US Postal Service--Stranger than Fiction

The scenario is a typical one for many companies in the current economy: demand has fallen, people are using alternative products and services. The questions is what to do? For most companies, the answer would be to drop prices to stimulate demand and at the same time to reposition to attract customers back or create new ones. What about raising prices? That would defy all logic in business. What would be the sense of raising prices when customers already are not interested in the product? Wouldn't that just cut the demand still further?

Well, none of these scenarios make a bit of sense when we're talking about the government or agencies of the government. The demand for postal services has gone down, replaced by the Internet. The answer Postal Officials have come up with is to raise prices by 9%. Think about this increase--inflation is running flat, prices on everything are falling. But, the Postal Service raises prices by 9%. The Postmaster General estimated that this increase would cover the losses of the service and maintain service. The estimates are undoubtedly based on current demand, which will likely dip still further given the increases and further erosion of the traditional mail system by technology. So, there will clearly be another short fall due to continuing drop in demand with a call for more increases next year. This should not even be legal. It almost sounds like the Mafia: "we'll make you an offer you can't refuse".

We can be assured that when the USPS goes to Congress for permission, it will get the go-ahead. What would the alternatives be if they were turned down? My goodness, it would be to cut their costs to the bone; lay off workers, cut back on hours, cut prices of their products, etc. This is what one would expect from any business manager with a brain facing a similar situation. But, once again, this is the government. So, rather than cutting costs or laying off more workers or cutting hours or cutting the price of stamps to attempt to get more people to buy and use stamps, they will go in the opposite direction.

This is all stanger than fiction. It is beyond the logic of any first year business student. The whole country is suffering from the effects of the Great Recession, and the Postal Service decides to raise prices. Will this decision reverse the decline in demand for services? No. So, what will the Postal Service do next year when demand falls still farther? Well, it will raise prices again. This is the height of audacity--we'll do it because we can. If you don't like it, don't use the mail. Oh wait, you already don't use the mail? So what, then we'll raise prices again next year on those who do.

It will continue to work this way until the legal profession finally accepts documents as legal that are faxed or e-amiled. Companies are the ones forced to use the mail system. But, wait a minute, that would take a change of the law which means that it would entail governmental decisions made by lawyers to change things from which they benefit. Fat chance. So, the illogical and almost criminal decision by the USPS will impact businesses most, especially mid-sized and small businesses (who else usually suffers?).

To quote the wicked witch in the Wizard of Oz when she was melting: "what a world, what a world"!

Stop Playing the Price Game

I am in Toronto visiting friends. Yesterday, I had a really interesting discussion with a fellow who imports household goods, spices, and other things. We were talking about value and brand over price. The gist of the discussion was that North Americans have become convinced that the only way to keep or attract new customers is through lowering price. This might bring in customers, but it also undermines the perceived value of the offering and undermines the brand.

The Wal-Mart impact is being felt in every sector of the economy. Many businesses look to Wal-Mart's success and conclude that they cannot succeed without having the lowest price. There are many ways to show value to the customer. Price is just one.

Consider that there is a continuum between high price, high differentiation and low price, commodity. These are the extremes of the continuum, not our only choices. Between these extremes we have many ways to show increased value--customer service, relationships, partnerships, etc.

It is a good thing to cut costs. But, that should be done to allow the firm to provide value in other ways. It should not be done so that price can be lowered. If it is, the margins are squeezed and the entire market become a war of attrition.

Let's consider Southwest Airlines or Porter Airlines (if you are not familiar with Porter, you should fly them to Toronto from one of the cities they fly from in the US--Chicago, Boston, Newark). Both airlines gained efficiencies by having only one type of place and flying only point-to-point. This means that all staff are qualified on all planes and they do not have to deal with hubs. This speeds flight arrivals and departures. But, at the same time, they used these cost efficiencies to create value differentiation--Porter actually pushes carts with free wine and provides food. Southwest does not charge for bags. These are things that drive up perceived value. But, they also do things that other airlines could do for free but do not--they smile, they act like they enjoy and appreciate having you on board. They make the experience enjoyable. This builds perceived value and increased loyalty.

We have to get control for companies back from the accountants and finance folks who think that everything comes down to price and start looking for ways to enhance perceived value. There are so many ways that companies can do it--it will enhance the brand and, if the entire organization is engaged, it also will grow the reputation.