James Moore: Stamping over your customers won't really help

Talk about indecent haste. Ofcom had barely issued its press release giving Royal Mail the green light to stamp all over its customers before the deed was done. With newly acquired power to set prices in its hands, the soon-to-be-privatised company said that from the end of April the price of a first-class stamp will rise by 30 per cent to 60p, while second-class stamps will increase by 39 per cent to 50p.

The Royal Mail certainly has a problem. Delivered mail volumes have fallen by 25 per cent since 2006 when it handled 84 million letters a day while revenues are down from £6.8bn to £6.4bn and the universal delivery service is losing money. At the rate of about £2m a week.

Ofcom has accepted that the treasured "universal service", where consumers pay a fixed price for delivery anywhere in the country is under threat. And it is true that the price of a stamp has been artificially held down by more than it ought to have been. Royal Mail argues that the price of a first-class stamp in Germany equates to £1.21. In France it's £1.11.

All the same, it doesn't require an MBA (or even a GCSE in business studies) to see the flaw with the thinking that immediate huge price rises will solve its problems, particularly when fed-up consumers are feeling the pinch.

The above figures indeed suggest that increasing the price of stamps has ensured that revenues have fallen less quickly than the volume of letters. But if you increase prices by too much you run the risk of it being counter-productive. People will see sending anything through the post as a luxury and cut back sharply. The fall in revenues that results from this might not be compensated for by the sharp rise in prices. Losses will escalate.

It isn't as if the internet isn't increasingly providing alternatives. If you have a business designing e-cards it might now be time to celebrate.

Royal Mail has naturally done lots of modelling that argues against this outcome. The trouble is that when businesses do modelling to see how a controversial measure might work in practice they usually get the sort of results that they want. Particularly if they hire consultants to do the modeling for them.

Ofcom and Royal Mail claim that yesterday's measures will ultimately protect the universal model. They are just as likely to herald its demise. It might not be too long before mail delivered to out-of-the-way places has to be picked up from the nearest Post Office (the network remains in state hands).

Politically, however, that is something that is too unpalatable for the actors in this particular drama, including the Government waiting stage right, to admit.