proposal that would almost certainly lead to higher-than-normal rate increases for efficiently mailed catalogs and other Standard flat mail.

Some postal experts fear the proposal would lead to reduced incentives for co-mailing, which even postal officials admit is the main reason that highly efficient – and profitable – “High Density Flats” volume has grown by 45% in the past two years.

More bad news: Postal officials can’t explain -- and don’t seem to be trying very hard to understand — why the Postal Service’s costs of handling most types of Standard flat mail have skyrocketed in the past year. That trend also threatens to cause higher rate increases even for efficient mailers.

Although the Postal Service is supposed to act like a business, this is a case of it operating like a bureaucracy where CYA trumps ROI.

Hall of mirrors

Let me walk you through the strange hall of mirrors where postal officials are ready to shoot themselves in the foot rather than celebrating, and building on, a successful tactic.

The Postal Regulatory Commission and legal challenges have pressured the Postal Service for years to do something about what is essentially a subsidy for the least-efficient flat Standard mail – the mail that does not meet the 10-piece minimum to create a carrier-route bundle. (Note: The USPS refers to such mail by the misleading moniker “Flats,” but for the sake of clarity Dead Tree Edition calls it “Non-Carrier-Route Flats.”)

The USPS has responded by imposing slightly higher rate increases for such mail than for most other Standard classifications. In Fiscal Year 2018, for example, revenue per piece rose less than 1% for the Standard class as a whole but was up 5.1% for Non-Carrier-Route Flats mail. But the cost per piece rose 13.4%, putting the category further into the red, with revenue covering only 68.65% of costs.

Got no explanation

In a recent report, postal officials speculated that, because of economies of scale, a 17.5% drop in volume for Non-Carrier-Route Flats during FY2018 caused the category’s costs to spike. (See pages 17-18 of this PDF.) But that simplistic theory doesn’t explain why the cost per piece for Standard Carrier-Route Flats rose even more, to 15.2%, when volume for that category dropped only 1.4%.

(Don't blame postal workers: The agency's average cost per labor hour has recently been increasing less than 4% annually.)

These unexplained cost increases have caused the cost coverage for Carrier-Route Flats to decline from 137.53% to 108.49% in just two years. Postal officials have not explained that dramatic trend, which could soon turn what was a highly profitable category for the USPS into a money loser.

“Based on feedback from industry representatives, which is supported by volume trends, flats volume has migrated from the Flats and Carrier Route products into High Density Flats because of comailing,” the USPS report said.

True. Better incentives have encouraged more comailing, a process that sorts a variety of mail pieces -- mostly catalogs and magazines -- into a single mailstream to take advantage of postal discounts. The work is typically done by printers, which are rewarded with a share of their customers' resulting postal savings.

High Density Flats are like Carrier-Route Flats on steroids, with a minimum of 125 pieces per carrier route. Achieving a significant proportion of such mega-bundles typically requires a mailing list – or a comailing run – with at least several million addresses.

It's working. Now let's screw it up.

The rapid growth of High Density Flats is good news for the Postal Service because of the category’s 131.20% cost coverage. That’s the kind of trend rate incentives are supposed to produce.

But postal officials are focusing on the phantom “problem” that the move to High Density Flats is allegedly causing: the reduced efficiency of Non-Carrier-Route Flats. The “solution” they are considering, they revealed recently, is to combine Non-Carrier-Route Flats, Carrier-Route Flats, and High Density Flats into a single category known as Non-Saturation Flats. (See pages 20-22 of this PDF.)

“In a way, the USPS is suggesting that if it lashes two water-tight boats to a sinking vessel it will save the sinking ship,” the Mailers Hub newsletter quipped this week.

No longer would postal officials be pressured to get Non-Carrier-Route Flats “above water,” which would require either massive (and, in some circles, unpopular) rate increases or massive cost reductions. This poorly sorted mail would become part of a larger category with more palatable cost coverage of 88%.

But two profitable categories – High Density Flats and Carrier-Route Flats – would also join that slightly unprofitable new category. Based on the Postal Service’s history, we know what will come next: Postal officials will spread the pain around, jacking up prices across the category, even on the types of mail that would be considered highly profitable if not for this bureaucratic finagling.

(That already happens in the Periodicals class, where efficient and inefficient mail are in a single category in which efficiently mailed publications subsidize the inefficient ones.)

Increasing the price spread between efficient and inefficient mail has prodded more mailers to participate in comail and more investment by printers in enhancing the process. By the same token, freezing or shrinking the price spread by having efficient mail subsidize inefficient will curb the favorable trend.

Iceberg off the starboard bow

What really galls the postal experts I’ve spoken with recently is that the Non-Saturation Flats proposal looks like an attempt to paper over some very real problems – what one postal expert called “re-arranging the chairs on the Titanic deck” -- instead of understanding and addressing them.

Postal officials don’t understand the cost trends with flat Standard mail, don’t know whether their various efforts to improve the handling of flat mail are working, and can’t even say when they will know.

Their explanation of the cost increases for Non-Carrier-Route Flats are simplistic and probably off base. (Note to the USPS: Here’s a hint in your own data: The proportion of Non-Carrier-Route Flats dropshipped to the SCF level has declined from 64.1% to 51.7% in just two years. If you actually dig into the category’s data, I’ll bet you’ll find much less relatively inexpensive mail, such as dropshipped 5-digit bundles, and a higher proportion of poorly sorted, non-dropship mail.)

Postal officials’ explanation of the even larger cost spike for Carrier-Route Flats is non-existent. Here’s why: A big culprit is probably the money-eating Flats Sequencing System, but postal officials won’t admit that or even discuss trying to unwind the FSS fiasco. Doing so would force them to shoulder the blame for rushing into the multi-billion-dollar investment before it was proven to be workable. The unofficial motto at L’Enfant Plaza is “Never recalibrate, just obfuscate.”

(Another note to postal officials: I dare you to publish a clear analysis showing the cost-per-piece of handling and delivering FSS mail – including the stuff the machines aren’t able to sort – with the costs of carrier-route and 5-digit-bundle mail. No, I take that back. I double-dare you.)

Related articles:

• New Postal Rates Will Benefit Some Publishers and Printers

• Why the Flats Sequencing System Should Be Scrapped

• USPS Cost Cutting Ain't Cuttin' It, Mailers Group Says

 

 

 

The FSS Slows, and the Red Ink Flows

Postal officials still have no fixes for a money-losing billion-dollar boondoggle, except to jack up postage rates for catalogs and magazines. 

Source: USPS reports. The Leakage metric was introduced in FY2017.

For the third year in a row, productivity of the U.S. Postal Service's Flats Sequencing System declined in 2018 – with no end in sight to the money-losing machines’ troubles.

Hourly throughputs declined 5% during Fiscal Year 2018 and are 14% below where they were five years ago, the USPS reported recently in its Annual Compliance Report. Leakage – the proportion of mail that was supposed to be run on FSS machines but wasn’t – rose from 20.1% to 21.9%.

