Pricing Volume Mail

In my last post, President Burrus' Dilemma, I created significant concerns among mailers that my proposal to the APWU supported their idea to eliminate worksharing. Anyone proposing increasing rates 25% on the Postal Service's best customers in an environment where mail, and in particular First Class mail is at a real price disadvantage with electronic competitors is arguing for organizational suicide.

What I was trying to do was suggest that if the APWU wanted to make a proposal to handle mail now sorted by the private sector that would offer a better value to the Postal Service's customers, I would be glad to help. Given the current economic and competitive landscape, any APWU proposal would have to offer postal customers a better value or preparing such a proposal would be a waste of time and energy.

I would like to use this post to clarify my thinking on pricing volume mail to give my readers a better understanding of how difficult APWU's task of designing a product that offers a better value really is.

The Postal Service's rate structure is complicated and the use of worksharing discounts further complicates thinking about pricing. The primary problem is the word "discount." It suggests that the customer is getting a deal when in fact they are buying a more basic product from the postal service for a lower price. It also suggests that single-piece customers and volume customers are part of the same market for mail and that single piece prices are a real alternative for volume customers.

The alternative way of thinking of postal rates is to start with the basic service as the basis for all pricing. To how this alternative would work, below are two price charts listing prices as they are currently shown and the alternative bottom up alternative.

Current First Class 1 ounce rates table

• 150 pieces of barcoded mail sorted to the same 5- digit zip code - $0.335
• 150 pieces of barcoded mail sorted to the same 3- digit zip code - $0.357
• 150 pieces of barcoded mail sorted to the same distribution center - $0.360
• Barcoded mail that is unsorted (the residual rate) - $0.382
• Unbarcoded volume mail - $0.414
• Single piece mail (shown for comparison purposes) - $0.440

Bottom-up First Class rate table:

• 150 pieces of barcoded mail sorted to the same 5- digit zip code - $0.335
  
• Sorting 3-digit sorted mail to the 5-digit zip code - $0.022
• Sorting distribution center sorted mail to the 5-digit zip code - $0.025
  
• Sorting unsorted barcoded to the 5-digit zip code - $0.047
• Barcoding unbarcoded volume mail and sorting to the 5-digit zip code - $0.079

In this way, it becomes quite clear how difficult the task the APWU has. In order to compete with the private sector for the handling of mail that is not sorted to 5-digit level, it wold have to offer that service at a price less than the current charge for sorting mail, but less than what the private sector charges to do it.

In looking at the above list, the product that provides the largest margin is unbarcoded volume mail. The Postal Service charges 7.9 cents to barcode and sort this mail. Mailers have the choice of finding a presorters who will do it for less than that. The highest price the Postal Service could charge these mailers would be what the private sector charges for similar services. This is likely to be much less than the 7.9 cents the Postal Service now charges for this service. Assuming that the private sector charges half of the difference to cover their costs and profits, then the Postal Service could not charge more than 3.95 cents to compete. This is a lot less than the 10.4 cents that President Burrus offered in his challenge to mailers, and is why his response, while possibly appealing to his members was non-responsive to Senator McCaskill.

What this exercise further illustrates is why such a proposal could not be accomplished within the current regulatory structure or with the current business model. Allowing the Postal Service to truly compete would require some major changes. These include:

• Basing all volume prices on the price for the product that involves the least amount of Postal Activity. All other products could be purchased as options. For standard mail, finely sorted mail drop shipped to the lowest practical level would be the basis upon which all prices are based.
  
• Removing all links between single piece rates and volume rates. This approach requires treating single-piece and volume products as separate markets with totally different approaches to product pricing.
  
• Allowing volume based rates. By offering rates bases on the volume of individual mailings and total annual mailing volumes, the Postal Service could offer prices that reflect the impact that volume has on business relationship costs. This is similar to volume requirements for sale rates but differs in that there is no requirement for marginal increases in volumes. Volume based rates are a requirement for contract rates to provide additional handling at prices below list.
  
• Allowing private contract rates. In order for the Postal Service to compete with private sector firms offering sortation or other mail handling services, those prices should reflect local competition for these services. The published rates for providing additional handling services would reflect rate that any volume customer could get without negotiations. In this way, the Postal Service would offer its services to corporate customers in the same manner that its private sector competitors do.
  
• Specific financial self-sufficiency/profit objectives. The Postal Service cannot have the authority to offer contract rates that differ from published rates without a requirement that prevents it from offering prices below not only costs but below costs plus a reasonable margin. At a minimum it must be subject to the same profit discipline of its private sector competitors.