The United States Postal Service (USPS) remains a very strange “business,” at least in its economics. In the face of stagnant volume, new technologies that co-opt the need for much of its service, and large and growing fixed costs, the Postal Service’s response has been to propose postal rate increases that dwarf any cost-of-living measure. The first request for higher rates has already been presented to the Postal Rate Commission and the Commission has recommended a new rate schedule. The second request appears on the way. Small-business owners use all major classes of mail for business purposes and are a major USPS customer. As a result, they will be impacted by the proposed rate increases and their reactions will in turn impact the Postal Service. The questions are how much will they be impacted? And, how will they react? This issue of the National Small Business Poll focuses on Postal Rates and those two questions.
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Mail Classes and Rate Increases
There are five primary classes of mail service in the United States. First-class mail consists essentially of letters and post cards. Periodicals class, the old second-class, consists of periodicals and educational printed material. Typical of the class are weekly newspapers, magazines, newsletters and books. Saturation/standard class, also known as third-class or “junk” mail, is self-explanatory.
Priority and/or Express Mail is overnight or two-day delivery. Parcel Post or package service is as the name implies. Small business uses all five mail classes and the Postal Service intends to raise rates on all of them.
The average small business employing people other than the owner(s) currently spends about $338 per month with the Postal Service for all five classes of mail or somewhat over $4,000 per year (Q#11). The amount varies substantially by firm size with those having fewer than 10 employees spending about $239 per month and those employing 20 people or more just over $1,000 per month. Even within size classifications the amounts vary considerably. For example, 23 percent in the latter size class spend more than $1,000 per month while 17 percent spend less than $100. As a result, postal costs are not among the largest costs for most small businesses but they are an important cost for some and currently represent one of the most cost-effective ways for small-business owners to reach customers. Consistent rate increases could change that, however.
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a. First-Class Mail
The average small business spends a little over $200 per month in first-class postage (Q#6). Assuming an average of 30¢ per piece (including discounts), the typical small firm mails about 600 pieces first-class monthly. Not surprisingly the amount varies substantially by firm size with those having fewer than 10 employees spending just over $140 per month and those with 20 or more spending over $675. The distribution of expenditure, even within size classes, is wide. About 2 percent say that they spend nothing on first-class mail while almost 4 percent estimate their expenditures at more than $1,000 per month.
First-class mail rates will rise shortly. The new rate will be 37¢ for a letter, up from 34¢, and 23¢ for a post card, up from 21¢. The survey was conducted prior to establishment of these new rates. As a result, small-business owners reacted to a 40¢ letter and 24¢ post card. Faced with the larger proposed cost increase and a monopoly on delivery, 59 percent of small-business owners say that they will pay the rate increase and maintain their current volume of first-class mail (Q#6a). This group of owners therefore can expect their first-class postage costs to rise by 17-18 percent.
Those with the smallest monthly postal bills are the most likely to ignore rate increases and maintain volume. But once a firm spends $50 or more a month on first-class postage, nearly half feel that they must adjust their use of first-class mail or take other compensating actions.
Thirty-six (36) percent of small businessmen and women intend to adjust in a specific way; 5 percent do not know how they will respond. One in five or 20 percent say that they will simply reduce the volume of first-class mail. The amount that they expect to cut is non-trivial. The median anticipated volume reduction is over 25 percent (Q#6a1). The average is even higher as 20 percent say that they will cut volume by at least half.
Another 16 percent intend to shift to cheaper forms of mail. Some will move from first-class to third-class; others will go from letters to post cards. Thus while these owners may not reduce overall volume, they will offset the rate increases by using different and lower priced classes of mail. These shifts should be substantial. Of the 16 percent who plan to shift, almost three-quarters (73%) expect to shift a majority of their first-class mail to cheaper modes (Q#6a2).
While the shift presumably will diminish effectiveness of the communication for small-business people, it should not matter to the Postal Service as long as each mail class pays for itself. But if first-class effectively subsidizes others, then the shift acts as a volume cut for financial purposes.
One significant rate increase apparently is not enough. The Postal Service will request a second first-class rate increase even as the current increase is digesting. Small-business owners were therefore asked how they would react to rate increases of 10¢ a letter to 44¢ and 5¢ a post card to 26¢. These figures represented the first and second increases rolled into one. (Half of the sample was queried on the first increase and the other half was queried on the first and second increase combined.)
Owners reacted to the larger increase in a revealing manner. Fifty-nine (59) percent say that they will maintain volume and effectively pay the increase (Q#6b). That percentage is identical to the percentage who say that they will maintain volume with the smaller rate hike. Since a likely rate increase of almost 30 percent still finds three of five small-business owners not reactive, their demand for first-class mail service appears reasonable inelastic.
