This week on Mailin' It, we’ll explore a critical challenge faced by all businesses, but one that presents unique complexities for the Postal Service—Pricing Strategy. Join us as we dive into the intricacies of postal pricing and the strategies that have been instrumental in our continued success.
Having an effective pricing strategy is not only a key factor in driving business success but also imperative for an organization like the Postal Service. In this episode, we dive into the intricacies of postal pricing, where the stakes are high and the implications of pricing decisions are far-reaching. Guiding us through the discussion is Sharon Owens, the VP of Costing and Pricing at the Postal Service. Join us for a deep dive into the world of pricing and its vital role in the Postal Service's long-term success.
Karla Kirby
Hello and welcome to Mailin’ It, the official podcast of the United States Postal Service. I'm Karla Kirby.
Jonathan Castillo
And I'm Jonathan Castillo. I'm really excited for this episode, Karla, because it's one of those that takes us behind the scenes at the Postal Service. This time around we're going to explore a challenge that all businesses face, but one that is particularly complicated for Postal. Having an effective pricing strategy is one of the most important factors in driving business success since the Postal Service is required by law to operate like a business and cover its costs. Postal pricing is critical to our long term success.
Karla Kirby
That's absolutely right, Jonathan. What makes this topic so interesting is that over the years there have been a number of challenges to the way the Postal Service can price its products. As a result, we've learned the hard way that pricing limitations can have serious repercussions on businesses ability to cover costs, serve our customers, and also compete with our rivals.
Here to tell us more about some of those challenges and how we've been able to overcome them is Sharon Owens, VP of Pricing and Costing at the Postal Service. Sharon, welcome to Mailin’ It.
Sharon Owens
Well, thank you. I am so excited to be here. This is just going to be fabulous.
Jonathan Castillo
There's so much to talk about when it comes to this topic, right? But I think the best place to start is who's in charge of setting the prices for the Postal Service?
Sharon Owens
Well, believe it or not, not me. Okay. It starts with Congress. So Congress establishes the objectives and the factors that guide our pricing framework. Then we have a regulator, and the regulator really gets to set the rules - the rules and the regulations regarding all of our pricing constraints. And then they get to check our math or evaluate the compliance.
These members are the regulator, the Postal Regulatory Commission are appointed by the president. They're nominated by the president and confirmed by the Senate. But finally, it's really up to our governors, the governors of the Postal Service are responsible for the pricing strategy and the timing of price changes. Our governors are also nominated by the president and confirmed by the Senate, and they have a fiduciary duty to ensure that the Postal Service can generate sufficient revenue to provide universal service for the entire country.
Karla Kirby
Okay. So now that we know who all is involved, I think it's important to provide context on how the Postal Service sets and adjust its prices. So I think it's safe to say a lot of people think the Postal Service mostly as a way to send and receive letters and packages. They want to know when their letters and packages will get to where they're going, of course, and how much it will cost. But there's a whole lot more to the Postal Service than what most people see at the retail counter. I think we could agree on that. So tell us a few things that influence pricing that most people probably don't know, or realize.
Sharon Owens
Well, it's very complicated. It's not like any other business that set their prices, I assure you. But to start with, the mail sent by consumers and small businesses and our post offices, that only accounts for 20% of our business. So the other 80% come from commercial mailers and actually even some of our competitors. Now, when we evaluate prices just like other businesses, we look at how a product's performing, how sensitive customers are to price increases and the costs associated with delivering that product.
And our goal is to maximize revenue while also considering stakeholder impact and economic and market conditions. Most businesses don't really have to consider their stakeholders when setting their prices. Now, our objective for every product is to generate enough revenue to cover its cost. However, there are some mail products that currently are not profitable. For example, we lose about $0.18 on every newspaper or magazine we deliver.
So we have an obligation to recognize and this is one of those fun facts, the educational, cultural and scientific informational value of our products. Probably other businesses don't have to do that. We do. And because of that, we used to just barely cover our costs for these periodicals. And over time, the cost has increased faster than we've been able to raise our prices.
