NOW

EXCLUSIVE: Stamps.com Under Scrutiny; Potential Impacts On Small Volume Shippers

By Gordon Glazer, CMDSM, CMDSS, MDP, MDC
Senior Consultant, USPS Specialist
Shipware LLC

Gordon Glazer

Back in July 2016 when I last wrote about the scrutiny over postage discounting programs and the potential impact to small volume shippers (click for story), Stamps.com stock was trading around $75 a share. Some pundits reported that the “sky was falling” and Stamps.com stock could fall as low as $15 a share, yet today it is trading over $190!

The controversy at its core concerned the use of specific USPS NSAs (Negotiated Service Agreements) commonly referred to as “Reseller programs” by Stamps that allowed the participation of small volume shippers to enjoy lower CPP pricing that they otherwise would not qualify for. (Note: CPP = Commercial Plus Pricing: USPS contract pricing requiring a minimum of 50,000 Priority Mail Packages per year).

Ken McBride, CEO of Stamps responded in detail to these allegations during a 2016 Q2 Earnings Call during which he said, “the NSAs and the Reseller programs are well known throughout the USPS organization, are encouraged by USPS management and are viewed as having been successful in driving growth for the USPS.”

He also stated, “it is also not a common practice of ours (to enroll clients) as only approximately 3% of our customers have been offered discounts with the Reseller rates in order to retain their volume with the USPS.”

While it is true that Stamps has played an instrumental role in the double digit growth of USPS parcel volume, it is not clear if the use of this discount program for low volume shippers has helped the USPS or unfairly enriched Stamps as recently reported by the Washington Post in its article “As U.S. Postal Service struggles, Stamps.com fortunes rise.”

Prior to the January 22, 2017 rate change, guidance was provided by the USPS that they intended to draw the line on unauthorized discounting below CPP by some entities utilizing the Reseller programs. The (unstated) goal was to stop cannibalization and competition between Reseller participants over existing client business.

In April of this year, rumors were flying around amongst postal industry insiders regarding major changes to the Reseller program; that a letter was “on the way” to the 3 licensed Reseller holders that would further define the use and administration of the programs. While no letters ostensibly arrived, rumors further circulated that all would be revealed by the National Postal Forum in May 2017. While there were reported closed-door meetings with senior USPS officials and the Resellers, no written guidance was released or revealed publicly.

The Captial Forum (TCF), a Washington DC subscription news service, issued a report on June 28th entitled “Stamps.com: Barcode Inspector Software Provides Insight into Reseller Spread Magnitude and USPS Per Package Revenue Loss; Use of Multicarrier Software Platform Results in Postage Being Purchased for ~2% to 31% Below CBP Rates.”

In this lengthy article, TCF reported the findings of a software developer who had decoded the postage barcode to reveal the NSA wholesale cost for a number of sample shipments. As a result, Reseller margins were revealed demonstrating the magnitude of the commissions earned by the Resellers and their partners.

On August 21, TCF reported that new “Marketplace Requirements” language was being inserted in multiple client NSAs in June of this year. TCF published this language from a non-redacted portion (of a NSA ~PM contract 340) which documented the new rules.

Key changes to the program are summarized below:

⦁ Defines that the relationship must be between the Reseller and the client. No third parties may be part of the contractual relationship. The client must be the physical shipper. This means that Stamps.com and its affiliates (ie; Endicia, ShipWorks, ShipStation, ShippingEasy) can no longer directly sign up a new client into one of these programs. Note: This doesn’t necessarily change any of the revenue sharing between a Reseller and their partners.

⦁ It defines the responsibility for any short-paid postage and the requirement for full client information on file to aid in the recovery of short paid funds. This is part of the new Automated Package Verification (APV)  you can read about here.

⦁ Provides full visibility into the usage of the programs by both existing and new clients and puts an end to any aggregation of multiple clients into a single postage account. A practice used by some middleware providers who directly manage the postage and reporting for their clients.

⦁ Requires submittal of prior 12-month USPS shipping history and good faith estimate of expected monthly volume and revenue.

⦁ Defines the minimum price that can be offered to a shipper and closes loopholes by ”prohibiting rebates, discounts, gratuities, freebies, promotions, inducements or other incentives that could be perceived as further discounting product prices.”

⦁ Disallows the use of free customized/specialized USPS packaging.

⦁ Every user must be approved in writing by the USPS.

⦁ Discounts below CPP but above the NSA cost may be allowed on an individually approved basis.

⦁ Spells out Termination and Remedy provisions for both the participating shipper(s) and the Reseller.

What is not spelled out with the new changes:

⦁ Will existing low volume clients be allowed to stay in the program?

⦁ What will the guidelines be to allow (or disallow) new low volume users access to the program?

⦁ Will further controls be put into place to restrict the use of multiple Reseller programs whereby traffic is routed by the most profitable contract (aka: least cost routing between NSAs)?

⦁ There does not seem to be any specific dates for compliance, while contractually each NSA typically becomes effective a couple days after approval by the PRC (Postal Regulatory Commission).

Perspective on how these changes may impact Stamps.com:

⦁ This will require a herculean effort to collect the required client information and prior usage history for each user. Each user will need to accept the conditions and be provided a specific privacy statement. This will need to be coordinated and completed by the actual Reseller, whose program is being used for that client, but Stamps will undoubtedly be heavily involved.

