Links to the resources mentioned in the podcast.
OIG White paper: Advertising Mail: Mail Mix Matters
2018 Annual Compliance Report
Chris: Hi, this is Chris Lien
Anita: And I'm Anita Pursley. Welcome to Industry Corner, a podcast where we share postal industry news to help you stay informed.
Chris: On today's podcast we discuss the annual compliance determination, USPS final decision on marketing mail content and a recent OIG white paper on mail mix and recipient reactions. So let's get into it. Welcome to the podcast. Hi Anita.
Anita: Good Morning Chris, how are you? I am well, good morning to you too.
Chris: It's warming up here in Rochester. I'm starting to see some signs of spring and in fact we have a festival that occurs here in Rochester called the Lilac Festival and it's a really neat event and so I'm looking forward to that this year, but spring is definitely in the air and it's just a great time of year with so much activity and of course there's no shortage of that here in the mailing industry. Is there?
Anita: No, not at all. Since you mentioned the Lilac Festival since I grew up in Michigan in the upper peninsula. Boy, that was my favorite flower, just the most fragrant, isn't it? Just incredible.
Chris: They really do a great festival here in Rochester and it's just a wonderful city. So…
Anita: I wish they could grow in Georgia. Okay. Let's get to it.
Chris: All right. So I think the first thing we're going to talk about today is the annual compliance determination for 2018, right. That that ACD report that the postal service puts out and postal regulatory commission, uh, responds, or is it, or is it, I did I have that backwards?
Anita: You had that backwards…
Chris: I had it backwards. Sorry. Okay. So I'll turn that over to you, why don't you walk us through the ACD since I've kinda flipped it…
Anita: Okay. Right. So, um, you know, I've always found the ACR, the annual compliance report a little bit more interesting than the actual determination, but the process is that the postal service is required within 90 days of the end of the fiscal year to issue an annual compliance review to the commission. And then the commission takes another 90 days to determine whether they've complied with the regulatory requirements. So simply they just look at three things. I think they keep the financial aspects of the postal service into a different document that they cover, cost coverage, work sharing, you know, making sure that the pass-throughs don't exceed 100% which is something I really despise. And then of course service standards. But there are definitely some losers in this ACD.
Chris: Yeah. So let's start with cost coverage. When we're talking about cost coverage it all ties to work share cost avoidance for the postal service. That's what this whole industry is really kind of based upon is, are these costs avoid to the postal service results in postage workshare discounts to the industry and they're supposed to balance and that's the whole percentage of the pass-through part in that. But I noticed that some are below the hundred percent some are above, in fact, above quite a bit. What does the ACD talk about relative to that? What are some of the concerns there?
Anita: As I said that the pass-throughs are not supposed to exceed 100% right? There's a lot of exceptions that the commission can fall back on. So there were only three workshare discounts that were not in compliance. And there was only one that they directed the postal service to actually make rate changes in order to get to that 100% and that was, I think it was in marketing mail flats, the automation three digit discount. Okay. So not too much to worry about there. On the cost coverage side, there were eight products that were, as they call it, non compensatory, but there are the usual suspects, right? Periodicals which have an exception because of their educational, scientific, cultural, what's the I? I always forget.
Chris: Informative, I think.
Anita: Yeah, maybe
Chris: Yeah, it's ECSI, right? We always remembered ECSI… ECSI Yep,
Anita: Exactly. Exactly. So what was really disturbing was marketing mail flats. As you know, and we've talked about on previous podcasts that the cost of flats just continues to rise. It's a very problematic situation for the postal service. And unfortunately the PRC directed the postal service to change marketing mail flats rates by two percentage points above CPI. Right. So make sure, I'm making sure the readers understand that marketing mail flats are the non carrier routes, but it's just really alarming that the commission wants to take that position when they have an open docket that is looking specifically at flat's costs. So why don't they figure out what's the problem with flats costs before directing the postal service to increase rates. So there's a lot of frustration on the part of the industry there and it's not going to generate that much revenue.
