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WASHINGTON-The U.S. Postal Service's proposed 10.3% rate increase for 1995 will push more advertisers into targeted database marketing and alternate delivery but not at the levels of previous, higher rate hikes.

Advertising mailers let out a sigh of relief last week when the postal service's Board of Governors, as expected, proposed the increase for most classes of mail. The independent Postal Rate Commission will issue a recommendation on the request within 10 months, with the final decision coming from the Board ofGovernors.

The proposal is far below the 24%-plus hikes that hit third-class mailers in 1988 and 1991 while other classes paid less.

"We would be better off without [a rate increase]. But that's unrealistic; 10.3% is tolerable," said Jerry Pickholz, chairman of Ogilvy & Mather Direct, New York.

However, the National Newspaper Association, representing small papers, plans to challenge the proposal, which would hike the price of mailing newspapers within a county by 36%.

The proposal won plaudits from several advertising and business mailing groups, including the Advertising Mail Marketing Association, Direct Marketing Association and Mailers Council, as well as Advo, Hearst Corp. and J.C. Penney Co.

But the support carried a condition: that the postal service overhaul the way it does business to include more cost cutting and competitive pricing. The rate hike is expected to add $4.7 billion annually to postal service coffers. Without the hike, the postal service is expected to have a deficit of $1.3 billion for fiscal 1994, ending Sept. 30.

Advertisers aren't expected to increase their direct mail budgets to coincide with the rate hike, O&M's Mr. Pickholz said. Instead, they will mail fewer pieces, mail less frequently or use a less expensive grade of paper and less color in their mailings.

The rate increase "will continue to put more pressure on targeting -to make sure [advertisers] are talking to the right people," said Steven Dapper, president-ceo of Rapp Collins Worldwide, New York. "Database marketing will continue to evolve. People who own proprietary databases to talk to their customers will have an advantage over those that use broad-based direct mail campaigns."

Alternative mail delivery operations, such as Alternate Postal Delivery and Publishers Express, said the postal increase will bring new business to them.

"Any time our competitors raise their rates, it's a plus for us," said Stan Henry, chairman of Alternate Postal Delivery. "Right now, we're about 15% below the postal service [in price]. If they go up another 10% and we hold our rates, that puts us at a 25% advantage. That's pretty good."

Federal Express Corp. and United Parcel Service declined to comment on how higher postal rates will affect their business. Both stand to lose a competitive advantage if an ongoing review of the postal service's rate process would allow it to have more flexible, competitive pricing.

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