Discriminatory Pricing in the Post Office

2013-03-05 2 min read

    I recently came across Jeff Jordan’s post about revamping the post office so it’s no longer losing more than $5 billion a year. Jeff suggests the obvious solution of raising prices but I think a more clever approach would be to start price discriminating. Everyone who needs to mail a letter has to pay 46 cents for a stamp but why not come up with tiered pricing. People who need to send something urgently can pay more than a dollar while others who only care that the letter arrives can pay 20 cents. The postal service would need to ensure their systems are able to track how full or empty each shipment is but this would allow them to ship the cheaper, less urgent mail with the more urgent mail to maximize the shipping space. Another way to price discriminate would be to give a discount for mail that’s picked up at the post office within a few days rather than being delivered to the home.

    I took a quick look at the USPS financials for 2012 and if the average price of a first class delivery increases from 42 cents to 52 cents, the post office would be profitable given the same volume. I realize that’s a 24% jump in price but if it’s done via a price discriminatory approach, such as introducing multiple price points based on delivery guarantees, it won’t feel as drastic.

    Service LineRevenueVolumeUnit PriceNew PriceNew Revenue
    First Class$28,86768,696$0.42$0.52$35,721
    Shipping + Packages$11,5963,502$3.31$3.31$11,596

    Airlines have been price discriminating since Sabre launched in the 60’s, coupons have been around for 100 years now, and retailers have been offering discounts on out of season items for even longer. Hardware and software improvements are streamlining operations all over the place and are allowing companies to price more efficiently than ever. I’d love to see the government do the same.