The postal price increases for marketing mail are driving down volume and, more importantly for the USPS, driving down profits. The postal price increases need to be rolled back.
Basic economic principles apply to the pricing decisions for catalogs and direct mail:
- Catalogs (and direct mail) are very sensitive to the cost of mailing. More than 65 percent of the cost of a catalog is the postage cost, with the other third a combination of printing, paper, mailing lists and creative costs.
- Catalogers decide how much to mail based on their breakeven cost. Breakeven is simple: The two components of breakeven are the cost of the mailing piece and your merchandise margin. For example, if a catalog costs $.75 to print and mail and your merchandise margin is 50 percent, then your breakeven is $1.50. If a segment of your circulation yields over $1.50 in revenue, then that segment has broken even and can be mailed profitably going forward.
- Catalogers track their breakeven costs very closely and make circulation decisions based on their costs.
- Catalogers have been decreasing their mail volumes because of postage cost increases.
- Mailing volume correlates directly with costs for catalogs and direct mail.
- The USPS’ internal statistical model failed to predict both the 10-plus percent decrease in mail volume and the $1.6 billion shortfall in revenue.
Catalogs and direct mail provide a large portion of the revenue and profit for the USPS. The USPS is basically a fixed cost operation. Therefore, more volume equates to more profit and lower volume translates into lower profits. Much of the catalog volume is handled by outside third parties and is given to the USPS at the local post offices ready to be given to the individual mail carriers.
How much profit is lost when a $1.6 billion shortfall in revenue occurs? While government accounting is obscure, corporate accounting focuses on the contribution to fixed and overhead. The variable cost of delivering catalogs is tiny; therefore, almost all the revenue from catalogs yields contribution to fixed and overhead (or more plainly stated, to profit). Incremental catalog volume probably has around a 90 percent profit margin so a revenue shortfall of $1.6 billion means a loss of around $1.4 billion in profit.
Therefore, the goal should be to focus pricing strategy on maximizing volume. The problem is that the amount and frequency of the pricing changes has resulted in a large drop in volume in both 2023 and 2024. Compounding the problem is that the USPS model for predicting the effect of price increases has been wrong. The methodology for its modeling has been shown to be deeply flawed by the NDP study on USPS Price Elasticities.
No where in the Postmaster General’s public statements on pricing strategy does he acknowledge the price sensitivity or profit implications of price increases on volume. He lumps together the different categories of “market dominant mail” as though the categories of mail all react in similar ways to price increases. While first class mail and periodicals are not very sensitive to price increases, catalogs and direct mail are very sensitive.
The pricing strategies for different categories of mail need to reflect this reality. Three different times in Postmaster DeJoy’s recent Congressional testimony he says that the pricing strategy is to “recover market dominant revenue by leveraging our pricing authorities to correct for 15 years of a defective pricing model.” This reasoning is wrong. Raising prices for catalogs and direct mail has cut volume and decreased profitability.
What the USPS doesn’t grasp is that more volume translates into greater profit and that cutting postage costs for this category will almost certainly yield both more top-line revenue and bottom-line profits.
What we’re not seeing from the USPS is economic modeling that shows the projected revenue and “profit” from a postage increase and the alternatives of keeping postage the same or a decrease in postage costs. What we have now is a USPS model that projected revenue after the postage increase that was wildly wrong. What’s needed from the USPS is a series of economic models showing the revenue and profit from a postage increase, the revenue from no increase, and the revenue and profit from a decrease in postage costs.
The reality is simple:
- More volume for catalogs and direct mail results in more profits for the USPS.
- Raising prices has translated into lower volume.
- The model being used by the USPS is wrong.
- The USPS needs to model the alternatives to increasing prices and deliver a model showing what happens when postage is lower or, alternatively, stable.
- It will probably require a lawsuit to force a roll back of future price increases.
Jim Coogan is the founder and president of Catalog Marketing Economics, a consulting firm focused on catalog circulation planning.
