- 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.
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:
on Nov 19th, 2012
in Ideas Worth Exploring
| 5 comments
Twenty years ago, when professional sporting teams started selling naming rights to their stadiums and arenas, many purists called it a low point in the commercialization of sports. But today, the number of arenas and ballparks not named after a corporate sponsor is small. For revenue-seeking team owners, it is just too hard to pass up the money that comes with selling your stadiums’ name. Strategy, business development and marketing all play huge factors in naming-rights deals, with top prices for these deals reaching about half a billion dollars, according to Sports Business Journal. As a business-centered organization looking to boost revenues, does the U.S. Postal Service have opportunities to sell naming rights? The idea of selling the naming rights to an entire Post Office might not be palatable to Congress, as lawmakers like to name post offices after fallen soldiers or local heroes. But what about selling space in parts of the Post Office? For example: this retail counter brought to you by XYZ Co.? Sides of vehicles or automated postal centers in high-traffic areas of retail centers could also hold valuable advertising space. With its national reach, yet local presence, the Postal Service is visible in every community nearly every day. Companies and nonprofit organizations would likely find the opportunities to reach such a large audience appealing. Another option might be to appropriate advertising space to other government agencies. For example, a state health department or the Centers for Disease Control and Prevention could use space on postal vehicles or in retail lobbies to announce a public health campaign. The Department of Energy or local governments could use retail space to tout energy conservation practices to citizens. This approach would also tie in with a larger vision of using post offices to connect citizens with other government services. Would such offerings tarnish the Postal Service’s image and degrade what is still considered a public institution held in the public trust? Or should the Postal Service think creatively about new ways to use its large physical network? Would naming rights be an easy way to generate revenue in tough economic times? Or should the Postal Service focus on its core business?
on Oct 10th, 2011
in Finances: Cost & Revenue
| 57 comments
Much emphasis has been placed on reducing the Postal Service’s costs in response to its financial crisis. Yet financial viability could come in the form of a balanced approach that both reduces costs and increases revenue. How would a smart business respond to declines in its major products? Would it raise prices where possible in stagnant areas and invest the proceeds into existing or new growth areas? Would it selectively discount products to grow volume in price sensitive segments? Disruptive innovation, such as that underway in the communications sphere, requires change to ensure the Postal Service has what it needs to move beyond the critical crossroad it faces today. The Office of Inspector General Risk Analysis Research Center’s new paper Postal Service Revenue: Structures, Facts, and Future Possibilities (Report Number RARC-WP-12-002) addresses the major components of the Postal Service’s revenue structure in Fiscal Year (FY) 2010, assesses existing opportunities permissible under the current framework, and discusses future options and policy considerations in a new era. Click here to read the Postal Service Revenue: Structures, Facts, and Future Possibilities white paper. How would you approach the revenue issue to make sure the Postal Service continues to provide self-funded universal service to the American people? This blog is hosted by the OIG’s Risk Analysis Research Center.
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