August 28, 2019
Facing its Own High Transportation Costs, USPS Might Temper Rate Increases on Drop-Shipped MM Letters
We have reported often that over the last three years, USPS, under orders from its regulators, has been raising rates on Marketing Mail letters much more than the rate of inflation. This pricing strategy was motivated by the theory that measured “pass-throughs” of USPS avoided costs as postage discounts (by having the private sector mailers do much of the transportation) were much higher than 100 percent.
Everyone agrees with the economic theory that the agency should not pass through more than its own cost savings as discounts to mailers. Disagreement stems from whether the USPS avoided costs are accurately measured and send the right pricing signals. If the agency has excess capacity or is less than fully efficient, it can underestimate the costs that could be avoided. Then it appears to be passing through too high discounts.
When USPS started this effort to correct the pass-throughs with rate hikes, both DSCF (Destination Sectional Center) and DNDC (Destination Network Distribution Center) Marketing Mail letters discounts were at 225 percent of avoided costs. After three years of above-inflation rate increases, DSCF is now 122 percent and DNDC is at 116 percent.
We also have reported that USPS transportation costs have been increasing much faster than inflation this year. Postmaster General Brennan just announced the appointment of a new senior officer position to focus solely on transportation and logistics.
Ironically, some of the progress in the pass-throughs we have seen in the last year is a result of the cost avoidances increasing as the USPS cost of transportation has increased.
The bottom line is that mailers of Marketing Mail letters might get a higher than inflation rate increase in 2020, but probably not much more than the expected average increase around 2 percent.