Nobody Likes Paying More for Less

The Postal Service is being forced to reduce the value of its prime asset, “last mile” delivery.nobody 1 Management has proposed to eliminate Saturday delivery and require businesses and households to accept delivery at curb or cluster boxes instead of at the door. At the same time, mailers are being charged more to cover the costs of an expanding universal service network. This is not a formula for investing in a successful future. The “habit” of daily interaction with the mail and with carriers may reduce the relationship customers have with the mail and the Postal Service.

The Postal Delivery Network

Delivery represents about 38 percent of all postal costs – the largest single operational function. nobody 2In fiscal year 2013, the Postal Service had a network of about 153 million possible delivery points. The network increased by about 800,000 in that year. Mail volume decreased about 1.5 billion pieces, primarily in the profitable First-Class Mail category. This decline is the heart the long-term strategic problem facing most postal systems.

An eventual legislative solution to the costly requirement to  pre-fund retiree health care benefits will not change the need for the Postal Service to continue to improve delivery productivity and seek different approaches to traditional delivery processes and services.

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Operating Cost Management and Average Cost per Delivery

Total Factor Productivity (TFP), a comprehensive index of efficiency, increased 1.9 percent in FY 2013. This fourth straight year of improvement reflects the successful efforts of management to control operational costs through consolidation of processing facilities, gains in worker productivity (such as reducing the number of routes by  about 1800 to 225,152), providing enhanced data and analysis for route planning, and reductions in the cost of labor through negotiations.  In 2011, the Postal Service established deliveries per hour as new process measure. The actual results were 39.9, 41.0 and 41.6 in 2011, 2012, and 2013, respectively – a steady increase in delivery productivity. A study by Oxford Strategic Consultants of the leading postal administrations identified the USPS as “the most efficient”, using pieces per employee as a measure of comparison.

Workload (weighted by the cost characteristics of mail volume, in the TFP formula) declined at the smallest level since FY 2007 as the effects of the recession begin to wear off. The increase in package volumes has somewhat offset the significant declines in letter mail volumes leading to the smallest decline in mail in recent years.

Still, the economics of delivery operations is clear.nobody 3 The mail mix is changing to more labor intensive and less profitable mail pieces. Something has to give. The cost of each door delivery is estimated at about $380 annually, compared to $240 for curbline and $170 for cluster box delivery. Changing the mode of delivery is one tactic. Reducing the days of delivery is another. Both are seen as service reductions, something few like but most appear to be willing to accept to hold cost increases down.

 

The operational magic of enabling a piece of mail to reliably and securely arrive at the correct mail box at the lowest possible price is critical, but it is only part of the performance problem. Performance can be measured objectively and managed accordingly. According to independent review of postal metrics, measurement systems, and performance, national service continues at very high levels despite significant weather disruptions.[1]  It is what the Postal Service can manage and where it focuses. Performance also depends on the collaboration of mailers and the mailing industry to appropriate prepare the mail (correct addressing, meet readability standards, provide barcodes, and other actions).

Alternative Delivery Networks Reduce the Ability of the Postal Service to Raise Prices 

nobody 4The Postal Service is not free to simply charge more. Businesses and consumers can reduce or eliminate their use of mail by switching to online services.  Established delivery services such as FedEx and UPS will carefully adapt to postal pricing strategies. At least one major printer has announced that they will provide delivery service for publications should postal prices continue to rise.
Firms like Amazon are creating “tiered” delivery networks focused on high density markets (where they may provide service directly), mid-markets (where they may work through local and regional delivery agents), and rural areas (where they would use the Postal Service). New local delivery networks are being created or have the potential to be created from local courier services, regional carriers, and other establishments.

A Market-Based Approach Would Use Different Approaches to Pricing Delivery Services 

Marketing is based on differentiation and on revenue opportunities. A market-based approach would note that some routes and even whole ZIP code areas are highly profitable – even at six days a week (plus package delivery on Sunday). Some ZIPs could be profitable on the Saturdays before shopping holidays. Other ZIPs could be profitable during peak season (typically, the Postal Service’s first quarter of their fiscal year, which incorporates Christmas mailings). Some ZIPs would not be profitable, even using lower-cost labor and reducing delivery to four or even three days a week. The relevant metric is profit per delivery, by route or ZIP, based on market characteristics and mail mix.

