Pricing

Postcomm Forum:
The Postal Market for the future

Lorna Clarkson

Commercial Director

12 June 2007

Royal Mail is applying for approval to offer zonal prices for end-to-end bulkmail services

What is Zonal Pricing?

Pricing mechanism whereby customers are charged varying rates according to delivery destination

Zonal pricing is not about the distance mail travels or origin of mail

Which services will be zonally priced?

All classes of Mailsort 120, 700 and Walksort, Presstream and Mailsort 3 1400

The services inside the universal service will continue to incur a uniform price

How will it be deployed?

Phased replacement programme - zonally priced services will be introduced whilst retaining the uniformly priced service

Uniform prices will be withdrawn from service 6 months later

Zonal Pricing structure is based on 5 zones

It is important that the mapping of postcodes to zones is transparent, objective and consistent

Postcodes are allocated to one of five zones on the basis of the postcode sector - the first numeric digit of the inward area code

eg [BN1 6]YD

Less than/equal to 100 per km2N/ALow DensityDNot applicableNot applicableGreater LondonLondonGreater than 100 per km2 and Less than/equal to 1000 per km2

N/AAverage DensityCGreater than 1000 per km2N/AHigh DensityBGreater than 500 per km2Greater than 10%Business DistrictADelivery Point DensityBusiness DensityNameZone

Our retail zonal pricing application broadens geographic pricing to all bulk mail customers

Presstream Profile (Up to 33% price variance)

International Profile Pricing (Up to 69% price variance)

Wholesale Zonal Pricing (Up to 61% price variance)

Parcelforce Worldwide (Up to 67% price variance)

With Retail Zonal Pricing, all bulk mail customers can benefitToday few select customers benefit from discounts available through geographic pricingMailsort 120

Mailsort 700

Mailsort 1400

Presstream

Walksort

Consumers and SMEs will continue to pay a geographic uniform price

The same % discount and surcharge applies to all zonally priced services across all weights and formats

+2.5%+4.8%-1.7%-2.0%-4.9%Packet+2.5%+4.8%-1.7%-2.0%-4.9%Large Letter+2.5%+4.8%-1.7%-2.0%-4.9%LetterLondonDCBA

Zones

+2.4p+4.5p-1.6p-1.9p-4.6pPacket+0.8p+1.4p-0.5p-0.6p-1.5pLarge Letter+0.5p+1.0p-0.3p-0.4p-1.1pLetterLondonDCBA

Zones

The price variations proposed are smaller than those available on other geographic pricing

66% of items are mailed to zones that receive a discount (A, B & C)

Greater London accounts for 16% of volume. Prices for these items will increase by 2.5%

Zone D accounts for 20% of items and these will incur an increase of 4.8%

Many of our customers will benefit from zonal pricing

Zonal pricing is critical to our financial stability and continued provision of the USO

Zonal pricing will improve cost reflectivity and free us to compete fairly

With PiP we rebalanced between mail formats with zonal we rebalance between geographies

If we had not introduced PiP, our financial position would be comparatively worse

If we do not introduce retail zonal pricing our financial position will be comparatively worse

Competing operators in the UK offer to:

Extract items in a mailing that are destined to high density areas,

Price these items competitively,

Leave Royal Mail to provide service to low density areas at a uniform rate

In Sweden, The Netherlands and Germany entrants have been able to achieve significant market share (between 9 12%) in the geographic areas where they offer service

Zonal pricing will enable us to compete fairly thus offering customers a greater choice of providers

Zonal pricing is unlikely to have a detrimental impact on volumes

There is a concern that zonal pricing will lead to a decrease of items posted to areas where a surcharge would apply (Zone D and London)

Similar concerns were raised with PiP which was to cause the end of creative Large Letter formats

So far . . . this has not been the case

The ROI of a campaign takes into account the cost of the campaign and the lifetime profitable value of the acquired customer

There are many customers in Zone D and in London that have a high propensity to spend

It will continue to be in the interest of businesses to mail these customers

Customer profile will continue to be the main driver for mailing a customer but there may be a different impact by type of database

Given customer profiles, testing to Zones A C could increase as costs decrease

Testing databaseCustomer profiling and geo-demographics determine decision to mail

Advertising databaseLow impact

Customer databaseImpact of Zonal PricingDatabase type

Operational issues are minimal for the majority of customers

Zonal pricing

NANA

Uniform pricingObligation to quote exact no. of bags in mailingObligation to produce mail in zone order within SSCObligation to print Zone code on mail itemObligation to print SSC code on mail itemObligatory electronic ordering

Main change is the requirement to interface electronically with Royal Mail

Dynamic pricing much more accurate than profile pricing

Online Business Account (OBA) available since Spring 2007

Electronic interface is increasingly the accepted way of doing business

Customers will need upgraded software

Tools are available to enable customers to assess the financial impact of zonal pricing

Tool enables customers to establish which zone a postcode is tagged to

Zonal look-up toolAnalyser enables customers to calculate the number of items per zone in a mailing

Zonal mailings analyserMailsort pricing calculator extended to include zonal pricing

Comparison with existing calculator, which will continue to be available, allows customers to calculate the financial impact of zonal pricing

Mailsort pricing calculator

http://www.mailsorttechnical.com/zonal_pricing.cfm?sbl=true

Deployment date for Zonal Pricing is April 2008

Subject to Postcomm approval we are working to the following timetable:

July 2006February 20072 month period in 20072 January 2008January 2008April 2008April September 2008October 2008Royal Mail initial application

Royal Mail published revised application

Postcomm consultation on application

Postcomm final decision

Royal Mail publish final prices

Royal Mail deploy zonal prices

Migration period

Royal Mail cease uniformly priced services

DateActivity

Retail zonal pricing is critical to our future success

Broadens the benefits of geographic pricing that already exist for a select few

We do not believe it will cause a significant change in mailing patterns

Will not impact consumers as they maintain a uniform tariff

It will help maintain the financial stability of Royal Mail and protect the USO

We have developed a pricing structure that is simple and easy to understand

Royal Mail is capable of deploying major change programmes successfully and our commercial assumptions have proved sound

In Commercial Confidence