Jonathan Castillo
I think one thing that's important to keep in mind, Sharon, too, is that the Postal Service is almost entirely self-funded. The revenue that we get from the sale of postage is what keeps us going. Right. So the federal government reimburses less than 1%, really, of the Postal Service's cost. Now, the federal government also imposes a universal service obligation on the Postal Service.
That means that we have to deliver to the entire U.S. population. And that includes, you know, remote areas that other delivery services just tend to exclude because serving them isn't profitable. Right. In order to reach all those areas, the Postal Service maintains the largest physical and logistical infrastructure of any nonmilitary government institution. So my question then would be how does the universal service obligation affect the Postal Service's costs and the prices that we charge?
Sharon Owens
Yeah, that's a great question. So think of it this way: We charge the same amount to mail a letter around the block as we do to get the same letter to the other side of the country. And obviously, the cost of doing this is very different. We want to make it easier to mail a letter. So we want to have a stamp be like our flat rate envelopes and boxes. It costs the same no matter where it's going. But in the past, the Postal Service used to be able to set all these prices to break even. That became much more difficult when the Postal Accountability and Enhancement Act, we call it the PAEA, was passed in 2006. With this law, the price increase for every class of mail is individually capped.
But the cross structure and the mail mix has changed significantly in the past 17 years, especially as volume has declined due to electronic diversion. We must go to every house, whether we have one piece for the mailbox or six pieces. And this is a really interesting, fun fact. The number of pieces delivered to households has dropped from about 5.5 pieces per day in 2007 to 2.9 pieces per day in 2022.
That's a 47% drop, which really impacts our unit cost.
Jonathan Castillo
You had mentioned earlier about something about electronic diversion. What is that?
Sharon Owens
Well, I'll tell you what, we have competition for really all of our products. You can now send an email instead of doing a personal correspondence. So many of us pay our bills online instead of writing that check and put it in the mail. And then think about advertising. Advertisers can send you emails or use social media and digital channels instead of advertising through the mail.
So that's what we call electronic diversion. When customers, whether it's individuals or large businesses, choose to use electronic means to communicate instead of using hard copy print.
Karla Kirby
Definitely good to know. So we've talked about the Postal Accountability and Enhancement Act on previous podcasts, but not specifically as it relates to pricing. So what was the PAEA and how did it impact the Postal Service's finances?
Sharon Owens
Yeah, that was that was a huge impact to pricing and costing. So in the 35 years from when we became the U.S. Postal Service instead of the post office department until PAEA, the Postal Service, implemented rate changes through a lengthy process, it routinely took about ten months to litigate. And so we only change prices every two or three years.
I mean, you could make a baby quicker than you could change a price before PAEA. So in 2006, Congress attempted to resolve this unpredictable and lengthy process by creating two tiers of products. The market dominant products cover most letters and flat shape mail. And then the competitive products covered most of our package and shipping products. So these package products are considered competitive because the private sector carriers offer similar products and services.
And because there's competition, direct competition, the Postal Service has more flexibility in pricing these products.
Jonathan Castillo
Now, Sharon, you know, the way you described it there, it seems that most of the Postal Service's products would fall into the competitive category. Right. But wouldn't the market dominant products be the most expensive to maintain?
Sharon Owens
Right. So as we talked about it, there certainly is competition for letters and flats. These hardcopy ways to correspond. But the Postal Service is the only entity who can put mail into a mailbox. And because we have that mailbox monopoly, the regulators determine that that's a market dominant product. Since we are the only provider to be able to put hard copy mail into mailboxes.
So but these products account for about 95% of our volume. Yes. 95% of mail and letters and flats, but only 5% of the volume are packages. Did you know a parcel cost about 14 times more than the cost of a letter? And a lot of our costs are fixed. I mean, think about it. We go to every house every day.
