The New Strategy in Competitive Postal Markets – Focusing on the Basics
Tim Walsh, Vice President Corporate and Regulatory Affairs, Pitney Bowes International – Mail & Express Review February 2009 One of the privileges of my job is the opportunity it affords to work with posts across the world. From Europe to Africa, and from Asia to Latin America, the world’s universal service providers face many of the same strategic, commercial and regulatory challenges.
In particular, executives in all EU posts by 2013, and those of Mexico, Argentina, New Zealand, India and Singapore now, must navigate fast changing and competitive letter mail markets. Elsewhere, virtually all posts are seeking to become more efficient, often driven by pressure from government as shareholder.
Clearly, there are many institutional and technological differences but, to a remarkable degree, posts confront many of the same fundamental commercial questions.
The DNA of Posts
In truth, the DNA of posts is similar. Appetite for risk is low and the underlying economics of the business are such that forging and implementing strategy in turbulent times is fraught with difficulty. Paradoxically, it seems that the burning platform of market opening can as often foster inertia as it can propel the business toward action.
Part of the problem may be the tendency to over complicate the challenges facing posts. Slow decision making is also a feature of the critical operational inter-connections within the business. Change upstream can have negative downstream effects (and vice versa) such that decisions in posts are not taken, but rather emerge.
More importantly in my experience is that sometimes the strategic conversation within the organisation is seen as quite separate from the dialogue that needs to take place on sales and marketing practices.
New Strategy
This dichotomy is false. In a letters business facing competition sales and marketing conundrums are at the core of the new strategy. Responsibility cannot be delegated down the organisation. It involves a re-ordering of stakeholder entitlements and customer expectations. New strategy embraces the posts’ customer and sales strategies and the important four of the five Ps of marketing: Price, Product, Place and Policies.
Promotion (the fifth and most glamorous P) and brand are not unimportant but can distract executives from some of the more difficult, nitty gritty questions that need addressing and which have perhaps a more immediate impact on a company’s performance in situations where customers have a choice.
Cost Drivers and Entry Threats
Even if a postal incumbent does not know where its costs and profits lie we can be sure that a new entrant will sniff out profitable customers, streams and geographies. New entrant networks will be optimised to serve specific market segments, and to target selectively, and progressively, distinct customer and volume segments
While bulk mail is initially attractive to new entrants to cover the fixed costs of network development, it is the SME, unsorted and standard tariff letters traffic which provide the basis for profitable growth. Posts’ new strategy must cover sorted and unsorted volumes as well as large and SME mailers.
In the face of liberalisation universal service providers therefore need a grip on their network costs in both their consolidation operations (collect, sort, transport) and in their delivery business. In products, too, cost drivers need to be better understood with prices aligned to the main cost drivers: speed, payment method, format and weight.
Customer Profitability and Segmentation
Understanding customer profitability is especially critical because the unit costs of providing a service are usually as much determined by customer behaviour, and transactional and operational support costs, as they are product related. Because of these costs, the largest customers of a post are amongst the most profitable or the most unprofitable – rarely do they fall in the mid-range.
In this context, segmentation and customer profitability modelling is essential to identify those accounts that cost more to serve than the contribution they provide. By contrast, during the 1990s, although posts aspired to become more customer focused, this sometimes reflected a tendency to think that anything asked for by a customer had to be provided regardless of the costs involved. In retrospect, it is clear that some posts lost control of the costs associated with customer behaviour during this period, with damaging financial consequences.
Customer Focus and Sales
By contrast, new entrants are focused not only on the needs of the mailer but also their value and potential to the carrier. New entrants are customer focused in the sense that their products are designed to meet unmet needs and their prices and payment terms are flexible. Moreover, new entrants also tend to pursue a strict application of terms of conformance to product specification by the mailer in the interests of network optimisation and customer profitability.
Well designed customer segmentation also allows a post’s sales organisation to understand how to serve customers better and more efficiently in each of the distinct segments. It is not about de-prioritising accounts outside the top tier but better serving all accounts, within each segment, with the right products and prices, and through the right channels. It is also about providing the framework to develop a sales and service model differentiated on the basis of cost to serve.
Marketing and Four of The Ps
A key focus for management in posts facing competition must be product development. It is not unusual to find posts providing a priority and a non-priority letter mail service but beyond that service differentiator very little product differentiation of their offer. Without greater product differentiation incumbents will find it difficult to cover the full range of mailer needs, and this will constrain their ability to reduce prices aligned to the re-allocated costs on new, pared down, workshared and value added products.
Product development is precisely one of those areas requiring detailed analysis of customer needs, volume thresholds, costs and access or mail preparation conditions that is the new strategy of postal businesses facing liberalisation. New strategy is dull but critical.
Equally, market opening demands advanced pricing expertise–price being the key variable to reduce switching risk– and to better match price structures to the needs of specific customer segments.
The determination of cost based discount structures will be an essential competence for postal marketing teams in the future, not only to reduce vulnerability to switching but also to incentivise mailers to cooperatively reduce costs, and to reward them for behaviours optimal to overall postal efficiency and innovation.
Whilst postal managers know instinctively that tariff re-balancing is necessary I regularly hear that discounted price structures will be delayed on the basis of “why give away revenue now?” Yet, the experience from markets that have liberalised is that it is better to act sooner rather than later. Delaying tariff re-balancing until after new entrants are established will be contested by rivals and scrutinised by regulators for anti-competitive intent. More importantly, if the goal is to align prices to costs to stimulate productive efficiency it is better to do it sooner rather than later.
Posts can also reduce sales, service and transaction costs by a more integrated management of channels. Channels represent a gateway between a post’s products and the end user and can be a source of competitive advantage. Channel experience strongly shapes end users’ overall perceptions of the post’s brand and customer satisfaction with its products.
A channel centric perspective is therefore also part of a post’s new strategy for sales and marketing, including: improving efficiency within channels; reconfiguring prices and policies to optimise customers between channels; and more effectively engaging with third party sales and payment channel partners.
Put another way, an effective channel strategy allows the re-routing of customers to reduce costs to serve, to increase revenue per customer, to penetrate underserved segments, and to boost customer loyalty.
Conclusion
Incumbent posts facing market opening or simply seeking to grow profitability must resolve a set of closely related cost, pricing, product, customer and channel issues. They need to become organisations with the capabilities to develop and deliver an integrated commercial strategy involving the transformation of key sales and marketing processes.
This requires meaningful change in sales and marketing practices based on product and channel cost analysis, and informed by a focus on customer profitability. There needs to be a shift in resources from big strategy (values, mission, vision….) to new strategy: from a focus on brand to the prioritisation of cross-functional projects involving the customer interface; products and prices; the sales process; and the costs to serve within and between sales and payment channels.
New strategy is, if you will, a process through which a post can begin to embed new entrant characteristics into its network, products and prices, compliantly. It is about how the incumbent develops platforms for differentiation upon which it can execute change in anticipation of entry into particular segments. It is about price and product differentiation; a more appropriate allocation of costs to a market required product set; and the right mix of incentive and reward to align customers to sales and payment channels.
How then to unlock a new strategy in traditional postal businesses? In my experience the nemesis of change in posts is the master plan. A canvas is painted with individual brush strokes. The successful posts are the ones who make the changes to products, prices and channels as soundly based as is practicable, who learn from experience, and who continue to change based on that learning. New strategy understands that a series of small steps can be more enduring than the giant leap implied by the burning platform metaphor.