And barely half of FSS mail – 54.2%, down slightly from last year – ended up being sorted in delivery sequence as intended. The only good news is that “Mail Pieces at Risk” -- catalogs or magazines that got jammed in the machines or needed other special handling -- dropped from 5.8% of FSS mail to 4.6%.

The Postal Service has touted various efforts to fix the agency’s flats-handling processes, but the compliance report says it “is still unable to provide an estimate of the financial impacts of these operational initiatives” because of flaws in its data-management systems. One such flaw, an Inspector General’s report revealed recently, is that FSS facilities are apparently doing nothing to track, understand, or correct the causes of leakage.

The Postal Regulatory Commission asked the USPS on Friday to explain why this year’s Annual Compliance Report makes no mention of Lean Mail Processing, which postal officials touted last year as “an initiative to make processing USPS Marketing (AKA Standard) Mail Flats and Periodicals mail more efficient.” (Puh-leeze! Lean Management is so 2017.)

Cost coverage worsens
The FSS’s failures contributed to greater unprofitability for the two main types of mail handled by the FSS machines – non-carrier-route Marketing Mail (“Marketing Flats”) and Periodicals. Rather than fixing the causes of the red ink – by scrapping the FSS machines, for example – postal officials have pressed for abolition of the inflation-based price cap on flats mail.

USPS’s costs per Marketing Flat mail piece rose an astounding 13.4%, causing cost coverage to decline from 74.0% to 68.6%. Postal officials blamed lower economies of scale, as increased co-mailing by printers shifted flat mail from Marketing Flats (17.5% volume decline) to such lower-cost categories as High-Density Flats (up 20.0%).

The cost per Periodicals piece increased only 1.3%, while revenue per piece declined by the same amount – perhaps also because of more co-mailing. The result is that the Postal Service’s highly questionable costing methodology showed that Periodicals covered only 67.54% of their costs, down from 69.33%.

Related articles:

• Failed Sequencing System: No Wonder USPS Still Hasn't Fixed the FSS 
• Boondoggle: The FSS Goes from Bad to Worse 
• Why the Flats Sequencing System Should Be Scrapped

Boondoggle: The FSS Goes from Bad to Worse

The USPS's recently released annual FSS Scorecard

The U.S. Postal Service’s money-losing Flats Sequencing System is becoming even less productive and more problematic, according to the USPS’s own statistics.

In the past two years, the average number of mail pieces processed per machine hour has decreased by 8%, and the proportion of “mail pieces at risk” (such as copies that are jammed in the machinery) has risen by 8%, according to information the USPS file recently. (See pages 2-4 of this PDF containing responses to Postal Regulatory Commission questions.)

Meanwhile, the proportion of FSS-zone flats that get fully sorted by the football-field-sized machines has declined nearly 10%. That means that nearly half of FSS flats end up being processed on an automated flat sorting machine (AFSM) and/or sorted manually.

The USPS spends 40% more to deliver flat mail that is addressed to FSS zones than to non-FSS zones (which use less automated methods), an expert’s study concluded last year. That indicates that the system wastes several hundred million dollars annually – not counting the initial $1.3 billion purchase price of the 100 machines.

But postal officials have resisted calls to scrap or rethink the FSS. A year ago, the USPS said it is still learning how to optimize the machines, stating that the technology “is in its relative infancy.” But, clearly, this baby is failing to thrive.

Instead of developing a Plan B for flat mail, postal officials and the PRC are pushing for Postal Service bailouts that in essence would force mailers of catalogs, magazines, and other flat mail to cover the FSS’s added costs. Dead Tree Edition has dubbed that the Stupidity Tax -- making mailers pay, in the form of higher postal rates, for the USPS's stupidity and stubbornness in moving forward with its FSS investment despite numerous red flags.

The PRC’s tentative plan, for example, would punish Periodicals and non-carrier-route Standard flats – because the USPS allegedly loses money on them – with five years of required rate hikes that could easily total more than 40%.

Related articles:

• Will Publishers Pay for the USPS's FSS Fiasco?
• The FSS: A Hopeless Case
• 5 Ways Magazine Publishers Can Maximize Postal Savings

 

 

Why the Flats Sequencing System Should Be Scrapped

A 2011 presentation explained how FSS would
streamline the handling of flat mail. Oops!

What many have long suspected has now been confirmed: The U.S. Postal Service’s Flats Sequencing System is a disastrous failure that cannot be fixed.

The FSS is adding so much to the costs of handling magazines, catalogs, and other flat mail that no amount of machinery tweaks, Lean Six Sigma projects, or "Tiger Teams" can ever make it right.

“When all processing and delivery costs are included, an average Periodicals flat addressed to an FSS zone costs over 10.5 cents more than if addressed to a non-FSS zone,” postal expert Halstein Stralberg wrote recently. Assuming the same 40% cost differential applies as well to flat-shaped Standard Mail, such as catalogs and retailer flyers, Stralberg’s analysis indicates that FSS is adding several hundred million dollars annually to the Postal Service’s costs.

And that doesn’t even count the $1.3 billion spent on purchasing the huge machines or the additional investments in building modifications, training, and other start-up costs.

“Because of the large investment in the FSS and the great hopes that were attached to them, USPS managers appear still unwilling to admit that the program is a failure,” wrote Stralberg, a longtime consultant on postal costing and prices to Time Inc.
 

Another utopian vision from 2011

Based partly on Stralberg’s analysis, three mailer organizations recently called for the USPS to “(1) retire the FSS machines, (2) allow mailers of flat-shaped mail to prepare their mail for (and qualify for) Carrier Route and other discounts in all zones; and (3) make Carrier Route and other worksharing discounts for flats deep enough to cover 100 percent of the costs avoided by the worksharing.”

“These reforms alone should encourage enough co-mailing to enable Periodicals Mail and flat-shaped Marketing [aka Standard] Mail to cover all, or nearly all, of their attributable costs,” they told the Postal Regulatory Commission.

The three organizations are MPA-The Association of Magazine Media, the Association for Postal Commerce (aka PostCom), and the Alliance of Nonprofit Mailers.They submitted their comments and Stralberg’s analysis to the PRC to counter the USPS’s proposal to abolish the inflation-based cap on Periodicals postage rates, as explained in my recent Publishing Executive article, Postal Rate Fight Continues as Publishers Battle USPS "Stupidity Tax".

A 2003 Stralberg presentation correctly predicted
FSS mail would cost more than carrier-route flats.

Stralberg’s predictions in 2003 about why FSS would not reduce flats-processing costs have turned out to have nearly prophetic accuracy, except the program turned out even worse than he expected.

For example, he contradicted postal officials who claimed that their costs for FSS-sorted pieces would be lower than for pieces in carrier-route bundles. (Postal officials now acknowledge that carrier-route mail is cheaper to deliver than FSS mail.)

But Stralberg never predicted that the FSS cost per Periodicals piece would be nearly double that of carrier-route pieces, as his recent analysis shows.