Again, whether we add a letter or a parcel, we're going there anyway. So we share that delivery infrastructure. And it doesn't vary whether we get more letters or packages. So like I said, we've gotten more flexibility in how we price our shipping products. That's going to allow us to compete effectively with the alternate delivery companies. But we have to ensure that the price exceeds the cost of adding another package to this network and make an appropriate contribution then to these fixed and share cost.
And our regulators determining that appropriate share. Now market dominant products totally different pricing regime. They are capped at inflation. So the PAEA said we can only raise on average First-Class Mail or marketing mail at the change of inflation for urban consumers. So it's the CPI-U is what each class of mail was capped at. So the combination of this cap based pricing we had that we were capped at inflation, but then the 2008 Great Recession really impacted mail volume.
And then we've got this continuous electronic diversion. So as our volume declined, our prices just couldn't keep up with these increasing costs.
Karla Kirby
And the PAEA also did mandate that the Postal Service prepaid billions of dollars in pension and health care costs. And it sounds like that put the Postal Service in a very awkward position financially. Now, luckily with the PSRA that prefunding has been repealed. But aside from that, what impact did that have on the Postal Service's ability to invest not only in its people but also the operations?
Sharon Owens
Absolutely. So in the 14 years since the price cap was instituted, we could have generated $55 billion in more revenue if we had known then what we know now and had additional authority to account for this decline in mail volume and the growth in delivery points and to account for our retirement obligations. So this loss of revenue resulted in really jeopardizing our long term financial stability.
We didn't have enough cash to invest in our massive network, even those basic needs. So we have very old vehicles, outdated equipment and tons of deferred maintenance in our facilities. You know, the PAEA just didn't address the fact that when mail volume declines and our delivery points are increasing, that's really going to impact the cost structure in a way that we can't control.
So and it also, you know, didn't really put together the impact. They were capping our ability to raise revenue while also saddling us with a payment of $5.5 billion a year to prefund those retirement obligations.
Karla Kirby
And we were the only agency with that requirement. As I understand it, it took several years, but some relief did come in 2020. Tell us a little bit about that.
Sharon Owens
Right. So it was late 2020, about four years after evaluating whether the system worked. And three years after determining it didn't work, the Postal Regulatory Commission established a new pricing structure. I mean, we were just talking about where are capping our products at the change of inflation just didn't address the those different cost impacts. So the regulator, even before the law passed, said that they needed to give us additional authorities.
And so they provided us with a couple of formulas to use. So good thing that we have a lot of smart, quantitative people working on pricing and costing. So rather than relying solely on an inflation based model, the regulator added additional pricing authorities that with a formula that addressed the decline in the mail volume and the increase in delivery points.
We call that mail density pieces per delivery. And there's a formula that gives us additional pricing authority - the ability to raise prices more than just the change in inflation to address this cost structure. And then we also got another really complex formula that will allow us to catch up with our amortization payments for our retirement fund.
So this formula would allow over five years for us to catch up and recover through additional pricing authority the payments that were past due to pay into our retirement funds. And then there was also additional authority for the classes that don't cover its cost. I mentioned we lose money on periodicals while this is at 2% a year, we get to add two more percent to the price of newspapers and magazines to help catch them up so their revenue will cover the cost.
So the Postmaster General Delivering for America Plan seeks to leverage this new pricing authority. It helps to rebalance for that 15 years of a defective broken pricing model that just wasn't going to be sufficient. This new authority, that density authority, the retirement authority and this authority for underwater products is going to be worth $44 billion in the next ten years.
That's a really key part of the plan. So we applied this as soon as that 2020 law revision and came in like the end of November, well, we were able to use that authority in August of 2021 and really start making up for the fact that lost mail volume and our retirement obligations. So we applied that in 2021, and we're going to be using that authority until till we're on that path of financial stability.
Jonathan Castillo
What else can you tell us about the Postal Service's current mail pricing strategy and our approach, given the organization's financial position and overall market conditions?
