Postal Issues — Rate Case Pushes Forward

THE GOOD news, bad news scenario has struck the commercial printing industry, as well as the mailing community. The first bit of news should help serve as some consolation to the latter.

Unless you’ve spent the last month on holiday in Copenhagen, you’re well aware that the Postal Accountability and Enhancement Act was miraculously salvaged by Congress in the closing minutes of the 109th session, a.k.a the lame duck, (see story on page 5). On December 20, H.R. 6407 was pushed through by President Bush, giving the green light to legislation aimed at modernizing the United States Postal Service’s (USPS) business practices.

The ramifications are huge. While details of the legislation are still coming to light, the main thrust is that the degree of future increases will be tied into the Consumer Price Index (CPI), except under extra-ordinary circumstances. Keeping increases in line with inflation is a major bonus to direct mailers in scheduling future campaigns.

Like a scene out of an action movie, where the evil foe is vanquished, but a bomb is still set to detonate in two minutes, there doesn’t seem to be any stopping this year’s rate case currently before the Postal Rate Commission (PRC). A decision was scheduled for March, with likely implementation in May. Some have already speculated that implementation could be delayed.

“My thought is that since this legislation could give the USPS some financial relief going forward, it may consider granting a longer period of time between the Board of Governors’ approval of the PRC recommendations and the date the rates are implemented,” pondered Joe Schick, director of postal affairs for Quad/Graphics, on the Sussex, WI-based company’s Website. “Mailers have been asking for at least 60 days and as much as 90 days to make software and process changes, but…it could be as little as 30 to 45 days.”

Schick cautioned that his views are based on the initial overview of the legislation. Indeed, the fate of the coming rate increase is not etched in stone.

In the short term, the euphoria over reform passage—which includes the retooling of the ridiculously litigious rate case filing process—should somewhat mitigate the sting of the coming increase, which is 8.5 percent for standard mail and 11.4 percent for periodicals. But mailers also have to reconcile the boost, and what it means from the production, distribution and volume standpoints.

Finding cost savings in areas of production won’t be easy. Ben Lamm, director of direct mail supplier management for financial services provider Capital One, notes that his company is already an efficient mailer and will have difficulty wringing more value out of its marketing spend.

“Mail is such a core part of our business that a postage rate increase will have a significant impact on our strategy and could potentially lead to decreases in our mail volume,” Lamm says. “An increase in postage does not mean an increase in marketing budgets, so we will have to work on even greater efficiencies. This will mean rethinking our package designs, working with our partners/suppliers on processes and developing further enhancements to our address quality efforts.”

Seeking Alternatives

Two consecutive years of increases prompted Mutual of Omaha to take a hard look at its business model, as well. According to Tom Graham, senior vice president of marketing, the company had set into motion ways to minimize its dependence on the USPS, including using online billing.

For a company that mails more than 200 million pieces, the threat of an 8.5 percent raise thrust Mutual of Omaha toward more marketing innovations.

“We have built a sophisticated production engine here that rigorously interrogates pricing and margin impacts at each step in the supply chain,” Graham says. “We have responded to these (rate) increases, which will amount to several multiples of the inflation rate, by putting additional pressure on our supply chain and by applying even tighter modeling to our marketing efforts. This translates into setting the bar higher and higher for financial returns on each dollar invested.”

Mutual of Omaha’s game plan for 2007 includes pricing compression for suppliers, a turnover of certain suppliers and ongoing efforts to move away from oversized pieces into standard letter rate packages. Interestingly, the company is making a concerted effort to reduce its reliance on the direct mail channel, opting instead for insert marketing, television and lead generation programs.

In a sense, even with reform, Mutual of Omaha is looking at a future that doesn’t include the mailstream as a cornerstone of its marketing efforts.

“As we figure out how to switch away from the mail, I don’t see us coming back to it just because the rate of increase will become more predictable,” Graham says. “It’s unlikely that, at some point, we’ll be completely priced out of the market. Long before that happens, we can pull the targeting levers and simply increase the minimum return rates we need to offset the higher cost structure. If we got to that point, we’d really be talking about a smaller business than we have today.”

Perhaps even harder hit is the magazine publishing industry, which cannot opt for other distribution channels for its printed editions. Time Inc. will absorb a $43 million hit across all classes of mail, according to Barry Meinerth, senior vice president of production and fulfillment.

