How Does the Postal Service Change Rates?
By Paul Johnson, President CMS – Complete Mailing Solutions
“Why doesn’t the USPS just implement a larger rate increase and get it over with?”
How many times have you or someone you know said this about postal rates for office postage meters and stamps? Postal rate increases (and the rare decrease) are often so small and frequent that it doesn’t seem worth it. People often wonder if the costs of implementing a one or two cent increase outweigh the resulting revenue increase. Yet nearly every year (with some exceptions) we see rates go up a penny or two.
What most people don’t know is that the USPS is severely constrained by laws and regulations including the Postal Accountability Enhancement Act (PAEA). Many also don’t realize that the USPS is not a department of the US government. In other words, it isn’t organized under any of the executive cabinet departments. It was reorganized in 1971 under the PAEA, to be an independent establishment of the executive branch of our government. As such, it has neither government funding nor the freedom to set its rates and policies in the ways that a free-market, for-profit corporation does. Considering these and other factors outside the purview of this post, they’re placed in a situation in which it’s quite difficult to succeed.
Interesting facts about the USPS
- The USPS is not tax funded, but is an independent establishment of the federal government. Revenue is earned exclusively from product sales. Learn more here.
- $71.5 billion in revenue for 2016 would put it in the top 40 Fortune 500 companies if it were independent.
- The Postal Service is the 2nd oldest federal department or agency. See the history of the USPS
The USPS is governed by the Postal Rate Commission (PRC) and, therefore, can’t make independent decisions about what rates should be (more on this in a future blog). So that begs the question…
How are rates determined?
The Postal Service operates two lines of business: one for “market dominant” products (First-Class Mail, Standard Mail, Media Mail, etc.) and one for “competitive products” (e.g., Priority Mail, Express Mail and First-Class Package Service). Each line has its own regulations and pricing rules that are administered by the PRC. While rate adjustments are a fairly in-depth topic, a key factor in determining rates for market dominant services (which account for 74% of USPS annual revenue) is the Consumer Price Index (CPI). When the CPI goes up, rates can be increased; however, when the CPI drops, postal rates must be lowered. Because they are constrained by the CPI, the USPS can’t respond to competitive pressures such as rate changes by UPS or FEDEX, who can increase their pricing at will.