It seems the pricing of parcels in today’s market is a lot like the story of Goldilocks and the three bears (with the U.S. Postal Service playing the role of Goldilocks): If USPS sets prices too high, it opens the door for the big retailers to come in and make their own deliveries. If it prices them too low, it loses money. It needs to price parcel delivery services just right.
Our recent white paper explains the outcomes of modeling research by renowned postal economist John Panzar, who notes that the parcel market is no longer just the dominion of established parcel delivery companies. The real threat to the parcel delivery companies is self-delivery by the large retailers. The Postal Service — and commercial delivery companies — just got a new competitor. Price your products accordingly.
In the past, if the Postal Service set prices below its competitors, it would most likely increase its parcel volume. In today’s evolved parcel market — where ecommerce is driving steady parcel growth and competitors are also customers — the postal price has to be higher than the cost of delivery, lower than competitors’ prices, and also low enough to discourage large retailers from self-delivery.
Our paper doesn’t say “you should charge X price.” But Panzar’s game theory analysis can guide USPS decision-makers on how to set pricing strategy. Many industries employ game theory in one way or another: Airlines model prices for different flights based on a number of factors, including seats on the flight, dates of travel, etc. And ticket resellers use models to raise or lower event prices depending on demand, date of the event, and prices on other sites.
A model can help organize all the assumptions about relevant factors in a consistent framework, one that can be adjusted with shifts in business realities. It should help decision-makers consider the impact of pricing on an ever-changing parcel market.
What do you think? What other threats does the Postal Service face in the future of package delivery? Besides price, what other strategies does it need to focus on to maintain its market share?