Sharon Owens
Well, so since the new pricing structure has gone into effect, we've fully used all that additional rate authority available to raise prices because we have that whole path tool to undo the financial harm that was associated with the PAEA pricing restrictions. So since January of 2022, we've started raising prices twice a year to first and foremost addressed the rising costs associated with inflation.
It just so happened that we got this additional authority right as inflation started to skyrocket. And in most of the changes that you've seen in our price is mostly associated with that rise of inflation. But we have taken full advantage of this additional authority that the regulator, you know, determined that we needed. And we did. So for most retail customers this means that the forever stamp price has been increasing a few cents every six months. And in fact, we just announced that we're planning on increasing the price of a stamp to $0.68 in January. Now, our regulators check on that math and check on the compliance, but we hope to know that that was approved very shortly. Now, as inflation declines and our financial position improves.
It'll make less sense to change price twice a year.
Karla Kirby
So before we hop to packages, I want to hone on one thing that you mention: The Forever Stamp. So can you explain to our listeners the Forever stamp? I know I have my own vantage point of what the Forever stamp is, but you touched on it. So the pricing for the Forever stamp, once you purchase it, it is good for a first class mailing regardless of the future price of stamps.
Is that correct?
Sharon Owens
That's right. You know, one of the things we do when trying to set prices and design our products is really think about ease of use. We want to be easy to use for consumers and small businesses. That's why our letter prices aren't zoned and don't vary by distance. And another way that we're able to be easy to use is to say, when you buy that stamp, it'll be good forever.
And we do mean forever. So whether you bought that stamp ten, 15 years ago, it is still good. If you have it in your desk drawer, you can still pull them out. They probably have a Liberty Bell on them. But now all of our stamps, we're going to make the first class single piece, one ounce stamp will be good forever.
We do it for International Mail, too.
Karla Kirby
Good to know. Definitely good to know. And it's been great for our listeners.
Jonathan Castillo
I was going to say, it sounds like if I purchase many sheets, many panes of stamps now, I might be saving money in the future. I don't know.
Sharon Owens
Well, sure. Yes, we hope you use them. Keep mailing those bills or cards or birthday…
Karla Kirby
Hence for forever.
Jonathan Castillo
The forever stamp.
Karla Kirby
So moving on to packages. So for packages, how does the Postal Service's pricing compare with its competitors and how much does their pricing factor into the Postal Service's own pricing decisions given that competitive market?
Sharon Owens
Well, that's right. So our competitors, they price their products dynamically based on market conditions. They include a lot of surcharges, fuel surcharges, delivery surcharges that improve their yield. But we don't - we have upfront pricing. We do monitor what they're doing with their prices and then we compare, well, what's our value relative to theirs? What's our time in transit?
We offer free boxes with some of our products, so we determine whether we're able to be the lowest price provider. We want to make sure that that we have the most affordable alternative. And I believe we offer significant value to our retail and commercial customers. And we're priced competitively to win the business. But you've got to remember that we are we have a regulator.
We don't have loss leaders. All of our products must cover their cost and help fund that fixed and shared infrastructure. So we have different prices for consumers that walk into a post office versus use our online solution. And we can negotiate contracts with large shippers just like the competitors. Again, as long as that contract covers its cost. Now, despite our competitors announcing that they were going to do a peak surcharge for their shipping services, we announced that we were not because we're ready for peak, we're not going to have to really increase our staffing or our capacity to handle your business.
We are ready to go. And so we are not going to have to pass on higher additional cost to our customers. We are ready to compete and win your business this peak.
Jonathan Castillo
Sharon, I think it's so great that you mentioned it about the no holiday surcharges this year. I mean, it's absolutely something that is a little bit different for us from the past. So I think it's definitely something that is great for the Postal Service and heading into this holiday season. But let me ask you this. What are some other ways commercial clients can save money when, you know, kind of working with the Postal Service?