Here’s the MPA/PostCom/ANM summary of why the Postal Service’s assumptions about FSS turned out to be so fatally flawed:

1) “The Postal Service’s planners greatly underestimated the extent to which mailers would sort flats to the carrier route level.” About half of flat-mail copies were in efficient carrier-route bundles when FSS was first conceived more than a decade ago. Because of co-mailing and similar mail-consolidation efforts by printers, the proportion is now higher than 70% in non-FSS zones. (When a system nearly doubles the cost of handling 70% of the mail, it cannot possibly save enough on the other 30% to reach breakeven.)

The view from 2010, before reality intruded.

2) “The Postal Service overstated the costs of manual sequencing of carrier route flats by carriers, and thereby overestimated the costs saved by diverting the sequencing work to the FSS.” Stralberg called out this flawed assumption in a 2003 presentation to mailers and postal officials.

3) “The Postal Service, erroneously assuming that practically all flats within an FSS zone would be placed in delivery sequence by the FSS, removed the vertical flats cases carriers had used for manual sequencing.” This triumph of optimism over reality adds to the amount of time carriers need to prepare flat mail for delivery. Barely half of the flats in FSS ZIP codes are presented to carriers in delivery sequence.

4) “The Postal Service’s planners incorrectly assumed that nearly all flats would be machinable on the FSS.” Stralberg warned in 2003 that flat mail unsuited for the Postal Service’s existing machines probably couldn’t be handled on the FSS, meaning that “non-machinable flats will cost more” under FSS.

5) “The Postal Service’s predictions that practical concerns about the FSS machines themselves, including their footprint, cost, and complexity, would be solved during the design and implementation of the system proved incorrect.” That’s nearly a direct quote from Michael Plunkett, a USPS pricing manager when FSS was being developed and now PostCom’s President and CEO. He also told the PRC, “From the outset of the FSS project there was significant skepticism that the proposed technology would achieve the intended results and concern that substantial capital was being invested in a system that would unnecessarily complicate a network that already needed to be rationalized.”

6) “Finally, because flats mail volume was lower than the Postal Service had expected, it added many outlying zones to the territory covered by each FSS machine, causing substantial service degradation.” Mailers warned postal officials more than a decade ago that digital disruption was reducing the volume of printed catalogs and magazines, but the Postal Service persisted with an FSS plan that assumed gradually increasing volumes. Flat mail peaked in 2005 and has dropped about 40% since then.

Related articles:

• The FSS: A Hopeless Case 
• Will Publishers Pay for the USPS’s FSS Fiasco? 
• USPS Needs a Plan B for Flat Mail, Coalition Says 
• Is The FSS A Boondoggle? Tough Question #2 For The USPS

More Mail on Saturday? There's a Reason for That

If you think your mailbox is fuller on Saturdays than it used to be, it’s not your imagination.

During the past year, the U.S. Postal Service made operational challenges that cause some letters to be delivered on Saturday even though they don't have to be delivered until the following week.

“When feasible, based on local operating conditions, the Postal Service advances Standard Mail [letters] scheduled for Monday and Tuesday delivery into a processing window that enables delivery on Saturday, which is generally the lightest delivery day of the week,” the USPS told the Postal Regulatory Commission yesterday (PDF, page 5).

“This practice balances the processing and delivery workload for Monday, which is generally the heaviest delivery day of the week.” Postal officials were responding to a question about how they managed to improve on-time delivery for Standard Mail during FY2016.

Last year, the Postal Service delivered more than 55 billion Standard letters, which generally are mass solicitations sent by businesses and other organizations. (The growing category is often called junk mail --but not by the Postal Service.) Standard letters have lower postage rates than do First Class letters, partly because First Class enjoys more expedited delivery.

Related articles:

• USPS Backing Down on Saturday Mail Delivery
• Discover-ed: How Direct Mail Competes With Digital Marketing Channels 
• Report Predicts Major USPS Downsizing - But Is It on Target? 

 

The FSS: A Hopeless Case

With FSS, things don't always go as planned.

Buried in two recent U.S. Postal Service reports are data and statements persuading me that the USPS's Flats Sequencing System will never end up saving money, much less recoup its $1.3-billion investment.

I explain why in an article that Publishing Executive published today, which also points out that the combination of the FSS fiasco and a Trump presidency could be yugely expensive for Periodicals publishers. To provide more depth to that discussion, here are the relevant excerpts from the two reports.

The first is the brief "FSS Scorecard" section of the agency's Annual Compliance Report. It reveals that the already slow and erratic FSS machines ran even slower and worse last year -- despite various "tiger teams," machine tweaks, and changes to mailing rules that were also focused on making FSS work:

FSS Scorecard

Chart from USPS FY2016 Annual Compliance Review

The Postal Service continues to measure critical aspects of FSS performance at each processing location. The resulting scorecard is utilized to develop a list of specific sites with the greatest opportunity for improvement. The table reflects the Postal Service’s performance on the key metrics utilized by the scorecard.

The DPS percentage metric represents the percentage of all flats destinating in FSS zones that was sorted to DPS using FSS for city carrier delivery. Flats volume outside of the FSS DPS percentage is either processed on the automated flat sorting machine (AFSM) or in manual operations.

The Mail Pieces At-Risk percentage identifies the percentage of mail that does not follow the prescribed path of sortation through a machine-based operation (e.g., on the FSS). These pieces, while not representative of service failures, require some additional handling in order to ensure they meet service expectations. At-Risk metrics enable the Postal Service to identify operational processes and machine elements that need to be reviewed for possible improvement. The metrics are broken down into three groups – Maintenance, Operator, and Shared (both Maintenance and Operator) – based on the ability of that group to affect the metric being tracked. Data supporting these metrics are gathered from machine End-of-Run (EOR) statistics. The Postal Service uses raw event indicators from the machine, such as the number of jams, and extrapolates the potential number of pieces that have fallen outside normal processing. Proper maintenance and adherence to operational guidelines minimizes the pieces at risk, hence decreasing the indicator.

Below are two excerpts from the "FSS Pricing and Passthrough" section of a USPS report on Periodicals pricing that include a couple of interesting revelations: 

1) After eight-plus years, postal officials are still trying to figure out how to make the "infant" FSS process work. In other words, not only is the system not working, the USPS doesn’t have a plan yet for getting it to work. 

2) The original idea was that FSS copies would cost the USPS no more than carrier-route copies, but now the vision is for the savings on non-carrier-route copies to make up for the “slightly” higher costs of carrier-route copies. With carrier-route copies now constituting more than 70% of non-FSS flat mail (and likely to rise because of better incentives in the rates that will take effect later this month), it’s difficult to see how a system with such long-term underperformance will ever make that work:


The Postal Service’s experience with the FSS is in its relative infancy, and the Postal Service is still learning about which operational flows will minimize the cost of FSS processing. Currently, the presumed efficient preparation for FSS sites is governed more by mailing rules than by pricing incentives. ... 