Chris: No, it's not it. Here's a concern that I have with that, and I know you recall this very well. It wasn't too long ago that the PRC directed the postal service to significantly increase postage on flats and the industry reacted and the volume went down and all these decisions that were based upon predicted volume growth in flats, all that changed, which impacted the FSS, the Flat Sequence Sortation device. It impacted a lot of things. And I'm sure there's a point where the volume of flat mail processed by the postal service reaches kind of that level as a declined where yeah, I could see that the costs are going up because you don't have enough volume. Volume helps freight. Mail moves more mail. Right. And I get it. I get that because of the volume decrease with flats that it's now increasing the costs. But it sounds to me like this would only exasperate the situation. If you're adding 2% more on top of CPI and you're right Anita, in terms of dollars and cents it's not going to appreciably move the needle, but it will absolutely have an impact on decisions that marketers and mailing service providers and the entire supply chain is going to have relative to what volume of flats and how they're going to leverage flats and things like that. So that's kind of unfortunate.
Anita: Right. And then it gets even worse when you talk about service standards, because most of the market dominant products fail to meet their service standards. And that's, you know, it looks like they're getting worse. And speaking of flats. If you look at the service performance on all flats and even First Class flats, periodicals, service performance went down every single class. So…
Chris: I would say that that's a direct result of the volume again, right?
Chris: If you don't have the volume to cube out a trailer or to maximize the space of moving these transport equipment around, I get it. You're going to hold mail. I know it's a dangerous phrase to say, but you're going to make a decision. Let's put it this way, I'll, kind of make it nicer. You're going to make a decision from a logistics and distribution aspect that allows you to maximize your volume, uh, your cubic space for whatever shipping container or transportation vehicle you're going to use. That's just how it works. So if the volume goes down, it's going to impact what my decisions are from logistics. And then ultimately that's going to get reflected in your service standards. I get it.
Anita: Right. And then you're not going to get the throughput on your machines. But, you know, every printing company in the country has issues like this, right? They're having to make necessary adjustments. So it's a daily decision. Right, right. We have to get to the bottom of this.
Chris: Yeah, it's a daily decision. You saw it firsthand, you know, when you worked at, at the various printers. You could, you could see it firsthand when you're up.
Anita: Exactly. Well, let's talk about something a little bit more pleasant.
Chris: Okay, sounds good.
Anita: What about the industry alert that came out earlier this month?
Chris: That is really good news. The USPS made a final decision on that advanced federal register notice for our listeners. We did a whole podcast talking about that on the postal service, wanting to consider limiting marketing mail to paper only and the outcry from the industry was huge, particularly from nonprofits. So Anita, what's the final decision?
Anita: Well, they backed off on the proposal. They still plan to do a few things that are indicated in the industry alert. They're going to review and clarify the existing eligibility and machinability requirements and then they're going to focus their efforts on identifying those mailers that are producing non machinable mailings and then they're going to work with them so that they can come up with solutions to make sure that they don't have any productivity issues. And then last they're going to examine the use of marketing mail fulfillment packages. Essentially they're still going to look at it, but they're not going to make any changes at this point. And they promised that if they do make decisions or consider decisions down the road, they're going to make sure that they give the industry ample notification. So that's really good news,
Chris: That is very good news and a smart move from the postal service to do that. And Kudos to the industry and the industry associations that rallied quickly around this issue brought forward. The response is, this overwhelming response from the industry and I know that that, I'm sure that that wasn't the initial thought from the postal service, but you know, that's kind of like the, the positive consequences out of all of this is just what a, what a huge outcry. But I really have to thank the industry associations for rallying their members and getting a response on that. So good, good.
Anita: I would agree. And we have to give the postal service credit too for listening and taking us seriously. So good news all the way around.
Chris: Absolutely. So I don't know if this is good news or not, but I know that the legislative activity is still going on. Is there any quick updates on that, Anita?
