How Postal Rates Are Set

Why do postal rates differ?

It’s a fair question and here’s the answer: Imagine that you go to a bicycle shop. You can buy an assembled bicycle for $100 or you can buy the very same bicycle unassembled for $75. In other words, if you do some of the work the store has a lower cost and you pay less.

Postal rates work the same way. You can drop a letter into a corner mailbox with a handwritten address and no ZIP code. The Postal Service must send out a truck to pick up the letter, read the address, and add the ZIP code. Indeed, the Postal Service must send out a truck whether or not there’s any mail in the box.

But the Postal Service can reduce costs if the letter has a machine readable address that can be scanned automatically. The Postal Service can cut expenses if that address is required to have up-to-date delivery information including a special bar code. The Postal Service can save still more time and money if the letters are facing in one direction for easy processing and arranged in ZIP+4 order.

The Postal Service can save again when letters are bundled in specially-coded bags or ordered sequentially in “flats” to speed processing. Lastly, the Postal Service can also save money because it does not need to send a truck to a corner mailbox — to qualify for lower rates mailers must take their mail to a limited number of special postal facilities, not just neighborhood post offices.

Just like the bicycle shop, the Postal Service charges less when users do more of the work.

What would happen to stamp prices if we got rid of advertising mail?

Without advertising mail, stamp prices will soar. Here’s why:

The Postal Service delivers more than 212 billion pieces of mail each year to more than 148 million delivery points. A huge system must be in place to perform this work, a vast network that requires post offices, facilities, vehicles, and more than 765,000 employees.

If postal volume declines, costs will remain largely the same. For instance, if a home gets four pieces of mail instead of five each day, the Postal Service must still maintain its network of offices, facilities, vehicles and people. In other words, the Postal Service has fixed costs which are always in place.

The result is that if postal volume falls, costs must be divided among fewer pieces of mail, so each piece of mail must cost more.

Think of a pizza that sells for $10. If it’s divided into 12 slices, the cost per slice is 83 cents. If we take the same pizza and cut it into 8 splices, the cost is $1.25 per slice. Same pizza, but a higher cost per slice when there are fewer slices. The concept is the same with the mail.

But wait a minute. Isn’t the Postal Service subsidized with tax dollars?

No. The Postal Service has not received an operating subsidy since 1983 — at least 25 years ago. The Postal Service did receive one-time public funding to help with clean-up efforts after the 2001 anthrax attacks, special-purpose funding universally supported in response to acts of terrorism and murder.

How are stamp prices set?

In 1971 the Post Office Department, then a part of the cabinet, was converted into the Postal Service, a governmental agency. At the same time, a new entity, the Postal Rate Commission (PRC), was established. A new process to establish rates was also created, a process which typically required ten months of hearings, testimony and debate before the price of a stamp could be changed.

After reviewing testimony, research and reports from a wide range of sources, the PRC could accept a rate change from the Postal Service, modify it or deny it. The Board of Governors of the United States Postal Service then had the right to accept the PRC decision or to implement a rate increase. And, of course, no matter who decided what, the entire matter could be appealed to a court for further debate.

Over the years it became apparent that the rate-making system set-up in 1971 did not work in the Internet era. While competitors could change pricing overnight or offer a new service at anytime, the Postal Service could not. At the same time, the need for an efficient postal system continued to grow as additional delivery points were added each year and volume increased.

In December 2006, the Postal Accountability and Enhancement Act was passed by the Congress and with a new law the rate system changed radically.

What happened? In basic terms, the system now works like this:

• The Postal Service can now set its own rates, however the new rates cannot exceed the rate of inflation and rates may be not be set for the purpose of earning a profit. Instead, the Postal Service may only charge enough to more-or-less break even.
• The public and the Postal Rate Commission — now called the Postal Regulatory Commission — have 45 days to comment before any proposed rate changes go into effect.
• The PRC has the authority to assure that no class of mail subsidizes another. In other words, the prices of First Class mail cannot be raised so that those who send parcels through the postal system pay less — and vice versa. There are elaborate economic models used to determine the costs for each type of mail.
• The Postal Service can conduct market tests of experimental products, typically for not more than 24 months.

Why go through so much hassle just to change the price of a stamp?

Because the mailstream is a basic pillar of the U.S. economy.

“The Postal Service,” says the Washington Post, “has about 738,000 employees, relies on revenue from operations rather than taxpayer funding and is one of few federal bureaucracies with which most Americans have regular contact. It is at the center of a $900 billion mailing industry, which employs 9 million people in such businesses as direct mail, paper manufacturers and printers.” (See: Postal Services Finances Bleak, March 23, 2004)

Over the years the process of changing the price of stamps has been costly, time-consuming, complex and combative. But by at least one measure the system worked very well: Today the U.S. has the most successful postal system in the world — more than 45 percent of all mail worldwide goes through the U.S. Postal Service.

Resources:

• Landmarks In Postal History
• How Mail Order Changed America’s Shopping Habits
• History of Postcard Rates
• History of First-Class Stamp Rates

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