Special report – mailing issues: Sizeable problem

As Postcomm prepares to enter consultation on Royal Mail's size-based pricing scheme, the debate still rages on its possible negative repercussions. Richard Simpson speaks to some of the chief protagonists.

Size-based pricing could soon emerge as the new model for bulk mail services. Royal Mail's most recent proposals will shortly be the subject of a three-month consultation process run by Postcomm. The postal operator says that, subject to the outcome of this, a size-based pricing regime could be introduced by September 2005, although Postcomm admits it could be as far away as April 2006 (PM April 2).

Under Royal Mail's proposals, mailings would need to be 240m x 165mm x 5mm or less, and weigh 100g or under, to achieve the most cost- effective postage rate. If size-based pricing is introduced, it follows that high-volume mailers will seek to adapt their packs to achieve the lowest possible postage costs, leading to a row over the implications for the creative side of the industry.

Aside from this spat, the major issue is whether mailing houses will be able to cope with such a sudden shift towards one potentially dominant pack size. Are the postal providers working with the industry to ensure provision is properly aligned with pricing?

Royal Mail director of pricing and commercial policy Lorna Clarkson argues that mailing houses will have "sufficient time to make any changes and adjustments".

She also points out that many other countries have already adopted the size-based pricing model. She refutes the suggestion that a move to smaller packs will lead to a 'dumbing down' of creative standards. "Yes, prices will rise for larger sized and unusually shaped mail, but this will be offset by price cuts for heavier mail.

"This means that companies will be able to add pages, upgrade paper, use card, enclose samples and inserts to differentiate their mailshots. This should give plenty of scope for direct mailers to be creative and innovative."

Royal Mail's view is not shared by most of the people affected. Mailing houses in particular are unsure how to take the news. And the problem even extends to photograph developers, which say the move to size-based pricing will spell doom for their industry (PM March 26).

Mailcom operations manager Les Helyer is in no doubt that even the possibility of size-based pricing is having an impact on the current investment decisions of some mailing houses. "Royal Mail may find that mailing houses are reluctant to invest in the expensive machinery that enables them to cope with larger, more awkward formats – such as C4 and polywrap. Because if postage prices on these become prohibitively expensive, volumes will drop and margins will be squeezed.

"Conversely, if mailers decide to restrict their design options and switch to smaller packs to avoid paying premium postage rates, mailing houses will be able to use their existing large-format inserting machines to handle the extra throughput of smaller items, since the machines are capable of coping with both."

Helyer's contention that a move to smaller packs will not cause throughput problems is supported by Lloyd James Group managing director of print and mailing services Marcus Collings: "In terms of handling smaller packs within the production environment, I do not foresee any problems. We are already geared up for enclosing smaller packs, so will need to make few changes to adapt to any new situation."

Vertis Direct Marketing services managing director Richard Husband says there is also a structural reason to suggest mailing houses will not be adversely affected. "There is no reason for the industry to be caught on the hop with changes in pricing or provision, as there is overcapacity in the market, and the industry will continue to adapt accordingly."

But Pitney Bowes director of national posts Malcolm Bruce is convinced any move to size-based pricing will have other negative implications for many bulk mailers. He offers an example: "C4 is a growth market, as C4 mailings have proved to be successful in generating good levels of response. Moreover, many marketers now require the content of their direct mail piece to remain unfolded. But size-based pricing will penalise C4 mailings. Many industry professionals understandably regard a forced move to standard sizing as restricting the value of the medium, and may look to other forms of communication to carry the message."

Bruce's comment will make uncomfortable reading for Royal Mail.

He adds: "For many industries, size-based pricing represents a very fundamental threat to their operations. For example, with a restriction [in cost terms] of 5mm on the thickness of an envelope, the sending and receiving of photographs will cost much more. Similar concerns are being voiced by the greetings card industry, and certain publishers."

Helyer draws a conclusion that Royal Mail may find even more alarming: "One outcome that Royal Mail may not have considered is that it is creating a whole new area of competition. Mailing houses that are already capable of handling larger items efficiently may be tempted, by the profits inherent in the new postage pricing structure, to manage the delivery too, by linking with distribution companies such as Business Post and TNT."

This view is echoed by Collings: "In two years' time, we will be looking to alternative suppliers that have entered the market through deregulation to provide a viable substitute. I question the logic behind Royal Mail's pursuance of size-based pricing, at the very point where it is about to encounter a competitive environment."

Some industry figures are adopting a more conciliatory position. Prolog account manager Georgina Sinfield argues that clients benefit from the nature of company's relationship with Royal Mail. "By solely using Royal Mail, we prevent the complications that using several providers may bring. Having a single supplier allows relationships to form that ensure the best possible all-round service."

Sinfield claims this kind of exclusive relationship – which brings with it a detailed understanding of what Royal Mail is able to offer – delivers a measurable financial advantage to clients: "For example, we do a regular mailer for a major credit card company, sending out free gifts to its new customer base. By advising it to use one of Royal Mail's discount services, Packet Sort, and setting up our systems to handle this service, the client saved 10 per cent on recent postage costs."

DPS Direct Mail technical director David Laybourne is perfectly happy to see things from Royal Mail's perspective: "Royal Mail's stance is completely understandable. It's had to streamline its business by investing in mechanisation, and that means that polythene and packs larger than C5 don't suit. And, in a 'user pays' society, should the principle of a universal postal tariff, regardless of the cost incurred by the service provider, still apply?"

John Watson Partnership senior partner Brian Smith goes further, arguing that Royal Mail's plan offers marketers a potentially substantial financial benefit. He says: "Under the size-based pricing tariffs, all mailings that conform will gain from the fact that they will be able to carry an extra 40g of material for no extra charge. So these mailers will be able to add inserts, cross-sell other products to expand their brand, or offer shared mailings for commercial gain."

But what about the fear that a move to size-based pricing will inevitably lead to 'sameness' in the way direct mail looks to consumers – an outcome that could potentially cause further declines in response rates? "For many mail order companies, the size and shape of their catalogue is an integral part of the brand, so they are strategically reluctant to change formats that they have been operating successfully for years," says Smith.

"However, success is about managing change. I urge these companies to look more carefully at the proposed pricing schedules and get specialist advice on how they can take advantage of them."

Millennium managing director Martin Smith takes a similarly pragmatic view: "Creativity often comes with cost implications. In this situation, if no compromise can be found between the budget and creative process, it might be time for direct marketing buyers to look at other agencies."

Most industry figures expect the scheme to be implemented in some form or other. But DMA (UK) director of development and postal affairs David Robottom suggests the implementation of a size-based cost structure could mean the opportunity to achieve a more satisfactory solution will be missed. He argues that the direct mail industry, and Royal Mail's market position, have changed fundamentally since the plan was first mooted, nearly two years ago. "It is no secret that Royal Mail is already looking to change its product suite in response to deregulation. For example, it is looking at financial transaction mailings – such as billings – to minimise volume losses. And of course any organisation would do the same in its position.

"Royal Mail will also be producing an evolution of Mailsort, intended to increase the emphasis on advertising and promotional mailings – including direct marketing. So why overlay size-based pricing?

Robottom concludes: "What we would like to see is Royal Mail working with the industry to work out its cost problems, and to come up with a solution that meets the requirements of both parties."