The premise of the FSS program is that increased mail processing costs (possibly substantial increases for pieces that previously qualified for Carrier Route rates) would be offset by reductions in delivery costs. The net reduction is intended to be systemic, meaning that while overall costs are reduced, some individual components may decrease substantially (mail previously prepared as 5-Digit, 3-Digit, ADC and MADC), while some individual components may increase slightly (Carrier Route). The dilemma is that there is not a practical way to set rates to reflect the fact that, in FSS zones, there is no cost distinction between mail previously paying Carrier Route rates and mail previously paying 5-Digit rates. This dilemma is further complicated by the fact that mailers previously paying predominantly Carrier Route rates do not want higher prices for their Carrier Route pieces.


I’m told that postal officials won’t even discuss the possibility of scrapping the FSS or radically repurposing the machines. (Could the machines be used to sort inefficient mail pieces into carrier-route bundles? Could machines located near major printing plants be turned into giant co-mail machines?)

One issue is that casing units (which carriers use to sort flats into delivery sequence) have been removed from so many delivery units served by the FSS. In other words, before waiting to see whether the FSS would work as planned, postal officials “burned the ships.” Now they’re saying, “Shit, we have no way to get out of this God-forsaken place. Who knew?”

The floor space once devoted to casing units often gets turned over to the growing parcel business. And the wave of recently hired carriers doesn’t have the experience or route knowledge to case efficiently. (With the FSS failing to sort nearly half of the flat mail assigned to it, by the way, there’s still plenty of casing going on. But it’s increasingly being done by inexperienced people using inadequate space.)

So I can understand the reluctance to ditch the FSS. But why are postal officials wanting to throw good money after bad by subjecting yet more areas of the country to FSS processing?

Related articles:

• USPS Needs a Plan B for Flat Mail, Coalition Says 
• There's Inadvertence, and Then There's Postal Inadvertence 
• USPS Cost Cutting Ain't Cuttin' It, Mailers Group Says

 

New Postal Rates Will Benefit Some Publishers and Printers

Mail that's been sorted by an FSS machhine.

A quiet boycott by some mailers helped persuade the U.S. Postal Service to change how it charges for publications, catalogs, and other flat mail.

As a result, many mailers will pay lower postage bills next year, printers will earn more money from their co-mail programs, and the USPS is likely to benefit as well.

The USPS announced on Wednesday average rate increases of slightly less than 1% for First-Class, Standard, and Periodicals classes, to take effect on January 22. But some customers, including the most efficient mailers of magazines and catalogs, will apparently see their postage bills drop.

The new rate structure will do away with a change first introduced a year and a half ago – separate Standard and Periodicals rates for ZIP codes served by the Flats Sequencing System. FSS rates are higher than rates for non-FSS pieces that are in carrier-route bundles but lower than other non-FSS rates. There was a logic to the separate FSS rates, but they backfired for the USPS.

“Many mailers who previously paid Carrier Route rates for their FSS volume experienced an above average price increase after the new rates were introduced in May of 2015,” the Postal Service said in explaining the new Standard Class rates.

Rate change led to partial boycott
“Since then, FSS volume has declined faster than the volume in other categories of flat-shaped mail” because catalog companies “have significantly curtailed the number of pieces sent to potential new customers (prospecting pieces) in FSS zones. Additional feedback indicates that other flats mailers may be engaging in similar cost mitigation strategies to avoid sending certain pieces in FSS zones.”

Periodicals mailers have little opportunity to engage in similar FSS-avoidance schemes. But publishers, like cataloguers, were talking of legal action a few months ago to prevent the Postal Service from shifting more ZIP codes to FSS, arguing that would in essence be an illegal rate increase.

The new rates would eliminate that controversy. Standard and Periodicals rates will be identical in FSS and non-FSS ZIP codes, so the USPS can move forward with shifting more areas to FSS without pushback from its customers.

The additional volume is exactly what postal officials say the giant FSS machines need to run efficiently. And by restoring some of the incentives to co-mail, the new rate structure should result in flat mail being presented to the USPS in more efficient packages and closer to the point of delivery.

One  failure, one success
Two major investments have been made this century in reducing the costs of handling and delivering flat mail pieces – USPS’s $1.4-billion Flats Sequencing System and the publication-printing industry’s massive expansion of co-mailing.

The FSS so far has failed. But co-mail – consolidating mail from a variety of customers in a way that reduces both the mailers’ and the Postal Service’s costs – has been a huge success.

Such a success, in fact, that it has undercut the ROI of FSS. Thanks to co-mail, more than 70% of flat Standard and Periodicals mail going to non-FSS zones is in carrier-route bundles, up from less than 50% when FSS was first planned. That means much of the Postal Service’s expected savings from FSS have already been achieved via co-mail.

By reducing the incentives to co-mail, the FSS rates actually undercut what the printers achieved. But the January rate structure will restore and actually enhance the incentives to co-mail.

For example, the Periodicals piece rate for copies that are in carrier-route bundles will not change, but the rate for copies in the next-best category will rise by more than 3%. That means the minimum savings from promoting a copy to carrier route will rise from 9.8 cents to 10.7 cents. Printers that use co-mail and other techniques to bring about such shifts typically get a share of their customers’ postal savings.

For publishers that have a high percentage of copies in carrier-route bundles, the savings from eliminating the FSS rates will outweigh the higher rates for less efficient copies – resulting in lower average postal rates.

The picture for Standard flats, such as catalogs, is more complicated. But again it appears that the incentives to improve mail sortation will be greater and that the most efficient mailers will enjoy lower postal bills.

Related articles:

• Good Money After Bad? Mailers Try to Block FSS Expansion:
• Nose of the Camel?: USPS Sneaks in a Rate Hike
• Dueling Bindery Breakthroughs: Dead Tree Edition's second-ever article, published just over eight years ago, focused on a variant of co-mailing called co-binding.

Nose of the Camel?: USPS Sneaks in a Rate Hike

Flats Ejection System: "Flyouts" plague FSS.

June 16, 2016 update: At 5 p.m. today, 19 hours after the article below was published, the U.S. Postal Service issued an Industry Alert entitled "Inadvertent Addition of New FSS Zones" as follows:

There were 27 new FSS zones inadvertently added to the July 1, 2016 effective L006 Labeling List as referenced in the Labeling List Changes section of the June 9, 2016 Postal Bulletin (22443). To resolve this action, the newly added zones will be removed from the L006 Labeling List effective August 1, 2016. In addition, mailers may take advantage of the 30-day grace period and opt to continue to use the June 2016 L006 list. Alternately, where the July list has already been implemented, software providers and mail service providers may remove the 27 zones from the list where applicable. The 27 zones to be removed are as follows: 02360, 02738-39, 02769-70, 02878, 02921, 07021, 07027, 07054, 07059, 07069, 07076, 07410, 07435, 07438, 07460, 07480, 23120, 23691, 64050-54, 64056, and 64058. 

Magazine publishers, newspapers, catalogers, and other senders of flat mail are slated to be hit with a backdoor postal rate increase next month.

Implemented without hearings, or regulatory approval, the rate hike will be tiny – a small fraction of 1% for most mailers. But the U.S. Postal Service has given mailers good reason to believe this is just the proverbial nose of the camel in the tent.

So don’t be surprised if there’s a legal challenge to block this precedent, as explained in Good Money After Bad? Mailers Try to Block FSS Expansion.

