Consider Postage Rates That Maximize Catalog Circulation and Increase USPS Profitability

The United States Postal Service needs to consider setting catalog postage rates that help both catalogers and itself improve their profitability. The USPS and the Postal Regulatory Commission (PRC) should consider keeping Standard mail rates unchanged for catalogs (and magazines), while actually lowering carrier-route postage. Lowering postage is a novel concept. Why should the USPS consider it?

Carrier-route sorted catalogs are a profitable business for the Post Office. Therefore, it should use lower carrier-route postage rates as an incentive to push catalogers and printers to increase the volume of catalogs that flow through co-mail programs and qualify for carrier-route discounts. Printers and catalogers can increase the percentage of mail that's consolidated and sent using co-mail pools, thereby increasing the percentage of carrier-route mail.

The discounts for carrier-route sortation have spawned an entire co-mail industry that's shifting costs away from the USPS, creating a win-win situation: the Post Office gets profitable mail and mailers get dramatically lower costs, allowing catalogers to mail more catalogs profitably.

Increasing carrier-route postage savings has already worked to incentivize mailers to find co-mail opportunities. The percentage of catalogs going though the mail system as carrier-route bundles has increased dramatically in the past decade.

And there's opportunity for increasing the amount of mail that travels as carrier-route bundles because deeper incentives will result in more co-mail pools, and larger and more frequent co-mail pools.

Lowering carrier-route postage will result in more volume in the short run because printers will build larger and more frequent co-mail pools.

Here's what's wrong with the USPS’ proposed postage rates currently being reviewed by the PRC.

• The USPS’ lawyers say it's not fair to question USPS management for being uneconomical, dishonest or inefficient. But USPS management is in fact “uneconomical” because it doesn’t use any economic analysis to set postage rates. If you don’t use the science of economics for rate setting, then you can correctly be viewed as being uneconomic. The USPS needs to show economic analysis of what will happen when Standard mail rates increase. This report needs to include a before-and-after analysis of the effects of previous rate increases, and an internal economic analysis of what will happen to the volume and profitability of Standard mail as a result of this proposed increase. If the USPS hasn't done an economic analysis of what will happen to catalog volume and its own profitability from catalogs, then it's fair to say they're being “uneconomic,” which violates the statute governing raising rates under the “exigent circumstances” exception.
• The USPS’ legal reply brief makes the claim that volume declines were from the recession alone and were “unforeseen.” The decline in Standard mail volume over the past three years is in large part a direct result of the huge price increases from past rate cases. Businesses that send direct mail, including catalogs and magazines, make precise decisions about the level of mail they can profitably send. Raising the cost of postage for Standard mail in the past has resulted in direct, predictable declines in volume. The USPS could reference the major rate increase of 2007 and the smaller rate increases of the last two years to predict with great accuracy the decline in mail volume from this proposed increase. Its argument that a decline in catalog volume was “unforeseen” when it raised postage rates 30 percent and more three years ago is simply wrong. Circulation plans are based on break-even calculations, which are based on postage rates. Volume declines can be predicted with scientific accuracy.
• The argument that the decline in volume is a result of the recession is offset by the fact that the economy is slowly recovering and catalog circulations are rebounding robustly. Abacus, a catalog co-op database, tracks catalog circulations closely. While Q1 2009 volume compared to Q1 2008 volume was off some 14 percent, circulation of Q1 2010 vs. Q1 2009 was up 8 percent. The economic recovery is translating into a rebound in the volume of catalogs mailed. Volume declines aren't solely the result of the recession, but more likely a combination of three primary factors: the transfer of mail volume to the internet; the recession; and the increase in postage rates.
• The standard for “exigent circumstances” is largely undefined, and both sides are seeking to have their legal briefs argue for reasonable definitions. The PRC must ensure the bar for “exigent circumstances” is high. If not, the loophole will be so large that the law is rendered meaningless. The USPS’ reply brief is particularly weak. It argues that it couldn’t see the decline in mail volume evolving based on the maturity of the internet. The internet, and in particular email, has been a major macroeconomic factor for a long time now. The USPS’ arguments that it “didn’t see this decline in mail volume coming” and “there's nothing we could have done about it because we're a quasi-government body” seem weak to me.
• The USPS presents legal arguments but not any economic arguments in its replies to the objections raised by lawyers for the various organizations representing bulk mailers. But the statutory language requires the USPS to be economic. Where are its economic arguments? I strongly suspect that no economic analysis exists. Again, if USPS management is uneconomic, then it hasn't met the standard for an exigent rate case filing. Therefore, this current request before the PRC should be declined. The USPS should be required to present a coherent Standard mail postage price that's been subjected to some economic analysis.

A strong case can be made that the USPS can and should find ways to increase the volume of profitable bulk mail — especially catalogs. The USPS should keep postage rates the same for Standard mail and increase the postage discount for carrier-route mail. If the carrier-route discount is increased, catalogers’ will have larger universes of names to mail above breakeven (i.e., volume increases).

Increasing carrier-route discounts will also accelerate the growth of the co-mail industry, which will produce more mail in carrier-route bundles — which are profitable for the USPS to deliver. This move should result in incremental profitability, in addition to generating greater volume and significantly stimulating the economy. Isn’t that a better plan for postage rates than increasing them and watch volume ratchet down again?

Jim Coogan is president of Catalog Marketing Economics, a Santa Fe, N.M.-based consulting firm focused on catalog circulation planning. Reach Jim at (505) 986-9902 or jcoogan@earthlink.net.