May 3, 2017

• Even with the CPI price cap, USPS raised two key fundraising mail streams by CPI+3
• Above inflation pricing will affect mail volume
• Imagine the impact with an altered or no CPI cap
• It’s not too early to consider “tipping point” or “death spiral”

Of course, price matters in most situations. It especially matters to businesses and organizations operating in a highly competitive marketplace. In recent years, organizations, including nonprofits, have come to expect their business inputs to decline in cost, or at least not consistently exceed the general rate of inflation.

That was part of the thinking behind Congress’ decision ten years ago to require the operators of the U.S. Postal Service to keep their price increases for each market dominant class of mail below the Consumer Price Index (CPI). USPS would need to keep prices in check to remain competitive, and the law would be needed to protect customers from the Postal Service legal monopoly over delivery of mail to mailboxes throughout the nation.

Fundraising postage hit hard in 2017

Many fundraising nonprofits depend heavily on postal mail and have no immediate substitute. And most budget for fundraising well in advance. The CPI price cap is intended, by law and common sense, to provide predictability to customers. Nevertheless, even with the price cap on classes of mail, USPS has the flexibility to raise rates above the cap as long as the weighted average stays below.

We reported last year that the Postal Service shocked many nonprofit fundraisers by raising their two most-used types of mail as much as four times the CPI, or CPI+3. The two most important types of mail for fundraising are drop-shipped Marketing Mail letters used for fundraising appeals, and single-piece First Class letters that carry many of the donations. It was disturbing to learn that USPS leaders did not even consider the round-trip impact on the nonprofit sector that generates one-tenth of all mail volume.

While the CPI came in at less than one percent, fundraising letters drop-shipped to destination network distribution centers (DNDC) were given price hikes of 2.8 to 3.2 percent. Fundraising letters dropped by mailers at destination sectional center facilities (DSCF) were hit with price increases of 4.2 to 4.3 percent.

The single-piece stamped First Class letters that are used for sending in donations increased by 4.3 percent in price. Many nonprofits provide either stamps or business reply mail indicia to cover the cost for donor. Many donors provide their own postage with a stamp.

Large increases on fundraising postage are having an impact on volume

Why bring this up now? We have heard anecdotal evidence that many nonprofits operating with annual fundraising budgets have been forced to cut back their mailings in 2017, specifically because of the inordinate postage increases. Soon we will begin to see aggregate USPS data on 2017 mail volume, starting with the January through March quarter. The 10-Q will show aggregate volume data on May 10, and the “billing determinants” will give the nonprofit impacts when they are published in June.

Postal Service managers told the mailing community that they raised drop-shipped Marketing Mail letters so much because the Postal Regulatory Commission (PRC) told them that they must deal with “pass-throughs” of USPS cost savings from work-sharing that exceed 100 percent. In other words, the USPS believes that the work-share discounts given to customers greatly exceed their internal savings from having the private sector do part of the work.

To keep the Marketing Mail class at the CPI cap, the Postal Service was then forced to lower the prices for Marketing Mail letters that are entered at origin and transported and sorted by the USPS and its contractors. They promise to continue raising drop-shipped letters and lowering origin letters in coming years until the pass-throughs, if not the morale of customers, improve. Call it reverse public-private partnership.

Some customers suspect that the math on work-sharing indicates that USPS has much excess capacity in its mail sorting and transportation network which leads to very low reported cost of bringing the work in-house. If so, this is an example of the relative ease of fixing a cost-price mismatch by raising customer prices rather than eliminating excess postal costs.

The increase of 4.3 percent in the single-piece First Class letter rate is even more puzzling. As it brought the rate back to the 49-cent level reached by the temporary exigent surcharge, many suspect for other than business reasons. Certainly, the USPS had to go to great lengths with reductions elsewhere in First Class to offset the single-piece escalation: metered mail, presort letters and cards, 5-digit automation letters, and the third ounce made free.

Among the several esoteric justifications given by USPS was this: “…will not unduly curtail mail usage or cause significant hardship for the mailing public.” Time and data will tell, but many nonprofits already feel the pain of an unduly large postage increases on their outbound and response letters.

How would USPS price without a CPI cap?

The Postmaster General has said many times that mailers should not worry about greater postal pricing freedom. The USPS would never price itself out of the market, she and her colleagues say.  Many nonprofit customers are quite concerned that without the limitation of a CPI cap, the USPS might do even more (inadvertent) damage that it has done with the cap. It is quite possible that volume reductions in 2017 are being prompted by statements that the PRC will provide monetary relief to the USPS in the form or altering the CPI cap. This kind of “relief” could backfire.