Sharon Owens
Right. So the most expensive way to… what cost us the most is when you use our post office infrastructure, it's there for convenience and we would love for you to use it. But, you know, big commercial customers, they can avoid that cost. Maybe they can sort their mail by zip code or even all the way down to the carrier route.
That saves a lot of processing stops. They could enter their mail closer to the destination. So they're not going all the way across the country with their products, you know, and that works for some mailers because maybe they're only mailing locally and it's easier for them to just use part of our network. We pass along that cost savings in terms of discounts.
Small businesses can save money when they use meters instead of stamps. So we encourage the use of meters. Now for our competitive products, we offer lower than published prices on our USPS.com Click and Ship. It's our online platform. And so that's a cheaper alternative than going into the post office. You can print your label and even schedule a free carrier pickup.
And then for these really large shippers, we negotiate contract prices. Maybe they need a different solution. So we call them negotiated service agreements. It often requires a volume commitment, but this is the most effective way for businesses to design a solution, including price that best needs their needs.
Karla Kirby
Well, it sounds like we have a great number of options for our commercial mailers. So are there any other tips that you would like to pass on to our commercial and or our retail mailers?
Sharon Owens
Well, you know, we're really trying to improve the value of mail. You know, we talked about that electronic diversion and the competition we're facing in the marketing segment. So we've done a lot of promotions and incentives. So we are putting out ideas to help make mail more impactful to improve the ROI when you're trying to get people to buy your product.
So these promotions and incentives about making mail sensory or tactile and really cool things that you can do with print, we offer a discount if you'll do that, or if you'll do emerging technology and do like augmented reality as part of your mailing campaign or even do an informed delivery. We're so excited about the impact of having additional eyeballs on your mailing marketing message when you can associate a really a content rich campaign.
So when we take a picture of your image and process your mail piece, when we process it, you can link a digital campaign that goes along with that image and people get it in their email every day if you sign up for informed delivery. So I know I don't get home till late. I can see what's coming in the mail and I can click and take action on a mail piece even before I get home or tell my husband not to throw away that piece.
I want to look at it when I get home. So we're really excited about informed delivery. So much so we offer a discount for marketers to put an additional campaign with that mail piece image. So that's some of the fun stuff that we do on the mail side. We are also trying to encourage growth. The economy has been really hard on the mailing volume this year.
All this economic uncertainty, these high interest rates, mail volume has really taken a dive. So we want to encourage mailers to mail more next year than they mailed this year. And if they mail more than a million pieces and beat how much they mailed and calendar year 23, we will give a 30% discount, 30% discount on that new volume right in 2024.
So we're really committed to helping strengthen the mailing industry. We're committed to print and marketing mail, and so we're excited about that. You know, we are showing how excited and committed we are to packages with no holiday surcharge this year. We are really going to help mail out next year to come back to the mail and get that volume back up.
Karla Kirby
Well, we've gotten a lot of great information today, wouldn't you say, Jonathan?
Jonathan Castillo
So much more that goes into it than I could have ever imagined. And I think it's just amazing all the different programs and, you know, savings discounts that we offer our commercial mailers. I mean, just absolutely great stuff. Thank you so much for sharing that with us.
Karla Kirby
Absolutely. And Sharon, thank you for visiting us today here at Mailin It. We welcome you to come back in any time and talk about some of the exciting efforts that we have going on in pricing. Anything you want to add as we close out this afternoon?
Sharon Owens
No, this has been a lot of fun. I hope people I mean, it can be a little nerdy. I get it. I try not to use economic terms or math terms, but it does take a lot of work. We've got a great team and we are we are trying to be responsible as we change prices. But make sure that we have enough revenue to invest and serve the American people.
Karla Kirby
Well, thank you again for being here. We greatly appreciate it and look forward to what's coming out of pricing next.
Jonathan Castillo
Thanks, Sharon.
Karla Kirby
Before we wrap up this episode, Jonathan and I have a few interesting facts for our Did you Know segment that we'd like to share. I've got a good one for you today, Jonathan.
