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Chapter 2
Postal Operations

The number of choices for customers continued to increase in 2005 with the introduction of new products and enhancements. Enhancements include new support for international mail and the introduction of a second postage product that provides sheets of stamps that customers can print on their computers and use at their convenience. PC Postage technology also supported enhancements to Web-based services, such as eBay and Click-N-Ship. The popularity of the PC Postage channel is evidenced by a 48 percent increase in revenues and a 21 percent increase in registered users compared with the previous year. PC Postage represented more than three percent of retail revenue in 2005.

The major addition to the postage meter channel in 2005 is the first information based indicia (IBI) product targeted to production mailers. It produces what is referred to as an "IBI Lite" barcode. IBI Lite requires less ink, which reduces costs while still achieving the benefits and security of the latest technology.

A 1-year market test of Customized Postage was launched in May 2005. Customized Postage utilizes PC Postage technology to allow customers to create personalized postage by uploading a digital image that can be printed with IBI. This service is provided directly to Postal Service customers by authorized companies and allows the customer freedom of choice and the benefit of competition in the marketplace. In 2005 customers bought 3.8 million personalized postage images.

Providing customers with the choice to use these channels is accomplished by working with commercial providers. This business model allows the Postal Service to reduce or eliminate capital investment while providing opportunities for cost savings, cost avoidance, revenue generation, and mail security.

K. Pricing and Classification

The Postal Service continues to pursue innovation in pricing and has adopted a pricing strategy that customizes and simplifies rates and requirements, and promotes pricing that better represents the value derived by customers. In embracing this strategy, the following initiatives were developed or implemented in 2005.

1. Negotiated Service Agreements

During 2005 the Postal Service successfully litigated three NSAs, implemented two, and submitted a new baseline NSA before the Postal Rate Commission (PRC). A NSA is a customized mutually beneficial agreement between the Postal Service and a customer to increase mail volume, enhance mail preparation, and reduce Postal Service costs when possible.

The Postal Service used the Capital One NSA filed in 2002 as its precedent to develop functionally equivalent agreements with Discover, Bank One (now JP Morgan Chase or Chase), and HSBC.

The Postal Service filed the Bookspan NSA with the PRC in July, the first baseline for Standard Mail. The NSA will provide Bookspan incentives to increase its use of Standard Mail letters to solicit members for its book clubs. If approved, the Postal Service would receive revenue generated by increased Standard Mail volumes and additional revenue from the volume generated by new club members. The Bookspan NSA seeks to establish important precedents by establishing volume-based pricing without associated cost savings, and by extending NSAs into Standard Mail.

2. Priority Mail Flat-Rate Box

The Postal Service continued the 2-year experiment for the Priority Mail flat-rate box implemented in November 2004. Available in two shapes, each with the same cubic capacity, the box is priced at $8.10 as of January 8, 2006, regardless of the actual weight or destination of the parcel. Providing flat-rate options offers customers the convenience of determining shipping costs in advance without scales or zone-based rate charts. The Priority Mail flat-rate box is easy to use and provides an additional easy to use option for retail and business customers.

3. Repositionable Notes

In April the Postal Service implemented the 1-year experiment for Repositionable Notes (RPNs) placed on the outside of letter and flat mailpieces. RPNs provide customers the ability to complement their First-Class Mail, Periodicals, and Standard Mail, with removable messages to their customers and potentially to generate higher response rates to their mailings. RPNs can be used as another means for mailers to advertise a product or service directly on a mailpiece.

4. Premium Forwarding Service

In August, 2005, the Postal Service launched Premium Forwarding Service (PFS) as a 2-year experiment to provide an option for customers who are temporarily away from their primary residences for a minimum of 2 weeks and up to 1 year to have most of their mail shipped each week via Priority Mail to their temporary address. Designed to replace informal or "snowbird" forwarding arrangements previously offered by some Post Offices, weekly PFS mailings are prepared by the customer's primary Post Office and shipped to the customer's temporary address. Since its launch through the end of 2005, PFS acquired 4,393 customers and more than $321 thousand in revenue. On average customers enrolled for 6.9 weeks of service. The Postal Service expects PFS to increase in popularity during the winter months.

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