The number who plan to reduce volume rises to 23 percent, 3 percentage points higher than under the smaller rate increase. Further, the size of the projected volume cuts rise. Sixty-two (62) percent expect to reduce volume by 25 percent or more and 29 percent expect reductions to be 50 percent or more (Q#6b1). The former is 11 percentage points higher than with the smaller price increase and the latter is 9 percentage points higher. The percent shifting to cheaper forms of postage (10%) declines somewhat due to the greater number reducing volume altogether and the greater number who aren’t sure what they will do. This population appears to have a reasonably elastic demand for first-class mail service. A contrast in the mail content and purpose(s) of the inelastic and elastic groups would be fascinating, though the data do not allow it.
First-class increases will not be quite as large in aggregate as they will be on a per piece basis. Some small-business users reduce their mail costs through actions such as pre-sort that qualify them for a postage discount. Fifteen (15) percent, including 27 percent of those employing more than 20 people, currently take advantage of discounted rates (#6c). Owners spending more on postage are also more likely to say that they qualify for discounts. Still, less than one-quarter of small-business owners spending more than $200 a month on first-class postage get some type of rate reduction. While discounts therefore soften rate increases, the impact on the total population appears moderate at best.
Assessments of postal rate increases on small business postal volume is complicated by fax and e-mail. Even without rate increases, small-business owners are adopting these new technologies and substituting them for postal service. The question is the extent or degree of substitution. The survey attempted to provide data on the issue by posing the question, “During the past year have you increasingly substituted the use of fax and/or e-mail for postal service?”
An errant skip pattern in the questionnaire unfortunately excluded all but 185 respondents, and those are not necessarily random. Yet, the data likely are indicative. Of those who were asked, 70 percent answered that over the last year they had increasingly substituted fax and/or e-mail for postal service. While this substitution may only be a sidebar to questions regarding the impact of postal rate increases, it serves as a reminder that direct postal costs and service are not the only factors influencing use of the mail.
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b. Periodicals and Saturation Class Mail
Comparatively few small businesses use Periodicals or Saturation class mail. Only 6 percent report any expenditure for Periodicals class mail (Q#7). The infrequency of use means that there are too few cases to estimate the average monthly expenditure on this type of mail, let alone small employer reaction to projected increases. The same is essentially true for Saturation class, i.e., “junk” mail. Eight (8) percent say that they make expenditures on “junk” mail (Q#8) at an average of $620 per month in postage costs (Q#8a).
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c. Priority/Express Mail
Over half of all small businessmen and women say that they use Priority/Express Mail through the Post Office (Q#9). Most spend relatively modest amounts however. Thirty-one (31) percent of the population and over 60 percent of users pay less than $50 per month for Priority Mail services. Since several users consume significant amounts of the service, the average is $255 per month. Larger, small firms average about four times as much as smaller, small firms.
The Postal Service plans to raise Priority rates about 10 percent. (The amount the Commission finally recommended was 10 percent just as in the survey question.) Almost half (46%) say that the increase will have no affect on their use of the service (Q#9a). They will pay the new rate and maintain volume. That is 13 percentage points fewer than the number who will do nothing in response to a first-class rate increase, but then Priority Mail faces competition and first-class mail does not.
Without a Postal Service monopoly, 41 percent intend to change providers in response to a 10 percent increase in Priority Mail. That is a very large shift. Surprisingly, larger users, as measured by Priority Mail expenditures, are no more inclined to switch than are others. Non-price factors must then influence their decisions. The single most frequently cited reason (58%) for continuing to use the Postal Service’s Priority Mail service even with a rate increase is that the USPS offers more convenience (Q#9a1). The second most frequently cited reason (18%) is that the Postal Service will remain the cheapest way to go even after the rate hike. Few cite any other specific reason.
Comparatively few small-business owners (7%) say that they will reduce their volume of Priority Mail in response to the price increase. Since changing carriers is preferred over reducing volume by almost a 6-1 margin, most who use Priority Mail apparently feel that they use it only as necessary. The number who would pursue the volume reduction option is too small to estimate its size.
The Postal Service plans to increase the cost of Priority Mail even more later this year. The survey conservatively posed a 15 percent increase (10% initially and 5% later). The primary difference in response between the smaller and larger increases is more frequent volume cuts. The proportion that intend to reduce volume in response almost doubled, from 8 percent to 13 percent (Q#9b). Meanwhile, the groups that would do nothing in response and that would switch carriers each declined 3 percentage points. However, these latter differences are likely a statistical artifact given sample sizes, i.e., there is likely no difference between the two.