A market-based approach would do more with rates linked to the market characteristics of different areas. nobody 5While the price for Single-Piece First-Class Mail could remain uniform to address consumer issues, other categories of mail could be managed by more sophisticated pricing schemes. Premium pricing, peak load pricing, surcharges and fees are all part of the arsenal for businesses. So are different approaches for funding the cost of universal service. Many of these approaches have been addressed in the literature of postal pricing economics, but very little real progress has been made in adapting them to the rate schedule.

A market-based approach would seek to leverage the strength of the existing network to provide new services, such as same day delivery or Sunday and holiday delivery for packages – like the Postal Service is now testing. It would provide significantly more real-time relevant information to shippers and receivers, as the Postal Service is now doing. There are many other potentially profitable services that could be developed by leveraging the Postal Service’s delivery network and its carrier workforce.

Investing in Relationships with the Channel and Strengthening the “Mail Moment”

One example is to support the unique relationship a carrier might be able to develop with the customers on their route. “Carrier Connect” is a program that has generated significant revenue through leads generated by carriers.

The need of mailers for low-cost delivery also needs to be balanced with the needs of receivers – those who are the customers of the mailers. They are no longer passive “postal patrons”. They are increasingly empowered to choose which channels best serve their needs for different activities important to them (see recent research by Accenture). Reducing the “habit” of a convenient daily visit to the mailbox may have an adverse impact of the “Mail Moment” and ultimately degrade mailer response rates and return on investment in the mail channel.

A market-based approach would focus more on building relationships with the receiver as well as the message or package originator (mailer or shipper).nobody 6 Such an approach would watch consumer trends, respond carefully to household preferences, invest in customer convenience, relationships, and trust around delivery of the mail. Instead of relying primarily on mail box oriented cost reduction tactics, the Postal Service and its partners would focus on supporting household loyalists who “depend on mail and would be lost without it.”[1]

The Postal Service and the industry should be investing in building trusted relationships between the channel and its users, with issues such as customer satisfaction and consumer protection as a foundation. Many companies invest heavily in community relationships and social responsibility initiatives.

Some services, including government services, could also reinforce the feeling that the Postal Service is not just another business focused only on its own bottom line but also on the well-being of its customers and the communities it serves. Businesses do this all the time, but few are as well positioned to benefit from this feeling as the United States Postal Service.

The Role of the Mailing Industry in Providing Relevant Content

Another part of the story is that the content delivered must be relevant – it enables the receiver to do something important to them – better (or at least as well) as alternative methods (such as online).  This is the realm of the content providers, the creators of mail, not the Postal Service.

nobody 7It is measured in terms of customer relationship management, open and read rates, time spent on a message, response rates, return on investment and other metrics. It is more complicated to measure – especially in a multi-channel environment where different channels may supplement or complement each other and where physical mail is increasingly linked digital channels, but these are metrics which are every bit as important as the channel itself.

This discussion is essential, but it is often missing from postal policy debates. While this is the responsibility of the industry, not the channel, the Postal Service should take a greater role is working with the industry in focusing on systematically improving this function and reporting progress. The industry itself cannot forget that it exists to solve problems for businesses and households, enabling them to do things important to them. Focusing on postal costs to the exclusion of almost everything else will lead to the decline of the industry more quickly and more certainly than the failure of Congress to correct the financial gap created by the requirement to pre-fund retiree health care benefits.

By Kent Smith

Kent Smith is Research Director, Ursa Major Associates / Postal Vision 2020. His 38 year career in the Postal Service included Rate Classification Research, Market Research, and Strategic Planning. Ursa Major Associates / Postal Vision 2020 is dedicated to taking a broader, longer-term perspective on the future of the mailing industry ecosystem. The thoughts expressed in this “Point of View” are his own.

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[1] The USPS “Mail Moment” studies have documented that about 37 percent of households have this kind of relationship with mail. This segment is comfortable using the Internet, but chooses mail as a more effective tool for important household tasks. It is an upscale and active segment that is highly desirable to businesses.

 


[1] The Postal Service provides extensive public data on service performance for most major mail categories. See the Quarterly Reports published for the Mailer’s Technical Advisory Committee, where major mailers and associations can question senior operations management, and the Annual Performance Review conducted by the Postal Regulatory Commission. The Postal Service’s Customer Engagement Measurement system also indicates high levels of satisfaction by consumers with the delivery experience.

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