⦁ It should protect and minimize cannibalization of Stamps.com clients that are already enrolled in the program since pricing, discounting, rebates et al have been eliminated and there is now strong visibility and remedies in place to control.

⦁ Provides a stronger relationship between the USPS and the end user client and will shift much of the financial burden for short paid postage to the end user and Reseller.

⦁ Removes some of the uncertainty that has been the angst of those that analyze and invest in Stamps.com.

⦁ It is a reasonable first step by the USPS to both control and learn how effective the use of these programs is in both growing and sustaining volume before taking definitive steps to curtail alleged improper use.

Stamps.com supports the recent statements by Jim Cochrane, Chief Customer and Marketing Officer and Executive Vice President at the U.S. Postal Service, who was asked in this recent interview on Stamps.com Blog, just prior to their earnings call:

⦁ (S) “…how does the Postal Service view the Reseller program and its role in growing postal package revenue?” (JC) “…we looked at Resellers and things like PC Postage providers, like Stamps.com and Pitney and Endicia, as excellent partners on bringing the best solution to customers.”

⦁ On the follow up question, (S) “…what extent has the Reseller program contributed to past growth and helped the Postal Service become the leader in e-commerce packages? (JC) “It goes after mostly small/medium-sized business. It gave us solutions there and that is a growth engine in the economy. And if you think about the early days of Resellers, it was mostly marketplace activity, eBay and Amazon in the marketplaces. And providing the solution there was really important for us. So it certainly contributed to the success that we are experiencing. And once again, we have grown this. I think last year we did about $7 billion in the channel which is coming out of PC Postage and Resellers. So together, those solutions have really crafted a nice segment solution for us for the small, medium-sized business.”

⦁ Stamps next question flat out asked, (S) ”With that, do you see the Reseller program continuing to be a growth strategy for the future? (JC) Well, if it is growing to the tune that ours is, and it gives us solutions down market where we do not have the sales team to interact, yes, I do not see a reason why it would not continue to serve both customers and the needs of the Postal Service, going forward.”

Jim Cochrane’s interview has created quite a stir among those that follow this closely, and I have been asked many times my opinion on why Mr. Cochrane would disclose on that forum such bold support in favor of the use of the Reseller program.

I believe Jim is being forthright in the support of a program that has helped provide the Post Office with the best example of success to help offset the negatives of declining First Class Mail volumes. While there are conflicting opinions within the USPS as to the value of these programs and how they are being used, the head of Sales and Marketing has come forward publicly in full support.

Some analysts, however, question the timing of this interview and the forum. Why come out in such vigorous support right before a Stamps.com earnings call, and why not do so in a more neutral platform since Stamps is arguably the biggest beneficiary of the Reseller program?

I think it was simply a matter of convenience and a desire to put some of the uncertainty to rest. I don’t believe this is very high on the list of critical challenges the USPS is facing. Costs are being covered, volumes are growing and the program leverages the private sector to advance the value of USPS as a major carrier, and the largest residential carrier.

The biggest challenges facing the Post Office today are Postal Reform legislation on Capital Hill and completing the 10 year review of the PAEA (Postal Accountability and Enhancement Act of 2006, implemented in 2007). The outcome of these two critical items, and the related adjustments to how they price their products, may well determine the future success of the Postal Service.

This is a logical, well thought out plan to limit and control unneeded noise and distraction in the marketplace. It provides a framework for all the players to move forward while allowing access to usage detail that has remained shrouded in secrecy due to privacy concerns.

There is much we do not yet know on how the USPS is going to enforce its newly acquired controls over the use of the program. But we suspect it will not be a draconian change, at least not right away. There is now a process in place that ties in nicely with the APV program that will support proper payment and collection for USPS services purchased through online means. It delays immediate action and provides some breathing room for the USPS to concentrate on much bigger concerns. All in all, it looks like a soft landing for Stamps to a difficult and contentious issue.

Perspective on how these changes will impact small volume shippers:

⦁ For those already engaged and enjoying Reseller discounts, be prepared to provide quite a bit of information regarding your legal identity and contact information. You will need to agree to a privacy statement that will allow the sharing of both your current and previous usage history, and you may need to provide a forecast for your future use. I suspect it is going to take the USPS at least 6 months to a full year to digest and plan the program’s use and management. This is just a guess, but having worked with the USPS for over 30 years, I have an inkling on how long this may take.

⦁ For those wishing to participate, the impact will be more immediate. I believe determination (to allow participation) will be based on two key factors: Will participation help grow Postal volume beyond what would likely occur without the use of the program? Or will its use help protect existing Postal volume from diverting to USPS competitors? If either or both of these questions can be answered in the affirmative, then participation will likely be granted.

A lot has transpired over the last year, hopefully you feel better knowing that the sky is not falling. I wish you great shipping success.

Gordon Glazer, CMDSM, CMDSS, MDP, MDC is a Senior Consultant, USPS Specialist at Shipware LLC, an innovative parcel audit and consulting firm that helps volume parcel shippers reduce shipping costs 10%-30%. Gordon is a postal industry veteran with 31 years’ experience and is a sought-after speaker and industry thought leader. He welcomes your questions and comments, and can be reached at 858-724-0457 or gordon@shipware.com. In the interest of full disclosure, Gordon has no equity position on Stamps.com or any of its competitors. Also, Shipware provides access to discounted postage pricing through one of the Reseller agreements mentioned in the reports.