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Mail Volume and Price Elasticity | PostalVision 2020

Mail Volume and Price Elasticity

The Issue: The Usefulness of Long-Term Mail Volume Forecasts

Things change, and forecasts are often outdated almost as soon as they are made. This is especially true when the future is not like the past, as in the case of the disruption of the mailing industry. Still, it may be useful to re-examine some of the more critical forecasts – the ones on which public policy recommendations have been made.

The Evidence: BCG Projection for 2020

In 2010, the Postal Service commissioned the Boston Consulting Group (BCG) to conduct an assessment of the future of mail volume as part of what became their Management Action Plan. That study recognized the volatility of the technological diversion trends, and provided a range of outcomes to support policy discussions.

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In 2012, total mail volume was 160 billion. At current trend rates, this forecast still appears to be valid. The methodology was interesting. Although BCG started with the baseline postal econometric forecasting model, they also conducted extensive interviews and a survey of mailers about future plans. They also developed estimates for major mail categories. This enables us, now several years down the road, to conduct a “reality” check with industry trends, by segment. Note that the study focused on “mail” and not packages.

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The Results

There does not appear to be anything in the 2010 findings that are contradicted by current trends. If anything, the projections for the growth of Standard Mail advertising (letters and flyers) may be a bit high. The slow economic recovery may have influenced this segment perhaps more than others – and competition with other media has been intense.

Thinking About Elasticities

This model does not directly address the issue of the elasticity of mail or different mail categories – an issue the industry is concerned with and which has recently received major publicity in a recent study by the Postal Service Office of the Inspector General highlighted in a recent Senate hearing. However, the BCG forecast, based on conversations with mailers, suggest that elasticity estimates based on econometric five-year “roll forward” models may no longer be as reliable for forecasting future mail trends as they once were.

Recent Approaches: UK Projections to 2023

A recent study in the UK by PwC followed a similar approach, looking towards mail volumes in 2023. They concluded that letter mail would decline by about five percent a year, slowing to about four percent by 2023 (The Outlook for UK Mail Volumes by 2023, PwC Strategy and Economics, July 2013). The study noted significant variances in the decline of mail volume in different countries, and also included a set of simulations that indicated a range of possible alternative outcomes.

Real-World Experiences: The Royal Mail Price Increase

It is also probably worth mentioning that Royal Mail dramatically increased prices on most letter mail last year, but the fallout – in terms of elasticities – has not been determined. What is clear was that Royal Mail increased revenue and turned a profit. The story is far more complex than this, but examining this experience should be a part of postal pricing discussions in the U.S.

Conclusions, Comments, and Recommendations

Traditional forecasting, with its dependence on past trends, may be less precise in a business environment undergoing significant change. Policy makers need to be much more aware of decisions being made throughout the mailing industry value chain and the impact those decisions may have on future volumes.

One cautionary note is that the nature of mail itself is changing as its relationship with other channels adapts and as technology improve the product. Issues such as dramatically improved response rates and return on investment may change the impact of price decisions. Policy makers might consider that value, rather than volume, may become a more critical measure of mailing industry health and effectiveness.

The industry should be looking carefully at data from the USPS Household Diary Study, particularly for most recent period (2010-2012). While it may be too early to tell, it does appear that the rate of decline in key mail categories is slowing as some of the effects of the recession wear off. In fact, in at least one category (Insurance related transactions) volume is increasing dramatically (152%) – even before the impacts of the Affordable Care Act really take effect. This kind of change merits more active investigation.

By Kent Smith

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One Reply

  1. Jody

    well timed piece Kent. Thanks.

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