Jonathan Castillo
I can't wait.
Karla Kirby
You probably know that in the early days, postal customers living in cities and towns for the most part, had to go to their local post office to get their mail. In some cities, people got home delivery, but they had to pay extra for it. Given that the Postal Service now delivers more than 162 million pieces of First-Class Mail every day, obviously lots has changed since then.
So how did we get from there to here? The beginning of free home mail delivery in cities is often credited to Joseph William Briggs, a postal clerk in Cleveland, Ohio. Briggs reportedly thought a free delivery during the winter of 1862, when he would see long lines of women trying to keep warm while waiting to pick up their mail from loved ones fighting in the Civil War.
Jonathan Castillo
I'm assuming the experiment was a success.
Karla Kirby
Undeniably, by 1900, there were more than 15,000 letter carriers in nearly 800 cities, bringing mail directly to people's homes.
Jonathan Castillo
Very interesting. Now, I've got a good Did You Know too!
Karla Kirby
Let's hear it.
Jonathan Castillo
Did you know that it wasn't always mandatory for post offices to have unique names?
Karla Kirby
Aren't most post offices named after where they're located or for someone famous?
Jonathan Castillo
That's true. But back in the 1800s, just naming a post office after the town it was in created a lot of confusion. Consider this. In New Jersey alone, five townships and one borough use the name Washington today. Luckily, we have zip codes now, but before that, having a bunch of post offices with the same name in the same state was a problem for mail delivery.
In 1840’s the Post Office Department try to fix this by encouraging people to select unique names for post offices.
Karla Kirby
Well, how did that go?
Jonathan Castillo
Apparently, the results were uneven. In Vermont in 1852, for example, mail for the St Jonathansbury East and St Jonathansbury Center post offices often went to another post office simply named Saint Jonathansbury, very obviously causing delays. And then in the 1800s, the post office department tried again. It told local post offices they should have short names that would not resemble the name of any other post office in the United States.
Easier said than done. Between 1850 and 1890, the number of post offices increased from more than 18,000 to more than 62,000.
Karla Kirby
Now, that's a lot of post offices.
Jonathan Castillo
Yes. And confusion over names became a huge problem for the government. It got so bad that in 1890, President Benjamin Harrison created the U.S. Board on Geographic Names, which actually still exists today. The board created guidelines for naming places in the U.S., including post offices. Today, the postal operations manual requires a post office to normally be named after the town or community it serves, thanks largely to zip codes and modern sorting technology, that's not a problem.
Karla Kirby
So, Jonathan, again, another great episode of Mailin’ It. Very informative. I'm going to tell you the thing that I took away as a retail customer: Forever Stamps.
Jonathan Castillo
Oh, absolutely.
Karla Kirby
You got to get them.
Jonathan Castillo
I think what really you know, kind of hit home for me, Karla, was you know, Sharon had mentioned about the Delivering for America plan and, you know, how it is leveraging, you know, all these new changes. Right? To really kind of take us out of that, you know, defective broken pricing model from the past, helping us get back to financial sustainability and, you know, I was really, really impressed with all the different programs that we have to help our commercial mailers save money in spite of all these changes.
So absolutely great stuff, I think, as a commercial mailer. Lot of amazing things in the pipeline.
Karla Kirby
Absolutely. And as you mentioned with the DFA, it seems like a lot of our episodes are touching on just how the DFA has created all of these different vehicles and just what most of our listeners probably don't know, and I think we mentioned it during the podcast, is we are self-funded for the most part. That is so it's not like we're raising prices to raise prices.
We are raising prices, like you said, to come out of a defective model and to make sure that we are covering our costs. So thanks to everybody for listening. And that's all for this episode of Mailin’ it. Don't forget to subscribe to Mailin’ It wherever you get your podcasts, and to make sure you don't miss any episodes follow along on Instagram @USPostal Service, X - formerly known as Twitter @USPS, and on Facebook.