July 30, 2019

Recently, we posted on LinkedIn an editorial titled “Reforming the Postal Service” published by The Washington Times on July 28 which you can read here.   While the editorial’s main point is that USPS needs to retain the price advantage of its parcel deliveries, we think the same point also applies to its letter mail services.

Our posting received a comment by Michael Critelli, retired CEO of Pitney Bowes, that we think is simple, elegant, and right on target:

“Thank you for posting this.  Legislators and other government managers seem to forget a basic principle of economics.  If you charge more for something, you get fewer people buying it.  Certainly, every product and service has some price increase potential, but only if value is added at the time.  Consumers and business buyers no longer buy into the idea of automatic price increases.  There is too much competition.”

Lately, discussion about reforming the USPS often includes the presumed need for “pricing freedom.”  The thought is that if the Postal Service could raise its rates faster than general inflation, it would do much better financially.  We and others have disagreed with this suggestion.  Congress was very wise to require the CPI price cap as both a governor to protect captive mailers and an incentive for the USPS, in exchange for its legal monopoly on the delivery of mail.

Mr. Critelli reminds us that, even in the competitive world without legal monopolies, “pricing freedom” only benefits a business if its customers perceive a real increase in value concurrent with a price increase.  Real world businesses have limits on their pricing power that often are much more onerous than the CPI cap that USPS works with.

The “pricing freedom” that some see as a major part of reforming USPS is more fool’s gold than a pot of gold.  Or, put another way, focusing on raising prices before figuring out how value will be added is really the cart before the horse.  The real danger is that the regulator and/or Congress will grant above-inflation price increases in the absence of sufficient value-addition, that will drive enough volume away to trigger a real crisis.