Spoiler Alert: This Is All About Direct Mail Math
It was not a well publicized announcement, 10 days before Christmas, that the USPS will most likely cut the price of a first class stamp by 2 cents, April, 2016. That’s a 4% cut!
Whether the consumer figures out that a letter will mail for only 47 cents is a question, but for the direct mail community, the news is big.
First of all, direct mailers don’t talk cents. They communicate in thousands. (‘000’s.) A 2-cent drop in mail cost is worth $20 per thousand pieces mailed.
Hopefully the marketing folks at USPS have now awakened to the merciless mathematics of direct mail. In the civilian world, when we experience a cost of living increase, we suck it in, or look for a raise in pay to compensate.
In direct mail however there is a brick wall facing an increase in mailing costs. The reality is, mailers don’t manage by total program cost. Rather, they manage by cost per response.
For instance, if a charity spends $1,000 to mail 3,000 letters, it is because they expect to get a 2% response…60 donations, at a cost of $16.66 each.
That cost per response (CPR) is bedrock..an anchor around which all other budgeting decisions are made. So when the USPS issues a 1% increase in postage, the CPR goes up, which is unacceptable.
The Story Behind The Story
When the post office raises its prices, we experience the inelasticity of direct mail performance, because mailers must preserve that cost per response. The only way to do that is to spend less on something else, and that is exactly what happens: smaller envelopes, fewer pages, cheaper paper, less ink, for example.
The bogeyman in this reduction process is that the cheaper the package, the lower the response, which drives up the cost per response again!
The end game option in this vicious circle is to cut out lower responding markets, by mailing fewer pieces, and diverting funds to other direct media.
None of this helps the USPS.
Mail Trends 2008-2015 Prove The Point
In 2007 the USPS delivered 104 billion pieces of direct mail, its highest performance in a 240-year history. Next year, the U.S. economy had a collapse, and there was a 4.3% drop in direct mail. In 2009, there was another drop of 16.8%, eroding 21 billion pieces over two years.
Revenues likewise fell from $20.8 B in 2007 to $17.3 in 2009. $3.5 billion dollars–gone. Looking for cash, the USPS raised its prices nearly 13% from 2006 to 2009.
The bottom line is that the USPS has held direct mail revenues in the $17 B tier ever since, with three more price hikes from 2009 all the way up to 2015. Its actual revenue per piece has gone up from 20 cents to 22 during that time. Direct mail volumes have stabilized around 80 billion pieces, down 23% from its stellar 2007 year.
What You Don’t See
While the USPS has been able to weather the economic storm, the quality of mail has deteriorated. In 2007 the average piece weighed 1.83 ounces. In 2015 that shrank to 1.60 ounces, a 13% decline in paper, ink, pages and envelope. More post cards, fewer envelopes, fewer flats.
The irony in this is that the USPS is actually earning more money for every ounce delivered: 11 cents in 2007, versus 13.8 cents in 2015, a 25% increase.
The Good News
A 4% reduction in postage in 2016 may not mean much to the consumer, but to the direct mailer, it opens the door to better creative, design, and production. These lead to better response, lower cost per response, which drives up mail volumes. Whew!
This price cut is good, good news.
PS: Kudos to you for getting through this important math lesson! Please share.
PPS: You can check all the numbers by reviewing the USPS Revenues, Pieces and Weights report which they faithfully publish very quarter.
2 thoughts on “Awakenings: What Happens When USPS Cuts Prices”
Good math lesson! The USPS could use a good marketing person like you to assist them in their efforts : )
Thank you, Lynn
Hi Lynn: It is the reality of direct mail, mostly overlooked by our friends and partners at the USPS. I hope the reassessment of postal rates continues! Thanks for writing, and sharing!