Wednesday, November 3, 2010

Hits and Misses in Parcel Pricing

Most analyses of the Postal Service's proposed parcel rates and service initiatives will come from the shipper perspective.  However, given the Postal Service's financial condition, they need to be viewed from the same perspective that investment analysts look at pricing decisions of FedEx and United Parcel Service.   From this perspective, the changes look like a mix of hits and misses.

  • Expansion of the number of flat rate boxes and envelopes is a hit for consumers and small businesses - It allows the Postal Service to sell pre-posted boxes at nearly any retailer in a manner similar to its arrangement with Office Depot.
  • Expansion of Hold for Pick-up Service - This should be a big hit with one major caveat.   Items that are either bulky (i.e. comforters, pillows, fragile items), large (i.e.  High Definition televisions and microwave ovens), or valuable now have a USPS delivery option.   This should be most valuable for shipments to rural areas.    The caveat is the number of hours that Post Offices are open.    For this service to be truly effective, Post Offices need evening hours.
  • Increases in rates to DDU for light weight parcels - The volumes that FedEx SmartPost, UPS Mail Innovations and other consolidators are generating are sufficient to justify raising rates significantly on the lightest weight shipments that they now tender to the Postal Service.   These weight cells must be as profitable as all others.
  •  Timing of announcement - The Postal Service should have waited at least another week to allow its rate increase to come after both United Parcel Service and FedEx.   Given its market share, the timing of its announcement should reflect its position as a price follower.
  • Uniform national drop shipment rates - The Postal Service is creating significant opportunities for cream skimming by charging the same drop-shipment rates to DDU's and SCF's regardless of where they are in the United States.   The market for last mile service is very different in Montgomery County, Maryland (DC Suburbs) and Garrett County, Maryland (far western Maryland).  The cost of serving these two markets is different as well.    By charging the same rate for both locations, the Postal Service is under-pricing the service to Garrett County encouraging carriers to drop-ship items that may not be profitable for the Postal Service to handle.    The opposite is true in Montgomery County Maryland.   With differential prices the Postal Service could increase the fuel allowance for rural carriers that will be delivering the parcels in rural areas that UPS and FedEx do not want to deliver.   (Royal Mail's destination entry pricing are geographically based and it has worked well for both Royal Mail and mailers.)
  • Average rate increase - The Postal Service's average rate increase of 3.5 percent for Priority Mail and all 3.6 percent for all Shipping Services is below the rate increases that UPS and FedEx have announced and most likely below the rate increases that they will be able to get from their commercial customers.    In particular, retail Priority Mail rates should rise at the same rate FedEx Ground and UPS for Zones 1-3 and 2nd day air for longer distance zones.   Commercial Priority Mail rates should increase a bit less to reflect the competitive of commercial markets.  
  •  Impact of pricing on positioning Shipping Services in the marketplace.    The Postal Service's pricing moves should significantly differentiate USPS prices from that of its competitors.   The lower prices fit the perception in the commercial marketplace that the USPS offers a lower cost, lower quality service.   The Postal Service is forced to be the low-cost, low-quality provider until its transit times for Priority Mail meet those of FedEx Ground and UPS for shorter distance shipments.
  • The impact of flat SCF drop-shipment rates on the use of the Postal Service for last mile delivery.   The Postal Service faces a risk that its last mile delivery service will be less profitable than it should be given the lack of geographic-specific drop-off rates.
  • Whether the Postal Service's cautious view of the pricing power of parcel carrier's is correct.   Both FedEx and United Parcel Service are beginning to see that its price increases are sticking in contracts that they are signing this fall.   The Postal Service's approach requires an economic forecast that is less robust than what United Parcel Service and FedEx now project.
  • Missed Flat-rate opportunities.    While the Postal Service introduced a new padded envelope, it could have also created multiple sizes for padded or even un-padded envelopes.  The larger envelopes would serve the needs of shippers of clothing that now ship in large envelopes that can hold two to four pairs of jeans.   Why not have a flat rate product for every size padded envelope that is generally sold in the local office supply store.

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