In MediaPost Blogs, Steve Smith criticizes the Postal Service’s 2D Bar codeP promotion as being too restrictive to fully allow advertisers to integrate mail with mobile media. He’s right. The promotion does discourage “the use of the mail for the full slate of mobile marketing practices.”
What frustrates, Mr. Smith is that the restrictions effectively reduce the value of the Postal Service as a media platform that will complement other modes of communications.
What gives? I am sure there is a logic of some kind here. Perhaps the USPS does not want to make the mail merely another media platform? But any mailing can also hold any number of call-outs and offers on the outside of the envelope. The mail is already a media platform. Or perhaps the USPS is reserving these other models for future programs. Or is this another instance of the USPS not being able to help itself from going only halfway into the 21st century?
Restrictions Reflect the Influence of 40 Years of Regulatory Pricing Precedent
The restrictions that Mr. Smith objects to reflect the problem the Postal Service has trying to justify variable pricing within a regulatory system not designed to regulate prices that are uniform across customers or time. While Postal Service management deserves some of the blame, the real problem is requiring the Postal Service to be the only advertising media platform that has prices subject to price regulation.
The current regulatory structure was created when the communications market had limited advertising modes available. Back in 1970, advertisers primarily had access to over-the-air VHF and UHF television stations, AM radio, Newspapers, magazines, direct mail, and a relatively new media platform FM radio.
The regulated rate setting process that began with the creation of the Postal Rate Commission set rate levels for “rate classes and sub-classes” or broad groups of heterogeneous customers by measuring attributable (long-run marginal) for the class or subclass of mail roughly once every three years. To meet this regulatory need, the Postal Service created and the Postal Rate Commission accepted a cost measurement that could only measure costs reasonably accurately for these heterogeneous groups of customers on an annual basis.
Over the years, the Postal Service created new products through various preparation and drop-shipment discounts. The Postal Service set prices for these new products primarily by determining the measured cost avoided. The goal of this process was to ensure that the regulated “discounts” were economically efficient. The economic theory behind this pricing approach represented the current thinking among regulatory economists as to how to allow a monopolist to offer and price a more differentiated set of services.
Work Sharing Differentiated Customers With Different Demand Characteristics But Pricing Mostly Ignored the Impact of Differentiation
The proliferation of new products defined by rate-sharing effectively divided Postal Service customers into more homogenous groups of customers than existed in the entire class or sub-class within which the new work-sharing option affected. However, neither the Postal Service nor the Postal Rate Commission made any significant effort to add measures of the differences in price sensitivity between customers that used related non-work-shared and work-shared products or between different but related work-shared products.
By primarily relying on economic theory that required special studies that measured cost differences to set prices for distinct groups of customers and ignoring demand-related factors, the postal regulatory price setting process delayed the development of new costing and demand assessment measures are clearly needed to price postal services at a significantly more finite level than anyone involved in setting up the current process could have imagined in the first two decades of rate regulation when the theoretical basis for this approach was set.
PAEA Allowed Regulatory Shackles (Precedents) to Retain Their Power
The Postal Accountability and Enhancement Act (PAEA) changed the process of setting rates for mail and encouraged the Postal Service to develop more innovating approaches to set prices. However, the PAEA created a number of regulatory requirements, and retained a number of rate review processes that retained the use of Postal Rate Commission precedents that effectively calcified the thinking of the Postal Service and the Postal Regulatory Commission as to what “innovative rates” can and should be proposed and how those “innovative rates” should be evaluated.
A Better Regulatory Change Strategy Was Used in the Freight Railroad and Trucking Industries
The failure of the PAEA to engender a major rethinking about postal costing and pricing contrasts with what happened to thinking about railroad and trucking costing and pricing by railroads, trucking firms, the Interstate Commerce Commission and its successor the Surface Transportation Board following deregulation of these industries.
