Is the Future in Letter Mail?

In his most recent statement, Here We Go Again, on the current debate on postal policy, APWU President Burrus makes a fairly bold statement.

The future of the Postal Service is tied to the revenue generated from letter mail. (All quotes in this post are in italics.)

His statement is both true and troubling. It leads to two simple questions.

1. If the future of the Postal Service is tied to letter mail, are there initiatives that can grow letter mail enough to replace revenue lost to the transition to the digital documents in order to maintain a workforce of 600,000, current levels of service quality, and the current operating and retail network; pay the costs associated with an accurate calculation of the Postal Service's retiree obligations, debt incurred for current operating losses and workers compensation payments; and generate sufficient cash to invest in improving service and efficiency to meet the needs of mailers in 2020 and beyond?
   
   
2. If not, what changes are necessary to ensure that mail remains a critical economic driver as we work our way out of the great recession as well as 2020 and beyond?

These are questions that I had to think about as I looked at potential business models for the Postal Service. I saw the same facts that President Burrus did.

Fact: In and of itself, restructuring has not and will not increase mail volume. Correct, restructuring is a response to changes in mail volume. To the extent that that restructuring makes the Postal Service more efficient, the Postal Service more competitive in shipping service products, and introducing the value of mail to customers who previously thought it was too expensive.

Fact: Major mailers independently determine the amount of hard-copy mail they send, and “reform” will have little influence on their decisions. The PAEA, which the large mailers unanimously supported, was followed by the most significant decline in mail volume in the history of the Postal Service. Mail volume since PAEA has been driven by the emergence of digital strategies developed by the major customers of the Postal Service and the increasing dependence of the Postal Service on economically sensitive advertising and parcels. The decline of single-piece letter mail that began over a decade ago reflects both a switch to digital alternatives for payments and a decline in payments reflecting lower economic activity. It is not clear whether a rebound in the economy that will increase mail payments or the new mortgages, phone services, credit cards, etc will only offer paperless transactions.

Fact: There is stiff resistance to government competition in the private marketplace. Therefore, it is unlikely that the USPS will be permitted to engage in banking, phone sales, and other new commercial activity. There is minimal tradition at any level of government in the United States of government entities competing in the private marketplace. This means expanding to provide customers complementary services in conjunction with letter or parcel services or expanding retail much beyond existing "postal products" will meet resistance from the private sector and Congress as long as the Postal Service remains a governmental entity. This restriction on the Postal Service serves neither postal customers nor postal employees. It is one of the reasons that I concluded that governmental models were wanting.

Fact: The opportunity to fix the PAEA by removing the crippling obligation to prefund retiree health care – a correction that is desperately needed – is hampered by Congressional “scoring” procedures, which prevent Congress from passing bills that add to the deficit. (Although the USPS is not part of the federal budget, it is part of the “unified budget,” so the Congressional Budget Office demands “offsets” when changes are made to the payment schedule.) The retiree health care illustrates a second failure of governmental models. As long as Congress has an opportunity to tie the Postal Service to the federal budget it can tax postal customers and employees with onerous calculations of retiree obligations, refusal to pay for services performed for free, and other assaults on postal cash and revenue.

Fact: Because they fail to address the fundamental challenges facing the Postal Service, reducing the number of employees, slashing the number of mail processing plants, and eliminating retail units are not long-term solutions. They are misguided cutbacks that diminish service and harm those who are the least “connected.” Burrus here highlights his real problem. Almost all of the proposals that the Postal Service have suggested to deal with declining volumes affect APWU members more than any other postal stakeholder.

