Delivering A First Class Service?

Ten years ago, a First Class stamp cost 27 pence. From next week, it will cost 60p. In just the past two years, the price will have increased by 50%. Royal Mail desperately needs to increase its revenue to preserve its universal service – but such price hikes also represent a gamble on the future of communications in Britain.

Charging the same price to deliver mail anywhere in the UK, from London to Lerwick, is a founding and fundamental principle of the Royal Mail, but this has brought it under threat from more modern forms of communication. It is just so much quicker, easier and cheaper to send an email or a text message, and doing so is no longer the preserve of the young and affluent.

Postal services have benefited in some ways, though, from changes in society’s behaviour in the 21^st century. The growth of internet shopping has been a boon for parcel delivery services – and although this sector is more competitive, Royal Mail’s universality gives it a crucial edge, particularly at the lower end of the market.

And the company is looking to exploit this advantage in its new pricing model, which sets a flat rate of £2.70 for all packages weighing less than 750g; this means a 35p cut at the high end of this bracket, but a 70% increase in the cost of posting a large but lightweight item.

The focus of media attention regarding these price changes has inevitably been on the headline figures for first- and second-class stamp prices (the latter is rising to 50p, five pence short of an inflation-linked regulatory cap designed to protect those on the lowest incomes).

But the biggest impact will obviously be on small businesses, which will still have little option but to rely on Royal Mail to serve their UK customers. Many will see spiralling costs that will have to be passed on to their customers, who will themselves be feeling the same squeeze.

And this is the risk that the Royal Mail is taking. As prices rise, demand falls – the challenge is to find the optimal price level to maximise revenue. That the regulator has given the company the freedom to pursue this goal is a good thing, but such freedom must not be abused.

Research suggests that 75p for First Class is the tipping point beyond which only a (shrinking) core of customers would continue to buy stamps – and only because they have no alternative. But the acceleration of prices over the last few years could be equally damaging.

There is also another, implicit flaw in the universality model, which becomes more threatening to its survival, the higher its prices rise. It is that by charging a delivery from one end of the country to the other at the same rate as one being made across town, the former offers better value for money than the latter.

Thus, short-distance customers are effectively subsidising long-distance ones. As the stakes get higher, so do the gains that can be made from finding alternative methods of communication where they are most readily available – in urban areas – which in turn is where Royal Mail’s biggest customers are and where its potential profits are easiest to come by.

And profits are a sore point for this company. In the last six years, while postal volumes have declined by 25%, Royal Mail has lost around £1 billion. These are losses on a scale that price rises alone are not enough to reverse – the company needs major reform to improve efficiency.

But all the while it must maintain its unique selling point, highly valued by its customers and effectively responsible for its continuing survival in the 21st century. The longer we want to continue using it, the more we will have to pay for it.