Anita: Yeah, yeah. I'll try to make it quick. I understand that the house committee on government reform, it's a sub committee of the House Committee on oversight and government reform I should say is planning to hold a hearing. And I'd heard that it was supposed to be at the end of this month, but we're pretty close to the end of the month and I didn't see anything on the calendar. But the plan is that the bill that was introduced in the last congress and also the prior Congress actually is going to be discussed during this hearing and it's the house bill that we've talked about quite a bit. It does include the 2.15% increase and medicare integration and so forth. Nothing really new there, but as you know, legislation has to be reintroduced each congress, but they are starting the activity again. And then we mentioned this on the last call that the Senate oversight committee held confirmation hearings for both governors Bloom and Martinez and a third nominee, John Barger. They're still planning to have confirmation hearing for him, but no vote yet. I'm kind of surprised there. I just checked before we did the recording to see if there was anything new on that. But we do anticipate a vote in the not too distant future. And the great thing about that is that we'll finally have a quorum.
Chris: That's just the whole point. I mean that last hearing that you and I sat and watched as it was streamed live, that seemed to be the consensus that Congress wanted to move forward and get some of these governors confirmed. So hopefully that'll happen soon because we do need a quorum and we need to be able to move forward with a viable postal service and mailing industry.
Anita: Right. And at the PRC, I don't know if our listeners are aware that both Nancy Langley, who's a Democrat and Tony Hammond who's a Republican, they are in their hold over years. So at the end of the year they are gone. And although we have Michael Kubayanda, who's a new commissioner, we still need to fill those two seats before the end of the year so that the commission will be fully staffed. And as we mentioned before Ann Fisher, who's their current government relations director. The president has announced his intent to nominate, but nothing happening there either. The actual formal nomination hasn't happened. And then there's a new name. Someone, I don't know. Ashley Polling, I think she was the lead postal staffer for Senator Heidi Heitkamp of North Dakota.
Chris: Oh, interesting. Okay.
Anita: Yeah, so she's also being vetted at this point, but nothing from POTUS on that. That's a quick legislative update.
Chris: Thank you for that. All right, so the last topic we wanted to cover is a recent white paper that the office of the inspector general published. And I have to tell our listeners, if you don't go to the OIG and take a look at their white papers, you're really missing out. This is great content. These are great white papers. They go through a lot of work to prepare these and it is just full of incredible statistics and information. And this one in particular that was just recently published, it's all about the mail mix and the effectiveness of that. And it's just a really interesting white paper on The Mail Mix and recipients' reaction to direct mail. That's the name of it. And the thing that jumped out right away to me on the executive summary with this is our listeners have heard me talk about the three C's of address, quality of complete, correct, and current address as well. The OIG has the three R's of advertising, mail effectiveness…
Anita: Right, Reading, Reaction… and what's the third one?
Chris: Response! Reading, reaction and response. And those three Rs are ubiquitous throughout this whole white paper that talks about the criticality of advertising mail. It's a significant source of revenue for the postal service contributing $20 billion in fiscal year 2017 it's 29% of the overall revenue, right? But it's 58% of the total mail. So it's an interesting balance with that. It's the majority of the mail that the postal service moves. It's revenue contribution is 29% but here's the thing, the power of advertising mail is significant and the reaction of that mix of advertising is all about what this white paper discusses in here and it has some really interesting statistics and some models that if you're into mathematics and all that part of it and statistics analysis, it would be a good read for that too.
Anita: And you know, my first reaction was, first of all, you don't have any control over the mail mix. So I thought, wow, what is this going to talk about? You know? There's some really interesting statistics so I'm interested to hear what your takeaways are.
Chris: So a couple of things and I agree with the white paper blending the mail with different shapes, you know, flats and letters, postcards, things like that. Blending that is good. People want to see different shapes, they want to see the different content. Um, flats are really important in this as sort of kind of an opposite of what we talked about before, right? Where the ACD report talked about how going after flats in terms of pricing. Well the OIG now is coming back and saying, well hold on a minute. Flat shape mail pieces are significantly more likely to be read and have a positive reaction and generate a response. Those three R's. So if you're looking for something positive for all three R's, flat shape, mail is the way to go.
Anita: And shape really matters. I mean not just flat.
