• on Jun 9th, 2014 in Ideas Worth Exploring | 4 comments

    Dim weight. Sounds like something you might call your not-so-smart cousin. It’s actually a way to price parcels based primarily on how much space they take up during transport and delivery.

    FedEx is the first major carrier to announce plans to charge prices based on the dimensional weight of all its ground shipments. Retailers and other shippers are bracing for a nasty hike in shipping costs come January 2015, when the FedEx changes take effect.

    Shipping costs are heavily influenced by how much cubic volume a parcel takes up in the back of a truck or plane. If parcels are roughly uniform in density (weight in relation to size), then charging by weight makes sense. But if parcels are light yet bulky, such as shoes, diapers, and many other goods ordered online, then weight-based pricing doesn’t reflect costs. Dim weight pricing will let FedEx charge more for these light yet bulky packages – for example up to 30 percent higher on a 32-pack of toilet paper – that take up more space in the truck.

    Analysts say FedEx’s change will result in the most dramatic rate spike the parcel shipping industry has seen in decades. And these increases will affect either online shoppers or retailers, or both. As the Wall Street Journal recently noted: “Someone will have to swallow the estimated hundreds of millions of dollars in extra shipping costs.” Could free shipping for consumers become a casualty of this pricing change?

    Analysts expect UPS to follow suit with a similar pricing strategy. If so, the Postal Service and small regional carriers could see an uptick in volume – albeit higher-cost and lower-yield volume – as shippers look for ways to reduce the expected sticker shock from dim weight pricing. The move also could accelerate Amazon’s reported plan to launch its own fleet of trucks and drivers for local deliveries.

    Do you think FedEx’s change in its pricing structure will benefit the Postal Service? Or is it likely to primarily shift less-profitable packages to the Postal Service? Should the Postal Service consider a move to dim weight pricing for its ground services as well? Or would it hurt the Postal Service’s standing as the lowest-priced competitor?

     

  • on Sep 26th, 2013 in Pricing & Rates | 9 comments

    The U.S. Postal Service’s governing body, the Board of Governors, voted this week to request permission to raise postage prices above the inflation-based price cap to generate $2 billion in revenue in 2014. It is asking the regulator, the Postal Regulatory Commission (PRC), to allow the Postal Service to raise the price of a stamp by 3 cents (to 49 cents), which is 2 cents more than the annual inflationary increase. Prices on other single-piece and commercial mail products would also increase. This request is known as an “exigent” price increase because it will exceed the statutorily mandated price cap that is tied to growth in the Consumer Price Index (CPI).

    By law, the Postal Service can only raise prices on its market-dominant products, such as First-Class Mail, advertising mail, and magazines, by the annual growth in inflation. The law allows it to ask the regulator for a price increase above inflation for “exceptional or extraordinary” circumstances. In a public letter to customers, Board Chairman Mickey Barnett described the “precarious financial condition” of the Postal Service and the “uncertain path toward enactment of postal reform legislation” as primary reasons for seeking price changes above inflation. Barnett said if comprehensive postal reform legislation were to pass, the Postal Service would reconsider its pricing strategy.

    The Postal Service filed for an exigent price increase in July 2010, saying the economic recession was an exceptional circumstance that threatened its viability. The PRC rejected the proposal and the Postal Service challenged the rejection in federal appeals court. The court remanded the original case back to the PRC, but at that time, the Postal Service did not pursue it.

    If the PRC were to approve this current request, the Postal Service would raise prices on January 14, 2014. On average, postage rates would increase 5.9 percent – or 4.3 percent above CPI. Mailer groups are expected to oppose the exigent price increase. The PRC has 90 days to issue an opinion on the Postal Service’s exigent price increase proposal.

    What do you think? Share your thoughts on the proposed exigent price increase.

  • on Jan 9th, 2013 in Finances: Cost & Revenue | 3 comments
    Some have argued that the U.S. Postal Service should be allowed to raise prices in order to increase revenue and ensure that the sales of their products cover their costs. Others have argued that the current costing system may overstate the cost of some products, as it assumes the Postal Service is able to adjust its capacity, such as quickly closing a facility or eliminating a tour, to match the decline in mail volume. So, the second argument goes, if the Postal Service is unable to adjust its capacity, it should temporarily lower the prices of certain products, in order to encourage volume, as it did in the past with its “summer sales.” The latter argument was briefly discussed in the OIG’s recently released paper “A Primer on Postal Costing Issues.” As a follow-up to that paper, we asked Professor Michael D. Bradley of George Washington University, an expert in postal economics, to co-author a paper on the use of short-run costing and pricing. Essentially, short-run costing varies from the current costing system in that it does not assume that the Postal Service can reduce its capacity as fast as volume falls. Using short-run costs to develop prices would allow the Postal Service to temporarily lower prices, at least on some products, to encourage volume that would make use of the excess capacity while the Postal Service creates a plan to reduce the excess capacity. However, the paper warns that short-run costs should only be used to set prices if they can be measured accurately and updated regularly and the Postal Service can be sure that a lower price will lead to a large enough increase in volume, otherwise they will simply lose revenue. Other issues that need to be considered when using short-run costs to set prices include:
    • Using short-run costs can result in prices that may generate additional revenue in the short term but will still not allow the Postal Service to cover its institutional costs.
    • Prices based on short-run costs would be more volatile.
    • Customers may be unsure as to whether prices are permanent or temporary.
    • Accurate measurement is difficult and would require significant effort from experts in postal operations.
    • The Postal Service may lose the incentive to shed the excess capacity.
    What do you think – should the Postal Service lower prices on some products to reflect current excess capacity? Or would lowering prices only lead to further revenue declines?

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