Officially, what the USPS posted last week in its Postal Bulletin was not a rate hike but rather a “Labeling List Change” – to have its Flats Sequencing System (FSS) machines process mail for an additional 29 ZIP codes. But the shift will mean higher costs for mailers because the postage on Standard, Periodicals, and Package Services flats are typically several cents per piece higher than what is paid for traditionally packaged mail.

No warm and fuzzy
More than 70% of non-FSS mail is presorted into carrier-route bundles, and“FSS is more costly [for the USPS] to process than Carrier Route prepared mail,” postal guru Joe Schick of Quad/Graphics wrote recently in FSS – A Four Letter Word.

“Despite all the discussions around FSS between the mailing industry and the USPS, we have never seen anything that would give us a warm fuzzy feeling about the ability of FSS to be the low-cost process it was intended to be,” Schick wrote.

Was the change "inadvertent"? Vote here.

No one has been able to squeeze a coherent explanation out of the USPS as to why it wants to shift more mail to a less efficient process. But we all know the reason.

It’s the same reason postal officials claim they haven’t bothered to measure the return on the $1.4 billion investment in the giant FSS machines: They don’t want to admit they made a mistake -- moving ahead with the FSS purchase despite the prototype failing two acceptance tests and despite knowing that the entire plan was based on inflated mail-volume projections.

When it comes to the FSS, postal officials are more concerned with CYA than ROI.


Other chapters in the FSS saga include: 

• Flats Litigation System: USPS and Vendor Battling It Out Over Huge FSS Machines
• USPS Needs a Plan B for Flat Mail, Coalition Says 
• Tasers on Stun: 9 New Business Ideas for the U.S. Postal Service 

Good Money After Bad? Mailers Try to Block FSS Expansion

An FSS machine: savior or white elephant?

Where the U.S. Postal Service sees an opportunity to expand the Flats Sequencing System to more ZIP codes, mailers see a backdoor rate increase.

Postal officials recently told mailing-industry representatives that declining volumes and some equipment upgrades are creating excess capacity for the FSS. At a meeting of the Mailers Technical Advisory Committee (MTAC), they proposed having the football-field-sized machines process the mail for additional ZIP codes.

See ya in court!
Irate mailers and printers responded by threatening to shift more business to alternate delivery -- private services that bypass the USPS. And they pointed out that the change would in essence be a rate increase for catalogs, publications, and other flat mail. In other words, a legal challenge is possible. (See FSS -- A Four Letter Word for some great insights and additional developments regarding FSS expansion.)

Publication printers are perturbed that they already have to absorb extra costs from handling and shipping FSS mail, without their customers getting any benefit. What’s especially galling is that, no thanks to postal officials, the printers’ expansion of co-mailing is the one recent investment that has brought about significant savings for both flats mailers and the USPS.

Mail that's been sorted by an FSS machine

The catalog and magazine industries are still smarting from a string of broken promises about FSS. They’re in no mood to support an alleged “efficiency” change that appears to be more about saving face than saving money.

Postal officials, including two previous postmaster generals, repeatedly promised mailers that FSS mail would cost no more than traditional carrier-route mail. That made sense: FSS was supposed to save the Postal Service lots of money by automating the labor-intensive process of sorting flat mail into walk sequence.

But it hasn’t worked out that way. On a recent (post-April 10) Standard Class postage statement I examined, FSS-sorted catalogs cost at least 7% more than the equivalent carrier-route pieces.

Today's vocab word: "obfuscatory"
The USPS has given coyly obfuscatory answers to recent questions about its FSS costs, telling the Postal Regulatory Commission a few weeks ago that it had not calculated the return on its $1.4 billion FSS investment. But clearly the system hasn’t worked as planned, and the high FSS postage rates bolster widespread suspicions that the system is still a money loser.

Why then, mailers ask, should the Postal Service throw good money after bad by shifting mail that is mostly in carrier-route bundles to FSS processing? It looks like a lose-lose for both mailers and the Postal Service, except for providing the face-saving illusion that the FSS is working.

Postal officials explain that the FSS would run more efficiently if it didn't have so much excess volume. They told MTAC that the labor-saving high-speed flats feeders they are installing will boost the machines’ throughput by 15% to 20%.

Related articles:

• Standard Mail Flats: Ending the Controversy Without Fixing the Problem: I realize now that I may have this exactly backwards. It's quite possible that the USPS loses even more money on FSS mail than on traditional Standard flats. 
• USPS Needs a Plan B for Flat Mail, Coalition Says: The one-size-fits-all FSS strategy isn't working, mailers' groups pointed out two years ago.
• Flats Sequencing Forecast: Cloudy With a Chance of Bravado: What looked like bravado six years ago is looking more like BS today.

 

Standard Mail Flats: Ending the Controversy Without Fixing the Problem

The long-standing controversy over the U.S. Postal Service’s money-losing “Standard Flats” mail is apparently being tamped down in true Washington fashion – not by raising prices, cutting costs, or solving a problem, but by changing a definition.

Flat mail that was sorted on an FSS machine.

By USPS accounting, Standard Flats have been losing money for years, leading to charges that the agency is unfairly subsidizing certain mailers. Last year, the USPS supposedly spent more than 49 cents while earning barely 40 cents on the sub-class’s average mail piece, partly because of a suspiciously large 9% increase in per-piece costs.

But a few days ago, postal officials told the Postal Regulatory Commission that the mail-processing portion of Standard Flats costs will decline by nearly 4 cents because of new requirements regarding mail that is sorted by the Flats Sequencing System.

“Mail destinating in FSS zones . . . that had previously qualified for Standard Mail Carrier Route rates migrated to FSS rates in the Standard Mail Flats product,” the USPS explained. Translation: What had been called Standard Flats hasn’t become more efficient; it’s just that the definition of Standard Flats has been broadened to include lower-cost mail that is sorted on the huge FSS machines.

Because of the FSS change, “roughly 20 percent of Standard Mail Carrier Route flats shifted into the Standard Mail Flats product,” the USPS wrote. “The migrated mail would tend to have different cost causing characteristics than the existing Standard Mail Flats, as the migrated Standard Mail Carrier Route mail tends to come from higher density mailings with more finely presorted containers.”

Undercharging and overcharging
The mail that “migrated” from the highly profitable Standard Mail Carrier Route sub-class, which now constitutes perhaps a quarter of Standard Flats, is also likely to have lower delivery costs than traditional Standard Flats. And, given the Postal Service’s tendency to overcharge for low-cost mail (such as pieces that are sorted into carrier-route bundles) and undercharge for high-cost mail, the FSS pieces are likely to be profitable for the USPS and therefore to help Standard Flats profitability.

Coupled with the USPS-PRC agreement that Standard Flats undergo higher-than-inflation rate increases the next couple of years, Standard Flats could be on its way to breakeven status.

A note of explanation is in order for neophytes who expect postal rates to be logical: You might assume that “Standard Mail Flats” means all advertising or marketing mail that is too large to be an envelope too flat to be a parcel – such as catalogs, flyers, and non-subscriber publications. But it actually is only the portion of such mail that isn’t sorted into carrier-route bundles, which require a minimum of 10 pieces per bundle.

