Media: All about ... Royal Mail size-based pricing

A battle has been won but the war continues, Claire Billings writes.

If you had hoped Royal Mail's latest climbdown on the thorny issue of size-based pricing meant the matter was close to conclusion, you'd be disappointed.

Although the notion of size-based pricing has been the subject of debate for two years since Royal Mail began consulting its customers, its introduction is still at least another two years away.

Royal Mail's latest compromise will allow packages that comply with the criteria set for large letters - slightly bigger than A4 and no deeper than 10mm - to vary in thickness by 5mm.

This is a resounding triumph for the publishing sector, which is worth £350 million a year to Royal Mail. It means magazines carrying slim covermounts, inserts and supplements will still squeeze into the cheaper category.

The news is not only a landmark victory for publishers, led by the Periodical Publishers Association, but it demonstrates a willingness on Royal Mail's part to co-operate with its customers.

But this is only one compromise, appeasing one disgruntled group of customers.

There are many other interested parties, such as direct marketers, who still don't know if their objections are being taken seriously enough.

Royal Mail claims that to move from weight-based to size-based pricing better reflects the costs it incurs when handling modern mail items such as poster tubes.

Agencies such as WWAV Rapp Collins believe the proposed price structure will inhibit creativity, limiting the possibilities for clients wanting to use innovative formats to improve response rates. Size-based pricing would have made work such as the Campaign Direct Award-winning St Patrick's Day mailer for Guinness by Tullo Marshall Warren more expensive.

Postcomm is taking this argument and others submitted for consultation into consideration. And while the regulator is broadly supportive of the scheme and of Royal Mail's recovery plan, it has not been convinced by the evidence that Royal Mail has supplied.

So, while the Champagne glasses may have been clinking over at the PPA last week, Royal Mail's chief executive Adam Crozier's plans to make the new charges a concrete part of Royal Mail's financial overhaul are still some way off.

1. Royal Mail has been working at introducing size-based pricing since 2002 as part of a long-term turnaround of the business. Its aim was to stem the £1 million-a-day loss it was making two years ago. Big, lumbering Royal Mail needs to be transformed into a slick, robust business able to stand up to a deregulated market in 2007. So far, it has converted its daily losses into equivalent profits and first-half income this year is reported to be £217 million.

2. Sized-based pricing separates post into three categories. A letter is any item smaller than 240mm by 165mm, with a maximum thickness of 5mm and weighing no more than 100 grams. A large letter is no bigger than 353mm by 250mm, no thicker than 10mm (with 5mm leeway) and no heavier than 500 grams. A packet does not meet either of these specifications. A fourth category has been introduced for A3 magazines, which are bigger than a large letter but weigh less than 600 grams.

3. Bulkier lightweight items, such as poster tubes, would incur higher costs than smaller, heavier items such as books. Larger items, Royal Mail says, cannot be machine sorted and take up more space in mailbags. Postcomm has rejected this argument, saying Royal Mail has failed to provide sufficient evidence to support the case and has asked for further information. The Direct Marketing Association has suggested Royal Mail invests in new machinery.

4. Postcomm launched its first round of consultation in April, seven months later than originally planned because of lack of evidence from Royal Mail. It has since received 10,000 responses to its initial consultation. Some 8,000 of these were in the form of postcard petitions, and more than 120 individual organisations provided submissions. Another round of consultation will run in 2005 to ask for opinions on the licence terms Postcomm agrees with Royal Mail, providing the system is allowed.

5. The earliest the new pricing could be introduced is April 2006. Royal Mail initially wanted to bring in the new system in 2005 but has had to provide more evidence to the regulator.

WHAT IT MEANS FOR

MAGAZINE PUBLISHERS

- A new category for A3 magazines has been introduced to protect publishers of larger-format titles as long as they do not break weight and thickness restrictions.

- Magazines carrying small covermounts are also being protected. While a CD in a plastic wallet attached to the front of a magazine should squeeze through, one carrying a pair of flipflops would not. Supplements and inserts will also be allowed.

- A pricing structure that sees costs increase gradually rather than in large steps has also been agreed.

DIRECT MARKETING

- Lobbying from the Direct Marketing Association and agencies such as WWAV Rapp Collins has so far failed to secure any concessions for the £2.5 billion direct mail industry.

- One fear is that direct mail, already coming under pressure from e-mail marketing, will lose its competitive edge on cost compared with other disciplines.

- Another concern is that, as direct marketing battles its poor "junk mail" image among consumers, it will have a negative impact on creativity. Placing restrictions on size could hamper creativity and stand-out, which would damage response rates.

- Sized-based pricing could make sampling campaigns, used by relative newcomers to DM, such as FMCG clients, too expensive.

- The industry continues to lobby for, at the very least, more weight bands to be introduced into the packet category to help prevent huge leaps in costs.

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