The postal price increases in the near term have proven to be a failure. The USPS modeling predicted that revenue would increase and demand wouldn’t fall. However, the data tells a different story. In 2023, revenue of “marketing mail” decreased by $920 million and volume decreased by 7.7 billion pieces.
The USPS produced and relied on an economic model that proved to be wrong. Mail volume fell for “marketing mail” and the result was a loss in top-line revenue and a bottom-line loss of $1.6 billion. These losses prove that the postage increases were counterproductive and need to be rolled back.
The USPS is a classic fixed cost business where incremental volume is highly profitable because the increased volume has little incremental cost. The postage increases for marketing mail clearly resulted in the huge volume declines between 2022 and 2023. The losses from volume declines were not made up by the postage increases.
An economic analysis of the modeling techniques used by the USPS shows that its modeling was deeply flawed. The economic study, Critique of USPS Elasticities, shows that when catalog postage was raised, less revenue was realized after the postage increase.
The USPS forecasts showing that a postage increase for catalogs would raise revenue proved wrong. Revenue, catalog volume and USPS profit have all declined since the last postage increase. Because revenue is proven to have declined when postage rates for catalogs were increased, the USPS should properly react to this reality by rolling back the future postage price increases planned for August 2024.
The study released by NDP Analytics reveals that the statistical modeling used to forecast the impact of postage increases on catalogs was flawed. Forecasted revenue increases were missed. The study digs deeply into how the statistical models used to justify postage increases were deeply flawed.
“Key findings of the critique are:
- USPS volume forecasts are increasingly unreliable;
- USPS model characteristics reduce accuracy in forecasting;
- USPS elasticity estimates reflect model shortcomings; and
- USPS practices limit forecasting accuracy and accountability.”
The executive summary notes that “The USPS has implemented higher and more frequent rate increases for market dominant mail to improve its financial position. Its demand model, which estimates the price sensitivity (elasticity) of market dominant mail, is used to justify rate increases. However, volume and revenue challenges signal an issue with the model.
“Here is why this matters for policymakers:
- The USPS is the only option for sending market dominant mail (i.e., catalogs).
- First-Class Mail and catalogs accounted for 96 percent of market dominant mail and 89 percent of revenue.
- Missed volume targets contributed to $1.6 billion in FY2023 losses. Therefore, in 2023 after a series of steep and frequent increases, lower-than-planned volume cost the USPS $1.8 billion and contributed to its total year end loss of $6.5 billion.
“USPS rate proposals have gone unchallenged, at least partly, because its demand model justifies the price increases. The model estimates the price sensitivity of market dominant products such as catalogs. In short, if demand for a product is not sensitive to price increases, a rate increase may result in a decline in volume but will produce more revenue overall. However, misunderstanding sensitivity to postage price increases contributed to missed volume and revenue targets.
“The USPS demand model estimates sensitivity to price. The model is used to justify rate increases. Recent performance signals issues with the elasticity estimates.”
The study then documents in detail what’s wrong with the USPS internal forecasting model. Buried in statistical detail are these takeaways:
- “Small tweaks to the model result in notable changes to the USPS elasticity estimates.
- USPS may lose more volume than expected with rate increases.
- USPS may lose revenue on some products due to rate increases.
- The USPS does not follow some common best practices. Three best practices are performance assessments, sensitivity analysis, and external experts.”
This study implies that the USPS fitted and tweaked its model to produce a revenue forecast to justify its postage increase for catalogs. But whatever caused the forecasting model to be wrong, this study makes the case that raising postage for catalogs does not increase revenue.
The USPS Board of Governors should choose to not raise rates in August 2024 based on this critique of the internal revenue forecasting model.
Why?
Catalogers are extremely sensitive to postage price increases because it immediately raises their breakeven and makes it necessary to reduce circulation. Mail volume will inevitably decline because catalogers monitor their breakeven cost very closely.
The USPS model said that revenue would increase because volume would remain stable in the face of a price increase. Volume declined.
What we cannot see from the critique is the negative impact of the postage increase. We know volume and revenue declined. What we do not know is whether USPS profitability declined with the decrease in volume. But we do know that its revenue declined by $1.6 billion. Catalog mail is very profitable for the USPS so a decline in revenue almost certainly translates into a decline in profits.
The Board of Governors should hold off on this upcoming postage increase until they can get a sound forecast of revenue and profitability with and without a price increase. The catalog industry has been saying that the postage increases cut both top-line revenue and bottom-line profit for the Post Office. The correct course of action is to skip the postage increase and watch what happens to top-line revenue and bottom-line profits in those categories of mail that are price sensitive.
Several United States Senators wrote the USPS Board of Governors asking for a rollback of the postage increases for “marketing mail” based on the poor economic outcome for both the USPS and for all the industries that use catalogs and direct mail to drive their businesses.
If the USPS Board of Governors doesn’t see the need to stop these semiannual price increases that are costing the USPS revenue and profits, it may be necessary to explore the economic impact of these price increases in a lawsuit. A lawsuit and immediate Congressional oversight may be needed to explore how and why the USPS developed such a faulty economic forecast to justify price increases.
Congressional oversight needs to explore how and why the USPS produced and used such a deeply flawed study to justify its biannual postage increases. And the USPS Board of Governors needs to immediately roll back its past price increases and stop the upcoming August increase.
Jim Coogan is the founder and president of Catalog Marketing Economics, a consulting firm focused on catalog circulation planning.
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