Lower volumes will require continuous re-optimization and most likely consolidation of the operating network. As a previous post noted, the Postal Service may have both too few retail outlets and too many corporate outlets and existing outlets offer a range of services that are too limited to serve the needs of its retail consumer and business customers. Changing to a more aggressive network optimization strategy and a customer-focused retail strategy requires the Postal Service to show why these strategies will in the long-run improve service, maintain service to the least "connected," and provide postal employees with the best possible jobs that it can offer. By only showing cost savings, the Postal Service left stakeholders with a feeling that all it is thinking about is how it gets through the next fiscal year. All other stakeholders have a longer and broader perspective that is left unaddressed.

Given these facts, where options are there?

As it is in the interest of President Burrus to maintain the jobs APWU for as long as possible, he focuses on options for increasing revenue, as the Postal Service can avoid significant reductions in its workforce if revenue starts growing again. He rejects the "dream of a Postal Service that survives by providing a smorgasbord of services “around the edges” of mail processing and delivery." He sees these ideas, including some presented at a recent Congressional hearing as having negligible impact on the bottom line. It is here that he presents two options that can generate sufficient revenue growth that he sees is needed to "maintain the national network of more than 30,000 facilities; employ more than 600,000 workers, and deliver mail to every home six days a week."

Here are his options:

1. Raise rates - He argues that rates do not drive volumes, factors beyond the Postal Service's control drive the overall trend and therefore rates can be raised without much affect on the long-term trends. While the price sensitivity measured in volume forecasts suggests that customers are not sensitive to price changes and price increases would have minimal affect, the positive impact of the summer sale on volumes suggest that large customers when given price incentives to mail do increase both volumes and total revenue. The impact of the summer sale suggests that we should be less confident about the value of price sensitivity measures filed with the Postal Regulatory Commission when evaluating pricing innovations. More information is needed on the value of mail for specific types of customers, and in some cases specific customers, to set prices that both maximize volume and revenue. Otherwise, the Postal Service is most likely leaving revenue on the table and mail pieces unprinted. A customer-focused pricing structure should be able to increase revenue and avoid the rate increases that his approach would produce.
   
   Relying on higher rates that are not designed around the specific value of mail to specific customers will likely depress volumes, revenues, and net income. Until more customer-specific pricing becomes common place, along with the internal infrastructure and regulatory framework to support it, increasing prices will remain an unpalatable option for growing revenue.
   
   
2. Expand Services to Small Businesses Underserved by the Postal Service. This idea repeats his earlier statement that the future of the Postal Service is in advertising. Here he goes further to note there are many postal customers that are underserved by the Postal Service as well as the private sector. His description of the problem that small business have with Internet advertising is the same problem that they have with all other media, their ads get lost in the clutter.
   
   For example, let’s assume you operate a small “gutter cleaning” company and you want to inform homeowners about your services. Television is a very expensive way to advertise, and viewers may or may not have trees around their homes. The same is true for advertising on the radio or in newspapers. If you use the Internet for advertising, your business will be listed with hundreds of other gutter-cleaning companies. As a result, you may decide to post signs at traffic lights and distribute leaflets in parking lots. You probably never thought that you could afford to send a letter to every home in the community that might need your service.
   
   This is an opportunity to marry the Internet to hard copy and, in the process, save the Postal Service.
   
   In many ways, President Burrus understates the problem of underserved potential customers. Small businesses are underserved by the problem goes beyond small businesses to those that want to advertise in communities that fall outside the core city in a media market or looking to replace advertisements that previously were delivered to every address within a newspaper. The private sector attempts to meet these needs through envelopes filled with coupons, marriage mail, and pennysavers that are delivered by mail as well as free newspapers that are delivered to a local community.
   
   The kind of partnership that President Burrus envisions involves more than accepting the efforts that private sector firms catering to serve small businesses. In his words: We have a golden opportunity to do what no other company can do: transform an idea into an advertising message, convert it to hard-copy mail, and deliver it to a specific audience. This is known as one-stop shopping. (If you want to apply real discounts, give them a package deal.) President Burrus is describing introducing vertical integration to the process from concept to delivery as a way to cut costs and improve service. In implementing this idea, the Postal Service would confront one of the key facts that President Burrus outlines, resistance to government competition with the private sector.
   
