• on Oct 5th, 2009 in Pricing & Rates | 23 comments
    Stamp prices are traditionally in whole cent increments. That means it is difficult to target a particular percentage increase. For instance, a one-cent increase on the 42-cent stamp would have been 2.4 percent; while the two-cent increase was 4.8 percent.

    Postal price increases are now limited by an inflation-based “cap” for each class of mail, and in First-Class Mail, the price of a stamp is a major component of the average revenue per piece for First-Class Mail. As such, the price change for the “stamp” plays a large role in the calculation of the average for the class. Other prices in First-Class Mail have to be set to bring the average back to the cap. This can make it difficult to meet many of the other pricing objectives in the class such as setting workshare discounts equal to the cost savings. It might be easier to meet the objectives if the stamp price were in a smaller increment.

    In any event, how important is it that the stamp’s price is in whole-cent increments?

    Since stamps are generally purchased in booklets or coils does it matter whether the individual price is rounded to a penny? Could increments larger than a penny be accommodated in the price cap environment? What other issues should be considered regarding the stamp price?

    This blog is hosted by the OIG’s Risk Analysis Research Center (RARC).

  • on Aug 17th, 2009 in Pricing & Rates | 24 comments
    Since the earliest days of the Post Office there has been a public policy goal of promoting the dissemination of information throughout the country. This goal was also part of all 14 of the rate cases conducted under the Postal Reorganization Act. By law, rates had to consider “the educational, cultural, scientific, and informational value to the recipient of mail matter.” This provision generally tempered the increases for Periodicals, or at least kept the “institutional cost burden” for Periodicals to a minimum. In fact, in the final rate case in 2006 before the new price cap system of the Postal Accountability and Enhancement Act took effect, the “markup” on Periodicals was only 0.2 percent. Periodicals prices were set so that revenue was only 0.2 percent above attributable costs. The average for all mail was 79.3 percent.

    The two price adjustments since that final rate case have been capped by inflation. Under the old rate case process, the increases would have likely been greater so that the prices covered the Postal Service’s costs for handling Periodicals. In fiscal year (FY) 2008, Periodicals revenue did not cover costs. In fact, the cost coverage (the ratio of revenue to attributable costs) was only 84 percent. (In rate cases, the recommended prices had to be at least 100 percent of costs.) The new law includes the price cap as an incentive for cost containment, but also says products should cover their costs.

    So what do you think? Should the Postal Service try to increase Periodicals prices beyond the cap? What role do Periodicals play in the mailstream? What takes precedence: the cap or a requirement that products cover cost? Should the price for a flat that happens to be a magazine be significantly lower than the exact same flat that happens to be a catalog?

    This blog is hosted by the OIG's Risk Analysis Research Center (RARC).

  • on May 22nd, 2009 in Pricing & Rates | 3 comments
    Sale is not a word usually associated with the Postal Service, but there is a first time for everything. Mail volume has dropped significantly this year, and the Postal Service is proposing a “Summer Sale” to encourage mailers to send more Standard Mail. The Postal Service believes it can use its excess capacity to deliver the additional mail volume at a relatively low cost.

    How will the proposed Summer Sale work? Qualifying mailers will receive a 30 percent rebate on any Standard Mail letters and flats sent from July 1 through September 30 this year above their individual threshold. Only mailers that sent at least 1 million Standard Mail letters and flats between October 1, 2007, and March 31, 2008 can participate, and mail service providers — companies that consolidate mail for others — are not eligible for the program. The threshold for each mailer will be based on the mailer’s previous summer volume and current volume trend. The Postal Service will also double check each participating mailer’s October 2009 volume against its trend. If it appears as though mailers shifted volume to the summer and mailed less in October, the Postal Service will reduce the rebates to account for the lost October volume.

    The Summer Sale is designed to increase mail volume and help the Postal Service gain some knowledge about how to improve its data systems and become more efficient at developing and implementing new offerings in the future. The Postal Service believes the program will provide an incentive for profitable new mail and boost a key customer segment, while enhancing its financial position.

    However, the Summer Sale is not without risks. If mailers simply shift volume to the summer months or switch advertising pieces they used to send as First-Class Mail to Standard Mail, the Postal Service will be giving discounts for mail volume that would have been sent anyway. Another potential risk is the administrative costs of the sale. The Postal Service expects these to be less than $1 million compared to potential revenue gains of $38 to $95 million; however, if its estimates prove inaccurate, it is possible the costs of the program could exceed the benefits.

    The Postal Service notified the Postal Regulatory Commission about the program on May 1, 2009, and the case (Docket No. R2009-3) is currently pending. What do you think about the proposed Summer Sale? Will it succeed? Do you foresee any difficulties in administering the program?

    This topic is hosted by the OIG's Cost, Revenue and Rates directorate.

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