Monday, May 14, 2007

Forever Stamps: Convenience or Scam?

Postal rate increases go into effect today, including a rise in the cost of mailing a first-class letter from 39 to 41 cents. But this time, there's a twist: the "Forever stamp," which will be sold for 41 cents so long as that is the rate, and then increase in price when the price of mailing a letter increases, except that Forever Stamps purchased at the old rate will still be valid for mailing a letter after the next increase. A good deal, right? Maybe, maybe not.

You might be tempted to buy Forever stamps as an investment vehicle, especially if you wait until the announcement of the NEXT rate increase. But as explained in this Washington Post story, that's not likely to generate an especially strong return.

Of course the Post Office isn't offering the Forever stamp as an investment vehicle. Its value is convenience and possibly some small cost savings. If you buy Forever Stamps now and through the next postal rate increase, you won't have to buy and affix a batch of 2 or 3 cent stamps when the rate next increases (to 43 or 44 cents, respectively, in these examples). Avoiding these small nuisances is certainly worth something. In addition, if you're the sort of person who forgets to buy the small-value stamps, or finds that the post office is out of them when you seek them, you could save money with Forever stamps. Instead of a pile of old lesser-value stamps for which you paid but never used, you just keep buying and using Forever stamps.

So what's the catch? The problem is that some significant portion of the population will start buying stamps in larger batches, no longer worried that the stamps will become insufficient to mail a letter before they have a chance to use them. And bulk purchases of stamps are an interest-free loan to the Post Office. The Post Office gets the money for the stamps (which cost very little to produce) long before it has to perform the service of delivering letters in exchange. Likewise, instead of keeping $41 (say) in the bank for an extra six months (or whatever) until the postal customer needs more stamps, buying a hundred extra Forever stamps on the theory that they last forever deprives the customer of the time value of that $41 (or whatever) for six months (or whatever). (Actually, ALL purchases of stamps are an interest-free loan to the Post Office, with the term varying depending on the time between purchase and use of stamps. My point is that Forever stamps will tempt people to keep the loan open longer.)

To be sure, consumers often make this sort of decision when they buy other sorts of goods in bulk. Stocking up at Costco on a twelve-pack of pickle barrels saves the customer the cost of making daily or weekly trips to the local grocery store for a daily or weekly supply of pickles. However, in the pickle case, the customer receives a volume discount for the purchase of large quantities of pickles that more than compensates for the lost time value of money (unless the customer ends up not eating most of the pickles or, as in my case, lives in a Manhattan apartment where space for pickle storage is at a premium). Not so with the Forever stamps, which cost the same amount whether you buy one or one thousand of them. (At the same time, even notoriously small Manhattan apartments probably have enough space so that a few dozen extra stamps aren't noticed.)

That's not to say that Forever stamps are a bad deal for everyone. As I said, the foregone time value of the money spent to buy lots of Forever stamps may be less than the savings from the combination of 1) avoiding the drawer full of outdated stamps and/or 2) avoiding the nuisance of buying and small-denomination stamps---what we might call the money value of time. So, for some people, Forever stamps are a good deal. Indeed, for just about everybody, Forever stamps are a good or no worse than neutral deal, so long as they don't alter their behavior to buy too many stamps too far in advance.

The real issue, then is awareness. So long as people understand the downside of stocking up on stamps (or pickles or anything else for that matter), they can make a rational choice about how many Forever stamps to purchase.

16 comments:

Craig J. Albert said...
This comment has been removed by the author.
Richard said...

I think it is a great idea, the post office can make less of the small stamps(2 or 3 cents), it cost the same to produce any stamp, why not print a 41 cent instead of a 2 cent, so they(post office) makes more on the 41 cent, agreed? So why not make maximum profit off each stamp? It's common sense. If you buy many stamps to use them later as a hedge against rate increases, then you have paid the post office an advance, the post office could put the extra income into a interest baring account, they will make money. I get convenience, that's all I really wanted anyway. It's a great idea, it's about time!