The failure is somewhat surprising given that the economic thinking behind postal costing and pricing was developed in testimony filed before the Interstate Commerce in the first set of efforts to loosen rail rate regulation and then abandoned as companies and regulators recognized that all or nearly all rates could be market based and all trucking services rates and a significant proportion of rail traffic abandoned regulated rates and employed contract rates, including traffic for which a railroad may face little competition from either other railroads or alternative transportation modes.
If the PAEA had forced a rethinking of postal costing and pricing in line with what occurred in other transportation modes, then the Postal Service would have had a major barrier removed that has prevented it from implementing costing systems and demand-based pricing approaches that reflect how freight transportation prices are set today. Such a change would have eliminated the need to present convoluted product designs and pricing proposals that reflects the need to follow regulatory precedent even if it means the proposal are less effective in meeting market needs.
Rational Pricing Requires Abandoning Current Legal Framework for Justifying Postal Prices
Offering a discount for mail shipped this November makes solid economic sense for the Postal Service as the period of the 2D promotion comes in between what will likely two record setting periods delivering election related mail in October and parcels in December. By offering a promotion during a short period when demand is expected to be lower, the Postal Service should be able to improve its overall productivity over the three month period and reduce the challenge of hiring seasonal staff that may be needed for October and December.
The Postal Service’s justification for the 2D bar-code discount illustrates a kind of convoluted thinking that is required to show that a discount meets legal pricing criteria. In particular the presentation to the Postal Regulatory Commission illustrated a dissonance between the need to offer a rational pricing structure that varies rates by season and a legal pricing framework that assumes that rates should stay constant for a full twelve months. The justification raises question as to how a price cap should apply when rational pricing would have prices vary from month to month.
The regulatory process also plays a part in the nature of the restrictions that the Postal Service imposed on when a mail piece with a 2-D mobile bar-code gets a discount and when it does not. The restrictions focus the discount on uses of a 2-D mobile bar code on uses that could potentially result in a parcel delivery. This restriction provides the Postal Service with some protection from those that might argue that all the Postal Service was doing was offering a seasonal discount. The restriction holds out the possibility, real or imagined that the discount could somehow lead to more parcel volumes, revenues and profits.
If the Postal Service had removed the restrictions on the advertising purpose of the 2-D mobile bar-code, it would have lost some of the regulatory protections it needed to offer the discount. However without the restriction, the Postal Service could continue to raise awareness of the potential economic impact of integrating mail with advertising on mobile devices. In particular, the restrictions prevent the Postal Service from using a temporary price adjustment to reinforce the idea that mail is an inexpensive way to drive a customer to a mobile device to buy services as well as products, turn potential contributors to non-profits to donate, and affect the speed the early stages of a sales cycle during which increasing brand recognition or providing product information will lead to a sale weeks or months later.
An effort by the Postal Service to reinforce a message about the importance of mail to marketers whose focus is social and mobile media advertisers would be timely as marketers remain uncertain regarding how to make mobile advertising effective while they are pressured to keep up with the times and spend more heavily on these new advertising platforms. Eliminating the content restrictions would have been a cheap way of teaching this lesson to a broader range of advertisers at a time when advertisers were most receptive to the message. Relaxing legal constraints on postal pricing would go a long way to allow this to happen.
Restrictions On The Use of Discount
The Postal Service’s 2012 Mobile Commerce and Personalization Promotion Program Requirements states that ineligible Mobile Barcode Uses (include but are not limited to)
- Register for event/seminar/class
- Make payment online for prior purchases or recurring services
- Sign up for email list, text messages or mailing list
- Sign up for online billing or paperless statement services
- Download a deal or coupon
- Enter a contest or sweepstakes
- Sign up for an newsletter (electronic or hard copy)
- Proxy stock vote
- Take a survey
- Confirm a reservation (like doctor or haircut appointment)
- Any link to a non-mobile optimized site
- Download and or receive text information such as directions/contact info
- Link to sign-in page for online account
- Link to webpage with information
- ”Like” or “share” on social network site