Here’s an Alternative “Exigent” Solution
Last week the Postal Regulatory Commission (PRC) released its recommendation for 2014 postal rates. In addition to the annual price increase tied to inflation (1.6 percent), the commission once again is attempting to implement an exigent increase on the order of an additional 4.3 percent, for a total increase of 5.9 percent.
I’d like to share some news with the PRC: demand is downward sloping. It shouldn’t be much of a news flash to the commission, but judging from its actions, its copy of Marshall’s "Principles of Economics" must’ve been lost in the mail.
Yes commission, if you increase price, demand will decrease. You may have more hard data on the elasticity of demand from all the previous increases you’ve implemented, but I’m skeptical that you’ve done the analysis to parse out the effect of price versus other structural effects on demand, such as technology-based payment methods, e-mail, and digital marketing efforts. If you have this information, we would love to see it, as the effects of your actions could undermine our entire industry.
What I do know is that my customers’ demand is incredibly sensitive to price. They fret each and every year about the budget for next year; what will happen with paper prices, manufacturing costs, and of course, postage. For direct marketers, each mailing is a self-contained P&L statement. And from our own examination of many of the line items for next year, it appears as though costs are increasing...for our customers and for printers.
The uncoated offset market has reduced capacity by 8 percent and market leaders have already announced a 7 percent price increase set for this month (more than likely implemented by December) with another one set for early 2014 when capacity is actually removed from the system. Additionally, the Affordable Care Act is threatening to increase the cost of employing many of the low-wage individuals our industry relies upon, and now we’ve heard from the USPS with its rate increase.
This trifecta of cost increases presents a significant set of headwinds that threaten our industry at a time when new channels are emerging and maturing to compete for budgets. Not only do these costs alter the direct costs of print communications, they also introduce a high degree of uncertainty about the future of the industry that deters investment decisions. If the industry’s cash flows are both lower and riskier, it could prove perilous.
Those of us in the printing business are left asking some mission-critical questions. Can I really invest in co-mingling equipment if mail volumes might be on the wane? Will the ROI of direct mail continue to beat other channels once there is movement along the cost curve? Or, will this movement be the bell that tolls when our industry becomes “exigent?”
To fix the situation, here’s an alternative “exigent” solution. It doesn’t address paper or medical costs, but it does address the remaining headwind—the future of the USPS. Let Pat Donahoe make the fundamental cost decisions necessary to shut down hundreds of rural post offices that are not needed. Cut the delivery service to five days, heck, cut it to three days if that will make things sustainable. I am not an expert on the operations of the USPS, but perhaps the same employees could sort and process three days a week and deliver mail on Tuesday, Thursday and Saturday.
Do we need six-day delivery? Do we need five? I’m not sure, but I AM sure that we do need a USPS system—including rates—that are economically sustainable and predictable. In that scenario, we lose the uncertainty; we and our mailing customers can finally make reasonable and credible projections of business volume and cash flows. And from those cash flows, we can make investments. Given the irrational nature of our current government, maybe I’m the crazy one for even dreaming.