direct mail, Economics, Marketing, Media

Awakenings: What Happens When USPS Cuts Prices

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.

Slide1

From 2007 to 2015 Direct Mail volume shrank 24 billion pieces.

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

Slide2

Revenue per piece grew 10% while weights decreased 13%.

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.

 

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direct mail, Economics, Marketing

USPS: The Report Nobody Sees

The USPS has published its quarterly Revenues, Pieces and Weights report (RPW) and some trends for both optimists and pessimists will start you thinking.  First off, understand that the post office doesn’t observe the normal calendar year, so the numbers shown here are normalized to January-December.

Revenues for the year, up 3.3% Slide1
First Class Mail, which includes all the bank statements and financial releases, plus personal letters and cards saw a 2.7% increase in revenues.   Pretty good, considering that the class took a 5% increase in price.

Standard Mail which is entirely promotional and non profit mail boomed 5.5%.   If nothing else, this is an indicator that the market was ready to invest in Direct Mail.

Periodicals revenues were flat, indicating the continued effect of online access to reading material.   Parcels were down as a result of a drop in media and library mail.

Pieces down, virtually flat -0.7% Slide3

The big win for the USPS was its ability to bag an increase in pricing without a significant drop in pieces.   In 2014 the post office delivered 152 billion pieces of mail, magazines and parcels, down a billion… but what’s a billion?   Fundamentally, piece count is the physical evidence: choosing to mail hard copy versus an alternative, such as email.

Drilling in to the numbers, Standard Mail grew a billion pieces, or 1.7%.   As can be expected, First Class dipped 1.5 billion.   Interesting, in Q4, which includes Christmas, volumes were up in all FCM categories except for single cards and letters.   Despite our best hopes, the Christmas season didn’t materialize on the kitchen tables of America as stacks of holiday greetings mail.

The most worrisome segment of the pieces category is Periodicals, which illustrate the rapid decline of magazine mail, the real victim of web communications today.  Periodicals dropped 4.7%.

Tonnage down 3.2%

Slide4While pieces are down slightly, the total weight hauled took a big dip: 500 million pounds or 250,000 tons.  For the record, the USS H.W. Bush Super Carrier weighs 100,000 tons.  Can you imagine losing 2-1/2 aircraft carriers in the mail?

But to the point, while mailers only backed off mailing pieces by 0.7%, they were much more careful to lower the weight of each package.   So the USPS still walked as many routes as last year, but their trucks didn’t use as much gas.

Slide5The drill down shows that Standard Mailers lowered their kit weights by 4.4% to 1.59 ounces on average.   Given that the postage is the same for up to 3-plus ounces, it is likely that printing costs drove down the weights.   That, and fewer Flat-sized kits.

Periodicals dropped 1%, which translates to fewer page counts, and less advertising.  Parcels and packages were down to 2-1/4 pounds.

Only First Class mailers upped their weights.

The Cost of A Stamp Up 4.1%

Slide6First Class postage took a real price increase of 5%, and watched its volumes decline 2.2%.

Standard Mailers took a 4.2% increase and grew their volumes 1.2%.   This is a clear indication that Direct Mail is enjoying the effect of its financial results in the market place.

Only Packages saw a price decrease, which spelled a slight increase in volume.

What’s Next?

We’ll see how the postage increase affects volumes and revenues after April, 2015.   Mean time, it’s a safe bet that Direct Mail is headed in the right direction, and may ultimately be the driving force in USPS revenue stability going forward.

Kudos to the USPS navigating its way through these changing times.   If you would like to see the RPWs they are available here…  http://about.usps.com/who-we-are/financials/welcome.htm

If you have a question, comment or observation about this report, let me know!

 

 

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