A Critical Examination of the USPS Study of Postal Price Elasticities

Some other critical parts are left out of this economic analysis, including the following:

• While overall revenue may still increase with a price increase, the carrier route portion of the mail is a proven profitable piece of business for the post office. A reduction in volume cuts out some potential profitability. Does the reduction in volume offset the increase in revenue and does a rate increase result in more profits, not just more top-line revenue? The Christensen study only addresses the narrow issue of whether there's a short-term net increase in revenue and not the critical issue of whether the increase in revenue results in more profits.

• While some portions of Standard mail/catalog mailings are inelastic, some marginal circulation for catalogs is very elastic when it comes to postage costs. Catalogers' basic business rule is to mail only at or above breakeven. Catalogers' base circulation decisions are based on the historical results of prospecting lists and whether those lists responded above breakeven in the past. Catalogers are sophisticated gatherers of historical response data and will cut that portion of circulation that's not above breakeven when the break-even costs of printing and mailing a catalog increase. When break-even costs go up, the marginal circulation of segments that are responding right at breakeven will be cut and volume will go down. It's a lockstep process; when postage rates go up, the break-even point for catalog circulation increases and circulation inevitably goes down.

Therefore, carrier route mail is both relatively elastic based on the cost of postage and is also profitable volume for the post office. The USPS should be planning how to increase the volume of carrier route mail. So what could be done to increase the volume and revenue of carrier route catalogs? Consider the following:

• Simply lowering the postage for carrier route mail will increase volume, according to the data in the study. This study indicates the rational pricing policy should be to lower postage for carrier route (ECR) mail.

• Dropping the postage for catalogers when they increase their volume of mail so that the post office is discounting the incremental circulation from a catalog compared to last year's circulation would be a way to incentivize mailers to increase their circulation and add more profitable volume of carrier route mail.

• Changing the carrier route requirement from a bundle of 10 to a bundle of six or seven would increase the amount of bulk mail that's profitably handled as carrier route mail. This change in the number of pieces in a carrier route bundle would represent a significant shift in mail being handled by co-mailing, the work-sharing solution that moves the mail handling away from the USPS and into the private transportation networks managed by printers.

• Directing the regular promotions coming from the USPS to where they will have the most impact - i.e., using the promotions to promote incremental volume by lowering the postage cost for incremental carrier circulation. Going after the marginally profitable circulation that's most elastic and lowering the postage cost will result in increased volume and revenue.

• Work on increasing the quantity of lower postage formats like tabbed slim-jims by loosening the requirements for mail to qualify as tabbed letters.

There are a lot of ways that the USPS should leverage the data-driven insight that carrier route mail is sensitive to price increases, and that increasing the cost for carrier route mail may actually result in less revenue and lower profits (and will certainly result in lower volume).