A typical Standard Class mailing of flat pieces contains a mix of both carrier-route and non-carrier-route pieces. So the references to “subsidies” are off base. The real issue is that the same mailers are paying too much for carrier-route mail and not enough for non-carrier-route, non-FSS mail.

Changing the definition of Standard Flats does nothing to solve this fundamental problem. In fact, by bringing Standard Flats closer to breakeven, it will reduce pressure on the Postal Service to make the needed adjustments in postal rates.

Both mailers and the Postal Service would benefit if postal rates provided greater incentives for Standard mailers to shift more flat-shaped mail into carrier-route bundles, which can be accomplished via co-mail, address-list management, add-a-name, and other techniques.

Related articles:

Why Offer 30% Discounts on a Money-Losing Product? 

A Decade of Postal Mismanagement Is Costing Publishers and Catalogs 

USPS Cost Cutting Ain't Cuttin' It, Mailers Group Says 

U.S. Postal Shredder (USPS): Damaged Catalogs Spark New Business Idea

Catalogs are being damaged so frequently in the mail that one company has turned the problem into a new business venture.

Flyouts in an FSS machine

“A recent project involving a national catalog brand showed that 23 percent of the catalogs received by our field agents arrived in poor condition,” a US Monitor press release said recently.

The company is now offering to tell its clients not only when their catalogs are delivered to customers but also whether those catalogs are “received torn, creased, smudged, wrinkled, stained or with water damage.”

The U.S. Postal Service’s Flat Sequencing System earned the nickname “Flats Shredding System” from postal workers because of its propensity to mangle magazines, catalogs, and other flat mail. In its early days, FSS generated plenty of complaints from mailers about damaged pieces.

The huge machines have been tweaked to reduce torn covers, “flyouts”, and other such problems. Still, shifting catalogs from traditional carrier-route bundles to FSS seems likely to cause more damage, especially for thin, flimsy copies.

Additional suspects
FSS is not the only likely culprit for increased catalog damage, however.

Companies these days rarely send “big book” catalogs that provide a comprehensive listing of their products; that’s what their web site is for. Instead, they mail more targeted pieces that are designed to spark interest and a visit to the web site.

That is resulting in thinner catalogs, more saddle stitching (using “staples”) rather than perfect binding, and lighter cover paper – all of which makes them more prone to being damaged in the mail than the big-book catalogs.

Full mailboxes may also be a factor. With the rise of e-commerce causing more parcels and thick envelopes to end up in mailboxes, flat mail may be more likely to get rolled or scuffed upon delivery.

Related articles:

•  Flats Litigation System: USPS and Vendor Battling It Out Over Huge FSS Machines
•  The Scoop on Droop: Bad News for Mailers
•  Tasers on Stun: 9 New Business Ideas for the U.S. Postal Service

 

 

USPS Cost Cutting Ain't Cuttin' It, Mailers Group Says

From Flats Sequencing to Network Rationalization, many of the U.S. Postal Service’s recent cost-cutting programs have not been living up to the agency’s projections, a multi-industry mailers group says.

Worse, the programs have shifted costs to mailers without apparently benefiting USPS, the Association for Postal Commerce (PostCom) wrote in a recent filing with the Postal Regulatory Commission.

“While PostCom applauds the Postal Service’s attention to reducing costs, the information presented [in a recent USPS report] suggests that these efforts have not been as effective as the Postal Service projected,” PostCom wrote. Judging by some questions the PRC has posed to USPS the past couple of weeks, the regulatory body seems inclined to agree with PostCom’s assessment.

PostCom pointed out that USPS recently estimated only about $900 million annual savings, versus its projected $1.2 billion, from Phase I of its Network Rationalization plan that closed scores of mail-processing centers.

It also noted that, in 2013, increases in mail-processing costs caused by the new Flats Sequencing System were offset by lower delivery costs. Yet in 2014, both PostCom and the PRC pointed out, delivery costs for Standard-class flat mail (the main type of mail sorted with FSS machines) increased 8% while processing costs increased 9%.

“As mailers have incurred additional costs to prepare mail to meet FSS standards, the Postal Service has not seen a reduction in either processing or delivery costs from the implementation of this initiative,” PostCom wrote.

FSS productivity down
USPS acknowledged on Friday that FSS productivity declined last year, because of lower mail volumes and some operational issues.

“A high turnover rate was experienced in the operations for both the Supervisors and employees, resulting in a lack of understanding of the approved methods and metrics needed to drive the performance during the declines,” USPS wrote in a response to pointed questions from the PRC about FSS costs.

 “To address these deficiencies, the Postal Service provided on-site training at 5 Select FSS locations during August and September 2014. A minimum of two Supervisors from every FSS site nationally attended these training sessions. The sessions provided the supervisors with information regarding accepted methods and metrics used in the FSS operation to use and train others in their home sites.”

PostCom also questioned whether USPS’s Load Leveling Initiative is paying off.

Load Leveling is supposed to reduce the agency’s cost for handling Standard mail by spreading the workload more evenly throughout the week, resulting in slower delivery of some mail. But USPS has released no analysis of the program’s financial impact, and Standard costs keep rising.

“Without better data, . . . it is impossible to tell whether the Load Leveling strategy has limited these increases or furthered them,” PostCom said. In fact, the organization indicated, USPS's lack of analysis or transparency about it costs makes it difficult to assess the success of any of its cost-cutting measures.

More accountability needed
The Postal Service, PostCom wrote, needs to be “more accountable to the industry in reporting how its strategies are reducing costs, how the cost reductions will support a more effective and efficient USPS, and how these reductions will benefit the overall mailing industry.”

“In general, PostCom supports the Postal Service’s efforts to reduce costs. But the Postal Service, and the Commission, must understand that much of what is described as ‘cost cutting’is really ‘cost shifting.’”

“When additional costs are placed on mailers, and the Postal Service does not experience concurrent reductions in its costs, something is amiss.”

Related articles:

• Has USPS Targeted the Wrong Plants for Closure?
• USPS Needs a Plan B for Flat Mail, Coalition Says 
• Postal Officials Don't Know Whether the FSS Is Saving Money

 

Seven Mysteries of the New Postal Rates

It sounds like a small price increase, but the new rates could have large implications for publishers, marketers, printers, and even paper mills.

Nearly three weeks after the U.S. Postal Service proposed hiking most postal rates, mailing experts and regulators can’t figure out what the proposal means.

Agreeing with a coalition of mailers’ groups that USPS’s filing was incomplete for all but First-Class Mail, the Postal Regulatory Commission on Monday extended the discussion period on the proposed April 26 rate increases for “market-dominant” mail classes.

Some mailers are skeptical of USPS’s calculation that the price increases, especially for the Standard and Periodicals classes, are just shy of 2%. But until USPS answers an extensive list of questions about the new rate structures and the new rules that will accompany them, no one can evaluate whether the proposed rate hikes are legal, the PRC said.