The reasons for not switching carriers following a 15 percent price increase are offered with similar frequency as they are with the 10 percent increase (Q#9b1). The survey data collected suggest that the planned rate increases will cut deeply into Priority Mail. The primary reason is the intended shift in service providers. But owner response assumes that competing carriers will attempt to increase market share rather than increase profits. Effectively, competitors will hold prices. If that assumption is wrong and competitors choose to raise rates too, it is not clear how small-business owners will react.
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d. Parcel Post
The last major class of postal service projecting rate increases is Parcel Post. About 40 percent of small-business owners have monthly Parcel Post expenditures (Q#10). The average monthly expenditure per firm having expenditures is $135. However, the pattern of expenditures is very unusual. Larger, small firms tend to spend somewhat less on the Postal Service’s package delivery service than smaller, small firms. Normally, the pattern is just the opposite as was seen with data on first-class and Priority Mail.
The likely explanation for these data is competition and volume. Those who have large package volumes probably use a competing service leaving those with an occasional package to patronize the Postal Service. The alternative explanation, i.e., smaller, small firms generate more packages than larger, small firms, does not make sense.
The proportion who will pay a 10 percent increase and maintain volume (48%) is similar to the proportion who will do so for Priority Mail (Q#10a). The 43 percent who say that they would switch services is also similar as is the 5 percent who would simply cut volume. In addition, the reasons provided for not switching from the USPS given the rate increase (and presumably no increase among competitors) appear in the same proportions for Parcel Post as they did for Priority Mail. “Offers the most convenience” (53%) and still “the cheapest way to go” (21%) remain the most frequently cited reasons (Q#10a1).
A 15 percent rate increase was also posed. The result is a much greater projected decline in the percentage who will do nothing than with a 10 percent increase. Thirty-seven (37) percent will maintain volume and pay a 15 percent increase, down 11 percentage points from the smaller increase. At the same time those intending switches rose 3 percentage points while those planning volume cuts rose 6 percentage points (Q#10b).
There are two possible reasons for the substantial differences in small-business owner projected behavior in the face of increases in Priority Mail and Parcel Post rates. The first is that there is something quite different in the competitive environment between the two. Rural areas are an example. The Postal Service might be relatively more attractive in Priority Mail due to its extensive, established infrastructure and the implicit time demands of the class.
For the same reasons, infrastructure and time frame, private carriers may have a cost advantage dealing with small firms in Parcel Post. The second possibility is that small sample sizes make small percentage differences difficult to interpret. Results are within the margin of error. In either case, substantial small-business patronage leaves the Postal Service.
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Alternatives to Rate Increases
The alternative to raising postal rates is becoming more efficient, i.e., to become more productive. The survey presented three general actions that might enhance postal efficiency and asked small-business owners to react to them. The first potential action is to eliminate Saturday mail delivery. Sixty-one (61) percent report that its elimination would have no impact on their businesses (Q#1); 24 percent say that it would have a “small” negative impact, but another 14 percent say the negative impact would be “large.”
The most frequent reason for negative impacts is the loss of a day on check deposits (31%) (Q#1a). Without Saturday delivery, checks will not be received until Monday. If checks are received on Monday, it may be too late to deposit them and have them recorded on that day. The result is a minor amount of interest lost, but more important is a delay in access to funds. Checks may be held by the financial institution for another day. The loss of a day therefore impacts cash flow.
The second most likely negative impact (18%) is that owners receive the information contained in the mail one day later. Decisions or other action based on the information received are thereby delayed a day. That may or may not be important depending on the information and the circumstances.
The impact most likely to be serious, if it impacts a firm at all, is that the owner can’t work on the mail (14%). For example, he won’t be able to fill orders. That means the business is down for a day when it otherwise might be working. Another 6 percent say that they would lose Monday as a workday which is a variant of the former concern. The implicit assumption in most of these responses is that the mail will arrive fairly late in the day on Monday.
A second potential way to become more productive is to reduce the number of Post Offices in operation. About half of all small businesses operate within a mile of the closest postal facility (Q#4). Over 90 percent operate within five miles. While a reduction in postal facilities would never be quite as mechanical, the survey asked small employers about the impact of eliminating their nearest Post Office. Thirty-two (32) percent report that such a step would have no impact and another 43 percent report it would have only a minor (negative) impact (Q#5). One of four (25%) say that it would have a serious negative affect.
