by Hallie Mummert at Target Marketing Magazine

The love/hate relationship marketers have with the U.S. Postal Service recently swung mightily toward hate, bordering on war of the legal kind. Last Tuesday, the agency filed with the Postal Rate Commission a proposal for rate hikes that greatly surpass the consumer price index cap imposed by the Postal Accountability and Enhancement Act of 2006. In its defense, the Postal Service claims to be facing exigent conditions, for which the Act allows the ceiling to be temporarily suspended. But the Affordable Mail Alliance, among other parties, challenges this assertion.

The Affordable Mail Alliance is a coalition of small and large marketers that use the direct mail channel for business, plus the trade associations that represent their interests, and its ranks have surged from 13 to 500 members in just two weeks, say Jerry Cerasale , the Direct Marketing Association’s (DMA) senior vice president, government affairs and a spokesperson for the Alliance.

Cerasale, who’s been close to all the postal reform action in the Capitol over the years, shared with Target Marketing his ground-level view on just how disastrous this proposed rate case could be for both the mailing community and the USPS.

Target Marketing: Why is the filing of this exigent rate case not the solution to the USPS’ economic problem?
Jerry Cerasale: We’ll leave aside the legal issue—let’s just look at it first of all on the economic side. The Postal Service is losing volume. Volume is dropping and the solution for them is to raise rates, which will cause volumes to drop even more. And that will start what we think is a death spiral.

What will happen, this increase—which on average is 5.6 percent, but you have to understand that it’s 10 times … inflation—will force all mailers to look for other channels to try and reach customers or potential customers. And once that happens … if I’m a cataloger and I get a new customer through the Internet; or I’m a magazine [publisher] and someone decides to use their Kindle or iPad to purchase a magazine [subscription] online as opposed to through the mail; or if I’m a credit card company and instead of mailing an invoice I give incentives to people to get the invoice by e-mail … all of those things, once they happen, that mail will never come back.

And that’s where the Postal Service is right now. They’re pushing the envelope here and forcing [the DMA and Affordable Mail Alliance] collective members to look elsewhere. And I think that doesn’t make smart economic sense.

In addition, in the last quarter Standard Mail just started to grow over the year before; it had a 1 percent growth rate in mail volume. So here you had a sprout of new volume, and what [is the Postal Service] doing? They’re coming in and smashing [mailers] with an increase that’s 10 times the inflation rate. It just doesn’t make any economic sense.

Now I can go a little bit toward the legal [side of the rate case] … We view “extraordinary or exceptional circumstances” as being 9/11, [Hurricane] Katrina, the anthrax issues. Not something like diversion of mail to electronic communication; that’s been going on for years, and it’s been expected. Recessions are part of our economy, and all of the Postal Service’s customers are in the same recession. They’re not raising their rates; they’re trying to grow business [without doing that].

So we think the Postal Service should look elsewhere before coming to customers first … Last year, the inflation rate for postal costs was 6 percent … whereas the CPI went down .03 of a percent. That’s where the Postal Service should be looking [for funds]. That growth in cost in their operations (which they are now just pushing over to customers) and the drop in postal productivity, those are areas the Postal Service should be focusing on first rather than taking the easy way to try and bust the CPI cap-and I mean really bust it, from .06 of a percent to 5.6 percent.

TM: Does the Postal Accountability and Enhancement Act that passed in 2006 give the USPS enough latitude to address its business challenges?
JC: I think it does. They haven’t tried enough to even show whether they need more—which, if they did, mailers … would get behind them.

They still look, for example at, say, the Jerry Cerasale Company, and say, “OK you send out parcels, so you’re a parcel mailer. And you send out advertisements, you’re a Standard mailer. And you send out bills, so you’re a First Class mailer.” They treat me as three different silos, instead of looking at the customer and all the uses of the Postal Service to work with that customer to create some kind of program and services the customer needs. They haven’t done that. … They’re the same Postal Service that they were three years ago. They have a few less employees, but they are still the same Postal Service that can deliver 300 billion pieces of mail a year when we only need a Postal Service that can deliver 170 billion pieces.

TM: Reports indicate the USPS likely has overpaid its Civil Service Retirement System contributions to the tune of about $50 billion. Could this money be the solution or will only a fundamental business change lead to viability?
JC: I think they need a fundamental business change. But I would not tell them not to look for an overpayment. Remember, if there’s an overpayment to the Civil Service Retirement System, it was an overpayment by the mailers because they were paying all the bills.

[The USPS] should look at and push that [issue]. And DMA will be working to try and get that money shifted to the retiree health benefits [fund], therefore saving some immediate cash for the USPS. That will help them in the mid-term—at least give them time to change the business model. … The mailers can’t afford to keep up the model the way it is now.

TM: The USPS projects it will raise $2.3 billion in the first year with this rate case. Is it adjusting for the drop-off in volume that raising postal rates in this economy will effect?
JC: I think it has some adjustment in it, but they’re using historical elasticity model—trying to say: “If you raise the price 10 percent, what’s the effect going to be on volume?” I think the recession, electronic commerce becoming more mature and non-baby boomers coming more into the marketplace who are at ease using electronic channels [are major environmental shifts] … so we believe the elasticity models are probably too old and don’t reflect the new reality.

And it’s interesting to note that this $2.3 billion, when you project losing $7 billion [annually], is still about $5 billion short. So, it makes you wonder a little bit about that.

TM: What prompted the formation of the Affordable Mail Alliance?
JC: This rate case. It had its beginning with some of the big mailing associations getting together and talking about the fact that we expected the Postal Service to file for a rate increase that would break the Consumer Price Index cap and what should we do on that-whether it was an exigent case, did it meet the standards for [being] extraordinary or exceptional? Our belief was, and we’ve learned, that mailers speaking unitedly are stronger than if we all go off in our own different ways …

It’s really a unique event for me, with virtually the entire postal customer universe joined together saying this case is not good, this is a mistake.

TM: So small mailers are getting involved in protesting this rate case?
JC: Yes. Some of the small mailers actually may be the ones who may be harmed the most by these increases; their margins are close, they have very little reserves. And we’ve heard from not just DMA members, but members of other associations that this could be a death knell for their operations.

TM: Is there an unintended message being sent in this exigent rate case that marketers will always have to wonder whether they can trust the USPS?
JC: I think that’s true. This really hurts the Postal Service’s customers, and their customers are very angry with them—more so than at any time I’ve seen, as a collective group. And this is going to have negative implications for the customer relationship management the Postal Service wants.

One of the [compromises of postal reform] was the CPI cap. There was some prediction of rates, and this just blows that out of the water.