A pallet of magazines in FSS-optimized bundles

Even after the rates are fully explained, divining their implications for individual mailers, for USPS, and for others will be no simple matter. Here are seven important but mostly unanswered questions about the rates:

1) How much will my rates change? If you’re assuming the answer is less than 2%, you may be in for a rude awakening. These are is not across-the-board increases. Forever Stamps aren’t going up at all, enabling USPS to stick First-Class business mailers with increases that exceed 2%. The new rules may whack mailers that have mostly carrier-route or high-density mail but result in lower postage for some other mailers. Folio: magazine notes that some rates will double while others will decrease more than 20%; most mailings, however, involve multiple types and levels of rates. Many mailers won’t really know what the new rates will mean until their printer or other service provider can run an elaborate presort analysis, which can’t happen until the new rules and rates are clarified.

2) Will the rates alter how paper is priced and sold in the United States? The new rates would continue and extend the Postal Service’s efforts to de-emphasize weight in calculating rates. USPS acknowledges that it overcharges for weight, in the past using it as a proxy for some of its costs that are not directly weight related. The result is that paper mills tend to charge higher premiums for lightweight paper in the U.S. than they do in other markets, knowing that American postal rates give buyers a strong incentive to use lighter paper. (That’s especially true for magazine-quality papers, which in many other countries are used primarily for products distributed through stores rather than the mail.) But with Standard letters no longer having “pound” rates and with weight charges for some other mail declining, some mailers may switch to heavier paper.

3) For flats mailers, will the new mail-preparation standards be must-do, ought-to-do, or nice-to-do? This is an especially big question for flats mailers, and their printers, because of new preparation standards for mail going to ZIP codes served by the Flats Sequencing System (FSS) and new incentives to create pallets of carrier-route bundles in non-FSS areas. It’s still not clear what mailers will actually be required to do on April 26 and what will be optional but important – for example, valuable enough to overhaul how mail is prepared and shipped. And sometimes USPS incentives are duds, not worth the additional expenses or investment required to take advantage of them.

4) Will the rates and regulations create new competitive advantages for some printers – and disadvantages for others? For many types of printing, a major differentiator is the ability to minimize customers’ mail costs through mail consolidation, in-line customization, dropshipping, etc. Postal officials talk a good game about wanting to encourage co-mailing, selective binding, and other forms of mail consolidation, but that isn’t always reflected in new rates. Conversely, incentives to consolidate and dropship mail can hurt small printing plants that don’t prepare enough mail to obtain the best rates for their clients.

5) Will printers, other service providers, and USPS itself be ready for April 26? The proposed rate structure will have some new charges and apparently lots of new rules and incentives. But software providers can’t redo their coding or printers their mail-preparation procedures or equipment until they know what the new rules will be. And then there’s the question of whether the Postal Service will be ready for the resulting changes in how mail is prepared and delivered.

6) Will the new rules and rates finally make FSS start paying off? USPS’s multibillion-dollar investment in the huge machines was supposed to reduce dramatically its costs of carrying flat mail. But so far, higher handling costs have eaten up the resulting delivery savings, which has increased pressure on USPS to jack up rates for Standard and Periodicals flats. New FSS preparation standards are supposed to address that by changing how mail is packaged for ZIP codes served by the FSS machines, such as by eliminating carrier-route bundles.

7) Will the new rules cause more lightweight pallets and other “tail of the mail” problems? Printers and mailers note that recent changes in postal regulations have forced a lot of flat mail to be placed on extremely light pallets, which tend to cause such problems as reducing the amount of mail that fits into a truck. The new rates include incentives (or requirements; it's not clear yet what's optional) for creating 5-digit carrier-route pallets and FSS scheme pallets. But will that have the perverse effect of causing other mail to be packaged and shipped less efficiently?

Related articles:

• USPS Raising Rates, Imposing New FSS Rules, and Perhaps Inviting a Legal Challenge
• USPS Needs a Plan B for Flat Mail, Coalition Says
• FSS Postage Rates Will Raise Issues for Cataloguers, Publications, Printers, and USPS

USPS Raising Rates, Imposing New FSS Rules, and Perhaps Inviting a Legal Challenge

Just in the nick of time, the U.S. Postal Service filed price increases averaging nearly 2% late Thursday on most mail except Forever Stamps.

The Postal Regulatory Commission marked receipt of the filing as 4:07 p.m., less than an hour before closing. If USPS had waited until Friday morning, the December 2014 Consumer Price Index would have been factored into the calculation of the inflation-based cap on postage increases -- perhaps lowering the cap because of plummeting gasoline prices that are leading to deflation.

No change for the Caped Crusader

The rate increases on the "market-dominant" mail classes, slated to take effect April 26, range from 1.886% for Standard to 1.965% for the Postal Service's favorite whipping boy, Periodicals. Take those numbers with a grain of salt.

Those are average increases, but I've never met an average mailer. Different types of mail in the same class may experience rate hikes that deviate significantly from the average -- especially for First-Class Mail.

To achieve the average First-Class rate hike of 1.949% without changing the 49-cent charge for a Forever Stamp, other types of First-Class mail will get larger increases, such as 2.417% for presorted letters and postcards and 10.18% for parcels. Within the Standard Class, carrier-route and letter mail will get relatively low increases, but Every Door Direct Mail will rise nearly 5% and parcels nearly 10%.

Mailers of catalogs, magazines and other flat mail in the Standard and Periodicals classes will also face new rules and incentives for preparing Flats Sequencing System (FSS) mail. The impact is likely to vary significantly from customer to customer.

Flats mailers will face "required FSS preparation for all flat-shaped mail pieces destinating in FSS zones" but also "pricing incentives to reward mailers that prepare and enter flats that are most advantageous to the Postal Service."

Generally speaking, CPI-based rate increases take effect as long as the PRC determines that the Postal Service stayed within the rate cap and followed certain other rules. But there could be a different twist this time around.

A Flats Sequencing System machine

Only the Postal Service's Board of Governors can file for a rate change, but Congress has failed to fill so many positions on the board that it no longer has a quorum. Until more governors are approved, a Temporary Emergency Committee of the remaining governors is acting in place of the board.

A legal challenge to the emergency committee's authority to raise rates might delay implementation, if not block them altogether.

It would be a sweet irony if the inaction of Congress -- where a majority of members seem OK with jacking up the postage paid by business mailers -- blocked USPS from rate increases that would fall disproportionately on business and institutional mailers.

Market-dominant rates are slated to decline by 4.3% this summer when the exigent surcharge expires, but that could be altered by an appeals court or an act of Congress. Postal officials seem especially concerned with the consumer confusion that would result if the price of Forever Stamps were increased and then decreased during the same year, which is probably why they left the price alone.

When (or, rather, if) the surcharge expires, it's not clear whether other First-Class rates could again be rejiggered in a way that again enabled the price of Forever Stamps to remain at 49 cents.