Those closer to a Post Office seem more concerned over its hypothetical closing than those farther away. Perhaps the Post Office influenced their location decision in the first place because the most frequently offered reason for the negative impact (68%) is that it would take longer to get there (Q#5a). The second most frequently cited reason given for a negative impact is that there is no other convenient place to mail parcels, buy stamps, etc. (14%). However, the two are likely corollaries and could be overcome by private, specialty firms such as Mail Boxes, Etc. moving to the vacated area or the sale of stamps in grocery stores or similar outlets. Five (5) percent fear the loss of a postal box, but less than 1 percent worry about local identity. Eleven (11) percent offer other reasons. More detailed inquiry is necessary to determine the precise nature of these negative impacts.
It now costs postal customers as much to send first-class mail to the neighbor next door as it does to send it to the most distant places in the United States. But, the cost to the Post Office to deliver that mail is substantially different. One way to become more efficient is to have postal rates more closely reflect the “cost of service” on a geographic basis. This can be done by charging lower rates closer to the mailer and higher rates farther away as is now done with packages. To keep the inquiry simple, small-business owners were asked if it would save them money or cost them money if they were charged a lower rate within their zip code and a higher rate outside their zip code on all mail sent; the exact rates were not specified. Twenty-four (24) percent believe that they could save money under such a system while 54 percent think that they would lose money (Q#2). Seventeen (17) percent volunteer that it would not make any difference. Even if small businessmen and women were sympathetic to the general concept, they see it as a cost increase.
A tiered pricing system could become administratively complex with multiple rates and multiple zones. However, even a two-tier system based on one’s own zip code adds an extra administrative dimension to postal rates. The survey asked small business owners if a two-tier system with one lower rate in your zip code and a higher rate elsewhere would create administrative hassles. Twenty-nine (29) percent say that it would not and 47 percent say that hassles would be “minor” (Q#3). Twenty-three (23) percent disagree. They feel that even this relatively modest step would create “major” administrative hassles for them. The more first-class mail sent, the more likely the owner is to feel that even a two-tier system would create a major hassle.
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There appear to be two groups of small-business owners when it comes to use of the United States Postal Service. The first find the USPS service inelastic. These small businessmen and women feel they have a specified volume of mail that must be sent regardless of cost (within reason). Accessibility to competitors influences their decisions to use the Post Office. Without direct competition as in first-class, 60 percent feel that they have no choice but to maintain mail volume and pay the projected higher rates. Add competition such as in Priority Mail or Parcel Post and the proportion who feel bound to pay whatever the Postal Service demands falls 10 to 15 percentage points or about 20-25 percent. Even then, 10-15 percent of small-business owners who will ignore projected price increases and continue to mail at the old level do so because the USPS is the only viable option. Apparently, there are no competitors in the area.
The second group of small-business owners is different. It has a highly elastic demand for the USPS’s service, though not necessarily for mail service per se. Where there is competition, i.e., Priority Mail and Parcel Post, about 45 percent would choose to switch given the Postal Service’s projected increases. Comparatively few believe that they would cut volume. Where there is no competition, i.e., first-class, one in five would cut volume and usually by a notable amount. The remainder would switch mail classes which effectively cuts volume for the business but does not affect the Postal Service’s volume and theoretically its ability to break-even.
The real change in the distribution of small-business communication methods may still lie in the future. It appears that fax and e-mail constitute an increasing proportion of volume even though just half of small businesses currently use e-mail. There is little doubt that the proportion of e-mail users will grow though it is not clear whether the new technology will result in an absolute decline in the number of pieces mailed per firm or a slow-down in the increase. The data here hint the former is more likely. The United States Postal Service submitted a massive Transformation Plan to Congress in early April. The plan’s purpose was to lay out the USPS’s version of the steps that must be taken, near-term and long-range, to transform the organization into a commercially and financially viable entity. It is obvious that the Postal Service cannot continue on its present course. Whether or not the ideas in the Transformation Plan will result in the desired outcomes for the Postal Service let alone other impacted groups is a subject for debate. Small business is a group that will demand to be part of the debate, and it will want options other than routine large postal rate increases.
Available options and desired actions are different matters, of course. When presented three separate options for enhancing USPS productivity in the survey, small-business owners blinked. About one-quarter felt that each possible productivity enhancing measure examined has serious negative impacts. Translated into actual proposals, it is questionable that any of the three would generate small-business support even though the overwhelming majority see no impact or a minor negative one. As others, small businessmen and women are not likely to be enamored with anything that is perceived as reducing service unless they see them not in isolation, but in the context of alternatives.