USPS Files for Market-Dominant NSA

This article and more can be found in the August 28, 2023 issue of Mailers Hub News

Late on Friday, August 11, the Postal Service submitted a request to the Postal Regulatory Commission seeking approval for a negotiated service agreement with Publishers Clearing House.  Though the USPS files NSA requests many times a week, the August 11 filing was different in that it was for market-dominant mail, not competitive products as is typical.  According to the USPS filing:

“The PCH NSA is designed to give PCH a discounted initial mailing of one million pieces of USPS Marketing Mail letters, mailed at cost.  This initial mailing is limited to one million dormant prospecting customer addresses, which PCH has not mailed to within the past three months.  In exchange for these discounts, PCH has committed to certain performance targets for follow-on mailings, both from PCH to the addresses of this million-piece mailing and to PCH from the addresses of this million-piece mailing, that are expected to result from the initial mailing, also known as a ‘multiplier effect.’  PCH expects two million pieces will result from the initial mailing, mailed at published rates, within nine months of the date of the initial mailing.  If the parties deem the initial mailing and performance satisfactory, an additional second prospecting mailing could be authorized at least six months after the initial mailing.  The same performance period and performance targets would apply to the second mailing.  The forecasted expected multiplier volume by source is as follows [the numbers were redacted in the public notice]:

• Initial First-Class Mail sweepstakes entries from target prospects
• Marketing Mail follow-ups from PCH
• First-Class Mail responses by customers to follow-up Marketing Mail
• Invoices sent by PCH to converted prospects
• Responses to invoices from converted prospects

“The parties intend for the NSA to take effect in November or December 2023, upon favorable review from the Commission.  The initial mailing date will then be established at least thirty calendar days after the effective date of the contract, expected to be in January 2024 or shortly thereafter.  The contract term will be one year from the date of the initial mailing.  If the parties agree to a second mailing, then the NSA term will conclude one year from the date of the second mailing. …
“If this NSA proves to be successful in improving the net financial position of the Postal Service, as expected, the Postal Service stands ready to consider NSAs on comparable terms to similarly situated mailers, provided that these mailers can provide a similar “multiplier effect” and are willing to commit to performance targets that mitigate the financial risk to the Postal Service.”

Regarding the financial terms of the NSA, the USPS stated:

“In order to both incent PCH to meet certain performance targets and protect the financial interests of the Postal Service, the financial terms of the PCH NSA consist of three primary components:

1) The Postal Service will provide PCH with an initial one million piece mailing priced at the Postal Service’s attributable cost, which will result in approximately $128K in revenue.  In order to maintain this discount, PCH will need to achieve at least 50 percent of its forecasted total multiplier volume.

2) If PCH does not achieve at least 50 percent of the forecasted multiplier volume, PCH will lose the discount on the initial mailing, which will be paid back to the Postal Service.  This will result in approximately $299K in total postage revenue and $171K in contribution from the initial mailing plus however much multiplier percentage that PCH did achieve.

3) If PCH achieves 90 percent or more of the multiplier volume, the Postal Service will provide an additional discount to PCH of the price paid for the initial mailing in the form of a postage credit of approximately $128K. …

“The Postal Service has carefully designed this agreement to assure that there will be no unreasonable harm to the marketplace.  From a financial perspective, PCH mail will cover its attributable cost in all cases, and to the extent that the Postal Service may have overestimated the expected multiplier effect, risk mitigation provisions have been agreed to in the NSA, in which PCH must pay back the amount of the discounted mailing if specified performance metrics are not achieved.  In addition, and as noted above, the Postal Service stands ready to consider NSAs on comparable terms to mailers who are similarly situated to PCH, provided that these mailers can provide a similar ‘multiplier effect’ and are willing to commit to performance targets that mitigate the financial risk to the Postal Service.”

Unlike other NSAs that are given a “CP” prefix for their docket number, the PCH NSA was given an “R” prefix (R2023-4), indicating that, in at least one way, the commission is treating the filing as a rate case, not simply another NSA.

NSAs

As defined by the Postal Regulatory Commission, a negotiated service agreement is a contract between the Postal Service and a ratepayer

“… for customer-specific rates or fees and/or terms of service … for a defined period of time in accordance with the terms and conditions of [the] contract.  A price associated with a negotiated service agreement is a price not of general applicability.  The terms of a negotiated service agreement can specify prepayment or other methods for payment of postage and fees.”

Proposed NSAs are filed by the USPS for review by the PRC.  Generally, in order to approve an NSA, the PRC must conclude that its terms are beneficial to the USPS, such as by reducing costs and/or generating new volume and revenue.