Chris: Shape does.
Anita: Right? I mean it could be maybe EDDM, or the large postcards, things of that nature. So yeah, something a little bit outside of the norm.
Chris: Right. And of course you know past business relationship with the household that enhances the effectiveness. That makes sense. Once you've got an established brand, people were very much lended to that. Demographic factors are relevant. And here's where I thought it was interesting. Anita…
Anita: Oh, I know what you're going to say. It surprised me.
Chris: It really does surprise me because what it says is that people with a college education or something beyond high school are less likely to read or respond or react to mail pieces or advertising mail in particular. And I thought, well that…
Anita: I was really shocked at that.
Chris: I was very surprised at that because I guess maybe I'm noncompliant, so I enjoy it. I mean when I get the mail I like looking at the advertising and I like to look at all the things that we've talked about in prior podcasts and that I know the postal service highlights with their irresistible mail and everything. I like the color. I like the substrates. I like the tactile part of it, the smell, all that stuff. It really is impactful I think, and catalogs are great example of that. Coupons. We're also highlighted in this too.
Anita: Now that I believe…
Chris: And I believe that too, you know they want to get a coupon, they want to have that physical coupon. I know there's some conversations and technology about digital wallets and maybe that has some reality to it for certain demographics, but I'm a very tangible person. I like to have that coupon in my hand or hold the magazine and hold that catalog, which by the way, there was the other thing that I saw in here is that while catalogs may not be read right away, they're kept, right? People will keep them, they'll put them on a table and they'll go back to it. So it's that mail moment that continues to get repeated over and over again.
Anita: Right, and I'm proof of that because I love my catalogs.
Chris: So do I. So do I. Any other reactions before I read the one comment from Steve Monteith, Vice President of Marketing.
Anita: Well, one of the things I thought was interesting is that I believe it said that Hispanics and nonwhite households are actually more likely to react positively to advertising mail. And then it suggests a potentially under-tapped market for direct marketers.
Chris: And that's a good point. So for those of our listeners that are working with advertising mail, or you're talking to customers, take a look at this white paper because it does present some interesting conversations. If you're looking at getting a higher read, or response, or reaction, those three Rs from your advertising mail. Take a look at the education level. If it's a high school education, they're going to be more favorable for this. If it's a non white from a demographic or ethnicity aspect that has an impact on it. Are you talking to somebody that's rural versus urban? Again, that's all in this report too, so some really interesting pieces in here, but the one that I wanted to call out, which I highlighted, I thought, so. Steve Monteith, Vice President Marketing. Steve's a great guy. He was a speaking here in Rochester, actually last week at PCC event. It confirmed in here that periodicals and catalogs, they are the anchor of the mailbox, right? As we've said many times before, “Periodical… that's the anchor of the mailbox”. It's those flats and it's the catalogs. It's that tangible tactile mail that really draws people's attention and increases those three R's.
Anita: Right, where's Dennis Farley when we need him?
Chris: I know Dennis was right.
Anita: That's right. Anchor of the mailbox.
Chris: Absolutely. Anything else, Anita?
Anita: We had kind of kicked around the idea of talking about all the things that are going on at the universal postal union cause we really don't touch on international rates that much, but it's getting really interesting. So let's save that for another podcast.
Chris: Sounds good. And speaking of our next podcast, as a reminder to our listeners, the NPF is right around the corner so because of NPF and all the activity. BCC Software will be there right front and center. Booth 201 I believe. So if you're at NPF stop by and say hi. But just for our listeners, there'll be a little bit of a break before we do our next podcast because we're going to be traveling and attending NPF. So stay tuned. We'll post one and record it as soon as possible. Anita, I again want to thank you for today's podcast and all the great information.
Anita: Thank you Chris. It's always fun.
Chris: I agree… and thank you to our listeners. We really appreciate that you're tuning in and providing some great comments to us. So I appreciate that very much. Thank you for listening to the podcast. And again, if you have any questions or concerns, please visit BCCsoftware.com or give us a phone call. As always, we'd like to know how can we help? Thanks and have a great day.