Postcomm to examine Royal Mail request to price bulk mail products by delivery zone

Royal Mail applies to charge higher prices for delivery to London and rural destinations; lower prices elsewhere

Postcomm, the independent regulator for postal services, has today written to customers and operators about an application by Royal Mail to charge large mailers – using products which are not part of the Universal Service – different prices depending on where in the UK their mail is delivered. Royal Mail calls this ‘zonal pricing’. Postcomm has up to nine months to assess whether, and if so when, this new pricing structure can be implemented.

Royal Mail’s ‘zonal pricing’ application does not affect stamp prices or those bulk mail products that are included within the definition of the universal service. It covers products that generated about 25 per cent or £1.4 billion of Royal Mail’s total regulated revenue in the last financial year.

Nigel Stapleton, Postcomm chairman, said:

“Postcomm will study with great care Royal Mail’s request to charge large customers different prices depending on where mail is delivered in the UK. Although these business tariffs are outside the ‘one price goes anywhere’ guarantee of the Universal Service, customers are entitled to understand Royal Mail’s justification and have their say on its plans to charge more for delivery in Greater London and rural areas. In highly populated areas outside London, Royal Mail proposes to reduce prices.

“Customers may be surprised that it costs Royal Mail slightly more to deliver in Greater London than it does to deliver in most rural and other less populated areas, despite the obvious economies of scale of providing services in the UK’s largest city. However, Royal Mail proposes a smaller price increase initially for Greater London than for rural and less populated areas.

“Postcomm’s recent consultation on the concept of varying business tariffs by destination identified that most major mailers did not want it and some might consider reducing their usage of mail as a result. Despite this, Royal Mail is keen to pursue ‘zonal pricing’, so we hope all mail users will give us their feedback during our consultation in order to inform decisions required from both Royal Mail and us.”

Royal Mail currently prices almost all its bulk mail products at geographically uniform prices. It says that introducing ‘zonal’ prices would help align prices more closely with its costs. In its application to Postcomm, Royal Mail has divided its 27 million delivery points around the UK into five zones. These are Greater London, other areas of high population and delivery point density, areas of moderate density and rural areas of low population and delivery point density.

The following figures from Royal Mail illustrate the price premiums and discounts that it proposes to make on the current geographically uniform prices in the first year of implementation:

Royal Mail proposes these price differences by each zone based on the current uniform rate

Greater London Business District High Density Average Density Low Density
+2.5% -4.9% -2.0% -1.7% +4.8%

This second table shows the differences in cost to Royal Mail of delivering to each zone relative to the national average cost of delivery:

Royal Mail delivery cost differences by each zone relative to the national average cost:

Greater London Business District High Density Average Density Low density
+12% -28% -11% -4% +11%

Royal Mail has said that it wants to improve cost reflectivity further by moving to prices that mirror more closely the cost differences shown in the tables above within the period of the current Price Control in stages before April 2010.

Under Royal Mail’s licence, Postcomm has up to nine months in which to make a decision on this application. The nine month assessment period began today as Postcomm is now satisfied that it has received from Royal Mail sufficient information of good quality to begin to make a considered assessment of the application.

Notes for editors

Royal Mail uses this set of variables to determine its zones:

Name Business Density Delivery Point Density
Greater London Not applicable Not applicable
A: Business District Greater than 10% Greater than 500 per km2
B: High Density Not applicable Greater than 1000 per km2
C: Average Density Not applicable Greater than 100 per km2 and less than or equal to 1000 per km2
D: Low Density Not applicable Less than/equal to 100 per km2

Royal Mail wants to introduce this new pricing structure to these business mail products:

Mailsort 120 – first, second and third class, OCR and CBC;
Mailsort 700 – first, second and third class;
Mailsort 1400 – third class;
Presstream – first and second class; and
Walksort – first and second class.
Royal Mail has also proposed certain changes to non-price terms such as mandatory electronic submission and sorting into ‘zonal’ sequence.

Royal Mail first submitted an application to price these products by delivery zone in July 2006 but Royal Mail withdrew that application. This stakeholder letter refers to the zonal pricing application Royal Mail submitted to Postcomm on 20 February 2007.

http://www.psc.gov.uk/news-and-events/news-releases/2007/postcomm-to-examine-royal-mail-request-to-price-bulk-mail-products-by-delivery-zone.html