Most NSAs – thousands of them – have been for mailings of competitive products, such as Priority Mail or ground packages, and offered discounted prices in exchange for the ratepayer’s shipping business; hundreds remain in effect.

A hard test

By contrast, there has never been more than a handful of NSAs for market-dominant products (First-Class Mail and/or Marketing Mail), including agreements with Bank of America, Bradford Group, Bookspan, HSBC North America, Discover Financial Services, and PHI Acquisitions.  Most expired over a decade ago; the last was PHI’s that ended in 2018.

Like a competitive product NSA, a market-dominant NSA offers reduced prices or other benefits in exchange for volume commitments, such as by reaching or exceeding volume targets.  However, it’s been difficult for the Postal Service to overcome the PRC’s “anyhow” bias, i.e., that the USPS is offering an incentive for market-dominant mail that would have been sent anyway, even without the discounted price.

In the PCH NSA, an important component is that mail will be sent to “dormant” prospects, addressees to which the company had previously decided to no longer send messages.  As a result, the resulting volume would not be “anyhow” mail that was going to be sent before being offered an incentive.

Of course, how the PRC evaluates the NSA remains to be seen, but the contents of its eventual decision may well be seen by the Postal Service and other potential market-dominant NSA customers as defining what such an NSA must provide and contain to be approved.

Questions

The first indication of the commission’s approach was not encouraging.  In a four-page “chairman’s information request” filed on August 23, the Postal Service was asked to obtain and supply details about PCH’s marketing and advertising activity as well as its own data about the proposed and other potential NSAs. Regarding the premise of the NSA that it involves new mailing activity to “dormant prospects,” the PRC asked about PCH’s advertising budget for the past five years, the proportion used for mail, the costs involved in producing a mailing, and how those costs have changed over the past five years, the lifetime value of a dormant prospect, and how that value would be different under the NSA compared to mailings sent to such prospects without a postage incentive.

The PRC also asked about the USPS costs and net contribution from different types of mailings by PCH, and the company’s definition of “dormant” prospects and its practices for mailing to them.

Lastly, the commission questioned the Postal Service’s statement that it would “consider NSAs on comparable terms to similarly situated mailers.”  Particularly, the PRC asked for “an analysis of ‘similarly situated mailers’ detailing the number of mailers that could possibly qualify and the estimated volumes for those mailers,” as well as how NSAs with other “similarly situated mailers” would yield the “multiplier effect” mentioned by the USPS in support of the PCH NSA.

To many observers, by asking about PCH’s advertising spend, the chairman’s information request was not only an overreach into PCH’s business practices but an indication that the PRC remains unpersuaded that the mailings under the NSA eventually wouldn’t have been prepared anyway.

How either the Postal Service or PCH could dispel such a conviction isn’t clear – there’s no possible evidentiary answer to a hypothetical presupposition.  Similarly unclear is whether the commission believes that, absent such proof, the NSA shouldn’t be approved because, presumably, the mail would have been sent anyway even without a discount.

If so, it would reinforce the belief held by many in the commercial mailing industry that the PRC is less interested in exploring new ways to build (or preserve) mail volume than it is in preventing unjustified discounts and protecting the USPS from any level of financial risk.  The USPS had taken pains to include provisions in the NSA to minimize such exposure that, even at its worst, would be reimbursed by PCH.

As noted, if the PRC disapproves the PCH NSA because its can’t be disproven that the mailings would have occurred anyway, it would fatally discourage any future market-dominant NSAs and reinforce the Postal Service’s reticence to explore innovative ways to sustain market-dominant volume.  Similarly reinforced would be perceptions of the PRC as overly cautious and bureaucratic, focused more on inflexibly applying its rules than on finding solutions to accommodate creative proposals.

Volume growth

The PCH NSA filing was one of two filings on August 11 by the Postal Service presenting ideas to stimulate mail volume.  (The other, separate but similar incentives for First-Class Mail and Marketing Mail, were discussed in the August 14 issue of Mailers Hub News.)

Both represent welcome examples of the USPS trying to use its pricing flexibility in new ways, and creative thinking by some in USPS HQ who understand the need to preserve all possible market-dominant mail volume.

Unfortunately, even as these efforts advance, others at the agency are adherents to Postmaster General Louis DeJoy’s belief that there’s no point it trying to slow the unalterable decline of hard-copy mail.  In turn, they want all the money they can get while that mail is still available, and so are pursuing aggressive price increases that arguably only worsen whatever volume loss might occur secularly. It’s unknown whether anyone at USPS HQ has considered how mailers are supposed to perceive the irony.