   The kind of product that President Burrus envisions also requires rethinking the definition of postal products. Postal products, regardless of class, need to be thought in terms of day certain delivery. The internet and mail work together best if the sender is certain when both will arrive. Networks need to reflect this and untamed processes, now managed by the private sector and the Postal Service, for moving mail from concept to delivery have to be eliminated to remove delivery uncertainty.
   

In summation, President Burrus has shown that even his best ideas to save the jobs of his members cannot succeed due to barriers that exist in the current business model and regulatory framework. Three barriers are noted in this post: resolution of the retiree benefit payment issue, independence from the Federal budget and Congressional interference, and inability to fully take advantage of all opportunities to serve customers due to the Postal Service's status as a government entity. Removing those barriers in a new round of legislation would give his members their best shot for maintaining the greatest number of existing good-paying jobs. Removing these barriers will require a new business model that includes changes far greater than envisioned by the authors of the PAEA.

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.
  

President Burrus's Dilemma

In August, APWU President William Burrus was asked by Democratic Senator Claire McCaskill to identify "the substantial steps the APWU is willing to take to assist the Postal Service in weathering its severe financial crisis? In crafting a response, he was faced with a dilemma: how does the APWU appear responsive without proposing anything that will affect upcoming contract negotiations with the Postal Service?

He could not offer any response that required changes in contract provisions as that would put the APWU in a weakened bargaining position even before negotiations have started. Instead he repeated his challenge to mailers and the Postal Service: "The American Postal Workers Union has challenged the postmaster general to discontinue the excessive discounts the USPS offers to large mailers, and instead to compensate postal employees for processing letters and flats at a cheaper per-piece rate. This would reduce the Postal Service’s costs; improve efficiency, and make better use of underutilized equipment and employees. As an added incentive, we propose to process parcels at no charge." (Answer to question 1, third paragraph) Unfortunately for the APWU, President Burrus's response will not appear to be responsive to Congress.

The Dead Tree Edition has clearly laid out the case that Postal Customers will make in refuting President Burrus's proposal in its post, "Mathematically Challenged Burrus Proposal Doesn't Add Up For USPS." Mailers look at President Burrus's proposal only as a significant increase in rates. The greatest increase would be born by those mailers that currently can sort mail while they print. These mailers are mostly likely now paying on average 35.1 cents for First Class mail. For these mailers, President Burrus's proposal represents a 25% increase in postage prices without changing the work that either the Postal Service or the mailer performs. Even the least business savvy member of Congress will understand that raising postage prices by 25% for a major group of customers will drive business away and make the current financial difficulties even worse.

President Burrus's proposal does provide the framework for developing postal products that will both make mail more attractive to some customers and provide jobs for unionized postal workers. These products would serve those customers that cannot sort mail while they print, or cannot sort mail while they print with sufficient density to pay the lowest postage rate the Postal Service offers. His proposal states suggests that the APWU would support the development of products for mailers that produce mail in quantity that requires physical sortation prior to delivery sequencing at rates less than the full letter rate of $0.44. Given that his first proposal of 43.9 cents is unlikely to have any takers among postal customers, President Burrus and his staff at the APWU has to come up with a more realistic price to sort mail currently physically sorted by private sector firms.

In a previous post, "Could the USPS Turn a Jobless Recovery into a Job Full Recovery?", this blog laid out the basic parameters of such a product. If the APWU, or for that matter any other postal union, is serious about competing for the physical sortation of mail now sorted in the private sector, they could contact me at the e-mail listed on this page and I would be glad to assist them in putting together a proposal that they can take to the Postal Service and eventually the Postal Regulatory Commission that would secure more jobs for postal union members.

This post created some consternation among postal stakeholders. A subsequent post, Pricing Volume Mail, clarifies the challenge of developing a product to compete with private sector sortation of mail.