“There’s no way you can offset that sort of impact on your bottom line,” Meinerth remarks. “We have aggressively looked at changing trim sizes, where possible. We’ve gotten to where we’re running most of our magazines on 30-lb. or 38-lb. paper. We’ve even got a few running on 28-lb. So we’re lightening magazines as much as possible to offset the postal hike.”

Meinerth points out that rising postal costs are just one of several pressures on the magazine publishing circle; decreasing advertising is perhaps the biggest monster. The retail marketplace has become increasingly difficult, as well.

“You’d be hard pressed to launch a magazine in the environment with suspect advertising revenues, a difficult circulation picture and rising physical costs,” he says.

Val Scansaroli, a production consultant to the publishing industry, believes that while publishers can shave dollars with lighter grades and reduced trim sizes, the best sources for gaining efficiencies (and recouping revenues) lie in co-mailing and co-palletization opportunities. Selective binding for multi-edition titles can help publishers to maximize work sharing incentives.

Direct mail printers are also closely monitoring the habits of their clients and the choices they make to reconcile the burden of postal increases. Jim Andersen, president and CEO of IWCO Direct in Chanhassen, MN, notes that clients have been focusing their efforts on postal optimization and streamlining packages without reducing effectiveness.

On the latter count, for example, packages may include fewer inserts and combination inserts, and envelopes could be printed flexo vs. offset. However, changing the makeup of a mailing campaign takes time, Andersen cautions, as marketers want to test the changes.

“Volume is the easy trigger to pull to compensate for a rate increase, but most marketers rely on the mail to generate interest, response and purchasing activity,” he notes. “Reducing volume can hurt sales and must be done carefully—which volume is reduced?”

Andersen feels the direct mail printing industry has an obligation to itself and its clients to be postal experts and guide the development of cost-efficient formats for response-driven campaigns. Among the tactics printers can employ:

• Suggest more efficient run and trim sizes, and optimal weights.

• Ensure that mailings qualify for automation discounts.

• Understand the new rules about shapes (letters, flats, parcels) to ensure the mailing is sized/packaged for most efficient postal handling.

• Provide access to co-mingling services.

• Use high-quality addresses that are updated on a just-in-time basis to avoid wasting postage on undeliverable (UAA) mail.

“Higher postage costs mean mailings have to be targeted more effectively to provide consistent ROI,” Andersen says. “Effective use of personalization leads to higher response rates. Whether that personalization is black on a preprinted shell or full variable data printing depends a lot on volumes.”

Whether it’s via finding new production efficiencies, reducing volume or finding other channels, marketers invariably re-evaluate their prospecting methodology when increases are implemented, notes Dave Colatriano, senior vice president and general manager of direct marketing for Baltimore-based Vertis Communications. The result is a raised threshold level for attractive prospects, while those less attractive—for example, unresponsive in the past 12 months—are eliminated from the data lists.

This rate case throws an incentive bone to those marketers who switch from parcel mail to flat mail and from flat packages to letter-sized envelopes, according to Colatriano. “Since we’ve had advance notice of the possible postage increases, Vertis Communications has begun working with many clients to develop more efficient-sized packages,” he says. “In addition, direct marketers are looking to partner with suppliers that can provide sophisticated mail planning and logistics strategies to get the biggest USPS discounts.”

Colatriano notes that with the advancements in production technologies and intelligent data solutions, multi-channel marketing programs are now more affordable.

Since the turn of the millennium, Vertis Communications has implemented a diverse core of advertising solutions across multiple platforms to augment client programs, from direct mail to e-mail, personalized URLs (PURLs), door hangers, billboards, newspapers, magazines and broadcast media. Refining processes is an ongoing quest for the printer, which can’t control postal rates, but can help control the quality—and ultimately, the success rate—of a mailing campaign.

“Our goal is to help customers fully utilize postal and rate structure alternatives; thus logistics planning and strategies will be a focal point for Vertis Communications,” Colatriano adds. “We will provide a means for our clients to use the USPS 4 State barcode system to effectively track products through the mail system, allowing back-end efficiencies. And we will employ our data processing resources to ensure list efficiency.” PI