For further reading:

• Postal Rates in 2015 Could Rise or Fall -- or Do Both 
• The Postal Service Giveth, and the Paper Market Taketh Away 
• Rate Cut Has Shippers Switching To USPS

 

Postal Service Starts Fiscal Year With a Bang

Maybe it was the election. Maybe it was the economy. Maybe it was even a sign that an organization that was left for dead is bouncing back.

Whatever the reason, the U.S. Postal Service revealed today it had a bang-up October, with domestic mail volume up nearly 7% over the same month last year, rather than the 2% decrease USPS was expecting.

The beleaguered agency had "controllable operating income" of $647 million in the first month of Fiscal Year 2015, more than double what it budgeted or what it earned last October. Controllable operating income excludes what is euphemistically referred to as prepaid retiree health benefits, which USPS has stopped paying, and accounting adjustments for the future cost of workers compensation cases.

Big growth areas
Major mail categories with significant revenue increases over October 2013 included "Permit Imprint Nonprofit Standard" (43%), Parcel Select (30%), "Permit Imprint Regular Standard" (14%), and "Permit Imprint First-Class (7%), according to an in-depth financial report also released today. Even the Periodicals class was up a bit.

In the first month with aggressive parcel rates for large business mailers, volume for Shipping & Package Services rose 14% and revenue by 12%.

Despite the higher volumes, work hours increased by less than 2% and total expenses by less than 3%.

It will take more than one strong month, however, to get one of the country's largest employers out of the financial woods. USPS is frequently on the verge of running out of cash, and it has no ability to borrow money, even for such mission-critical needs as replacing its decrepit, inefficient delivery vehicles.

Related articles:

• Lower Pay Rates Are Boosting USPS's Finances 
• Frenemies: The Love-Hate Relationship Between UPS and the Postal Service  Blossoms 
• Discover-ed: How Direct Mail Competes With Digital Marketing Channels (Tidbit: When it comes to attracting new customers, email is no longer such a great alternative to real mail.) 

Discover-ed: How Direct Mail Competes With Digital Marketing Channels

A major financial services company provides a rare peek inside its direct-marketing strategy, with lessons aplenty for printers, marketers, and postal officials


With more than $300 million spent annually on direct-mail postage, Discover Financial Services is one of the U.S. Postal Service’s largest customers. And though Discover still spends most of its direct-marketing budget on mail, it is increasingly shifting those dollars to a variety of digital media.

A Discover executive recently provided a peak inside the company's marketing strategy, demonstrating how digital media have become more competitive with direct mail and yet how good old snail mail endures as a marketing channel despite its high cost.

“Last year, for the first time, more of our new accounts were acquired through digital channels than they were through the mail channel,” Harit Talwar, Discover’s chief marketing officer, told the Postal Regulatory Commission recently.

Postage rates up; digital costs down
Though they “once were rather immature marketing outlets,” digital marketing channels “are now viable, fully effective, cost efficient channels that produce good results, he wrote. “Moreover, they are channels that tend to become less expensive over time. This is in contrast to mail which also produces good results but tends to become more expensive over time.”

“For the Postal Service to continue to play in this arena, it must maintain and improve the effectiveness of mail, push mail to work effectively with other channels, and deliver that effectiveness at appropriate price points,” Talwar wrote. He was explaining why the PRC should approve a proposed negotiated service agreement between USPS and Discover that would provide incentives for Discover to spend more on direct mail.

“It is critical to understand that for us, Standard Mail is not a monopoly product for it operates in a highly competitive market that includes a wide variety of targeted digital channels,” he wrote.

“Our digital channels are now viable, effective, cost-efficient channels with higher adoption rates that reach far more recipients at a much lower price than mail.”

“Discover has many choices, and their number and effectiveness grow every year,” Talwar added. For example, the ability to target people by interests and even location, along with new creative formats, have made web advertising far more effective than it was in the days of untargeted, undifferentiated banner ads.

He categorized Discover’s nine direct-marketing channels as email, pop-ups (including home page takeovers), paid search, banner ads, social media, Discover’s web site, mobile web, mobile apps, and direct mail.

Skipping the light Fandango
“New technologies are emerging that would allow an advertiser such as Discover to promote the 5% Cashback Bonus promotional earn category to a user who is making a dinner reservation in their Open Table® app, reading a restaurant review in their Yelp® app, or buying movie tickets from their Fandango® app.”

“More customers are signing up for a Discover card via our mobile app than initially expected.”

Contrary to popular opinion, however, email no longer competes with direct mail when it comes to attracting new customers because consumers have learned to ignore un-targeted email blasts. But email is still “a highly effective channel” for cross-selling existing customers, Talwar wrote.

“Among the targeted marketing channels, mail is about two-thirds of our marketing spend for promotion of the Discover card. Four years ago it was a bit more than 80%.” Nevertheless, Discover’s spending on postage has increased 27% during the three-year life of its current NSA – an indication of how rapidly the company’s total direct-marketing expenses have risen.

Answering the unanswered question
For the printing and mailing industries, Talwar left a key question unanswered: Why does Discover continue to spend so much money on direct mail – the vast majority of it for postage – when its cost per acquisition from digital channels is in general so much lower? But he did provide a few hints:

• “To acquire new cardmembers, we partner with an outside source on a database of prospects. Based on credit bureau attributes and risk tolerance, we send pre-approved offers with segmented messaging and pricing, or we send invitations to apply.”

• Some new-customer mailings go to all of Discover’s “analytic segments, while others go only to select segments. “Segmentation is based, among other things, on customers’ creditworthiness and response rates.”

• “We market primarily to those whose credit quality is sufficient to qualify for a Discover card.”

•  Mail is used extensively with existing customers, with “targeted offers to encourage them to activate their card, to increase their use of the card, or to take advantage of balance transfers. Mail is also used to promote our card's features and benefits, to promote business with our partner merchants, and to ‘cross sell’ our other products and services.”

• “Mail is used in tandem with the other channels to reinforce each other and send a coordinated set of messages, or a common message across our channels to our targeted recipients.”

It's clear that Discover derives huge value from direct mail's ability to hone in on precise targets. Only mail messages can be delivered solely to prospects having good credit scores and other characteristics that make them likely to get approved for a credit card and to be profitable customers. Mail's targetability enables Discover to send different offers to different people, with especially high-value prospects getting additional mailings.

Mail is also the only reliable way to reach existing customers with a cross-selling promotion. (Yeah, there’s email and mobile apps, but do you look at every email and download the apps from all of your banks and credit-card providers?)

Talwar’s comments indicate that Discover doesn’t fall victim to “the last-click fallacy” – the belief that a sale should be attributed solely to the last communication the customer received before signing up. The company realizes that direct mail, like event sponsorships and TV advertising, makes people more likely to click on its digital offers.

“Mail is a very strong, viable, and highly effective channel, which is not going away,” Talwar wrote. “It is just not the only game in town anymore, and it is going to have to compete with these other channels, as well as with the channels that will emerge in the future if it is to maintain its position and prosper.”

Related articles:

• Postal Service ‘Discovers’ A Way To Grow Direct Mail 
• Affordable Postage A Key to Printing Industry’s Future, Quadracci Says
• Ten Ways To Celebrate International Print Day