Postal tariff strategies: From volumetric pricing to size-based pricing to pricing in proportion
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Postal tariff strategies: From volumetric pricing to size-based pricing to pricing in proportion David Robottom Received (in revised form): 26 January 2006
Abstract This paper looks at the various postal tariff strategies employed in the UK since the mid-1990s, culminating in the forthcoming introduction of ‘pricing in proportion’ (PIP) later this year. Size-based pricing first reared its head, under the guise of volumetric pricing, approximately ten years ago. Its driver was the desire of Royal Mail to align its cost base with its prices. This was despite what was generally regarded as its inefficient operation. The internal pressures within Royal Mail came from a perspective of reducing processing costs for very often hand-sorted mail (large flat-sorting mechanisation was still in relative infancy) in growing volumes. After a series of ill-fated attempts to persuade industry to adopt or consider size-based pricing, Royal Mail decided to launch a consultation on the issue in 2002. Royal Mail made it very clear that the reason for the consultation and why it wanted to move to size-based pricing was twofold. — Commercial reasons. Royal Mail believed it would improve its commercial position, improve efficiency and make it simpler and easier for Royal Mail customers to use its services. — The secondary aim was to provide Royal Mail with a way to bring about a better alignment of prices to costs.
Commercial gain
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Here it is worth noting that the principal aim was not to ensure prices are geared to costs but to maximise commercial gain for Royal Mail. This is very pertinent in the context of later developments. Royal Mail actually defined size-based pricing at this stage. ‘Size Based Pricing measures the dimensions of postal items and prices them according to their length, width and thickness. These dimensions are not multiplied together to obtain a price — as in ‘‘volumetric’’ pricing — because all three dimensions are important individually. However we have found no mail company which prices only by size. They all have weight limitations (or weight caps) and it is normal to have some weight breaks within each of the larger sizes. For our purposes therefore we have defined Size Based Pricing as ‘‘a system of pricing mail which takes account of the size of each mail
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Postal tariff strategies item’’. This definition does not exclude weight, which we propose to retain in the form of weight limits for our sizes, and as the basis of a single weight break in each of our two larger sizes.’
Competitive threat
Although the explanation is quite detailed, it is confusing. It is difficult to see how Royal Mail could obtain cost efficiencies if it is still using weight as one of the pricing parameters. The
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