Tam said...

What's the point in the USPS offering the 41 cent stamps? Why would anyone buy them instead of the Forever Stamps? I can only think of one instance - if you just wanted a few stamps, and the Forever Stamps can only be purchased in booklets of 20. But does that really happen enough for it to make sense for them to offer both? Or am I missing something?

Michael C. Dorf said...

In response to Tam, here are two weak reasons for continuing to make $1 cent stamps:

1) For letters weighing more than an ounce, it could be useful to get to the right total postage. But this is a weak reason, because the post office could simply phase out all cent-denominations of stamps. They would then sell a Forever stamp for a first class letter and different forever stamps for each additional ounce.

2) The Forever stamp only comes in the Liberty Bell design, but of course this only raises the question of why the Post Office doesn't offer different designs of Forever stamp.

Garth said...

interesting.

you raise the point of the opportunity cost of purchasing these stamps for regular joes.

is this market really that big though. i buy a book of stamps, maybe once a month. the stamps are only good for mailing things.

for me, Richard is right on. i want the convenience of not worrying whether i've got the right postage on my letters.

most volume mailers on the other hand do have an interest in locking in a lower rate. however, as a busines, i am sure they will thoroughly analyze the costs and benefits of locking in a rate at a given value.

i wonder what their perception of the Forever Stamp is. did they lobby for it and what do the numbers say when you run them on a bigger scale than my househould bills.

if this is aimed only at the consumer, it's a good deal.

Tam said...

I assume a stamp buyer buys a booklet of stamps primarily to send out lighter-than-one-ounce letters. Is the current regime under which a hike raise renders those stamps insufficient for that purpose fair? Wouldn't it be more fair for them to "grandfather" in the stamps purchased at the old price? (Which is essentially what they'd be doing if they sold only Forever Stamps from now on).

After all, even without the hypothesized increase in bulk purchasing, the funds from the revolving interest-free loans, which as you point out occurs with virtually every stamp purchase (except those that are used the same day) are surely enough to cover the temporary shortfalls that occur around the price hikes due to people who recently purchased under the old prices. So I question the legitimacy (from moral or fairness criteria, rather than legal ones) of the USPS accruing this benefit to themselves.

After all, no one would say that lawyers should be entitled to the interest on various of their clients' funds in their possession. That's why we have IOLTA, the legal profession's way of putting to good use what would otherwise be an interest-free loan to attorneys from their clients.

Garth said...

Tam,

if i read you correctly, you are illustrating two competing frameworks through which to view stamps.

you believe that purchasing a first class postage stamp is akin to purchasing the right to send one first class letter.

however, even though it looks like a first class postage stamp, it is really a right to send a certain amount of weight through the mail.

thats why bulk mailers have their own stamp machines capable of printing out "stamps" in odd amounts.

the postoffice contributes to this confusion by blurring the above distinction in favor of the former.

i'm sure all casual users of the postal system would appreciate the former, but the Post Office seems to be delivering the latter.

Tam said...

Come to think of it, I have to be wrong. Implicit in my argument was that the PO isn't already putting to use the interest income for the consumer's benefit. But to the extent that the interest income reduces how much they have to raise through sale of stamps, it does benefit all the users.

The disanalogy with IOLTA is that if lawyers were to receive the interest income from their trust accounts, it would just line the lawyer's pocket, and that's why you need it there, but not with the USPS.

Still, the "grandfathering" effect of selling only Forever Stamps would be pretty convenient.

Kenji said...

I just found this site, which shows the history of post rate increases:

http://www.akdart.com/postrate.html

Based on this, over the last thirty years or so, the post rate for one ounce of mail increased by a compounded rate of approximately 4.7% per year. So, this is not a bad investment, given that it's almost a risk-free investment.

Patrick said...

They sure do sell a lot of these 'forever' stamps right after a hike, then they stop and start selling the amount stamps again, and by the time they raise the price again, everyone's used all of their 'forever' stamps at the rate they were purchased at. That seems wrong.

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