Parcel shipping: United States Postal Service rolls out new prices to take effect in May

Jeff Berman, Senior Editor -- Logistics Management, 3/13/2008

WASHINGTON—When postal-reform legislation—H.R. 6407, The Postal Accountability and Enforcement Act—was signed into law by President George W. Bush in late 2006, there was an initial consensus that the United States Postal Service (USPS) may be in a better position to compete with private sector bellwethers UPS, FedEx, and DHL.

Effective May 12, shippers will get to see if that is actually the case. The USPS announced yesterday that is the date when it will officially introduce volume-related and other price incentives for various service offerings.

Prior to The Postal Accountability and Enforcement Act being passed there had not been an overhaul in postal pricing for more than 30 years. The law authorizes the USPS to:

revamp how it determines pricing,
change prices when needed, and
introduce new or customized products in response to consumer demand.

Other components of the legislation ensure that the Postal Regulatory Commission (PRC) establishes a system for separately regulating rates and classes for “market-dominant” (monopoly) products like first class mail and parcels, periodicals, standard mail, and bound printed matter; and “competitive” products, including priority and expedited mail, bulk parcel post, and international mail, among others.

Some of the main USPS pricing changes coming on May 12 include:

Parcel Select, its “last mile,” delivery to every door offering, will include pricing and volume incentives for large- and medium-sized shippers.
The USPS said in a notice to the PRC that the average overall Parcel Select price increase is 5.7 percent. It also said prices will increase more for Destination Bulk Mail Carrier (BMC) entry than for Destination Delivery Unit (DDU) to further encourage customers to bring packages to the DDU. And it will provide incentives in declining block prices for shippers with more than $5 million in annual Parcel Select revenue that increase their volume from the previous 12-month period. Shippers whose annual Parcel Select volume grows more than 10 percent will receive rebates from 2-to-14 percent of DDU postage based on annual postage revenues, according to the statement;
Parcel Return Service, which enables customers to return packages to businesses, will transition to a weight-based pricing system, which the USPS said will result in price reductions for lighter packages. Parcel Return Service, according to the USPS notice to the PRC, will have an overall increase of 2 percent, with prices realigned between the return delivery unit (RDU), which will decrease by 21 percent, and return BMC categories, which will see a 9 percent increase;
Express Mail, premium overnight delivery will switch to a zone-based pricing system, which will deliver lower prices for closer destinations. The overall Express rate hike is 3.1 percent, but if it is purchased online or through corporate accounts, there is a 3 percent discount, and a 7 percent discount is available for those who meet quarterly volume minimums and;
Priority Mail will have an overall increase of four percent, with average retail prices rising by about 6 percent. But customers using electronic postage will receive reduced prices, which on average, said the USPS, are 3.5 percent lower than retail prices.

Postal industry experts told Logistics Management that these changes will allow the USPS to stand on firmer footing when competing for market share with FedEx, UPS, and DHL.

Pricing structure changes better for business

“I think they are making a competitive statement,” said Doug Caldwell, executive vice president of ParcelPool, an Orem, Utah-based small parcel delivery consultancy and services provider. “These are the first discounts they have made in the parcel arena for things like volume-based and price-based discounts, as well as individually-based ones. They are running the business like they should be and not as a government agency.”

A main driver of these pricing changes, added Caldwell, is that the way the USPS sets rates and does business will be more similar to what its competition does, which, in turn will present more opportunities for them.

He also explained that the USPS will provide discounts for individually-negotiated customers that will not be made public, akin to what its competition does. While these discounts may not trump the competition, said Caldwell, they are likely to be similar. Another benefit, he said, is the USPS’ costs from a delivery unit perspective are lower than the competitions, and perceptions from shippers in the past that the USPS did not have comparable service have also faded.

An eagle eye on the market

The real “sweet spot” for shippers with this news is 1- and 2-pound Priority Mail, according to Jerry Hempstead, President of Hempstead Consulting in Orlando, Florida. His reason: Priority Mail is a six-day delivery product for every address in the U.S., where FedEx, UPS, and DHL only deliver five days a week. Hempstead also said that the USPS does not charge shippers for fuel surcharges, address corrections, and delivery area surcharges.

With a major component of The Postal Accountability and Enforcement Act requiring the USPS’ competitive products to cover its own costs and prohibiting the USPS from using revenue from market-dominant products to subsidize competitive products, the USPS is now taking steps to “price things with the market in mind,” noted Kate Muth, vice president of the Association for Postal Commerce.

“The USPS is making a real competitive charge by encouraging shippers to enter pieces closer to its final destination through its new bulk rate structures,” said Muth. “This pushes shippers to use a third-party consolidator or 3PL to help a shipper with its total density—or number of pieces—and allow the USPS to not take on as much of the delivery costs and then share the discount with the shipper.”