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ROYAL MAIL SIZE BASED PRICING

KEY MESSAGES

Why are we doing it?
� Modern postal systems have changed so much since we introduced our current pricing system based on weight.
� Most mail is now sorted by machine and size is now the key factor in the cost of sorting and delivering most mail.
� Royal Mail needs its prices to reflect its costs so needs to its prices to be based on size.
� This is something many postal systems, including most of Europe, have already introduced.
� Three-quarters of mail will not be affected by these changes and will cost the same to send as now.

What is it?
� Three-quarters of mail will not be affected by these changes and will cost the same to send as now.
� There will be three categories for most mail � an ordinary letter size, a large letter size and a packet.
� Ordinary mail weighing less than 1kg will fall into these three categories.
� We believe this should be easier for customers as there will only be five prices for most mail so they should be able to price their mail at a glance.

Consultation?
� We have already spent 18 months talking to business customers and trade associations to make sure our proposals will work for the majority.
� Postcomm is holding a three month consultation so that everyone gets the opportunity to make their views known. Closes July 29 2004.
� We will keep talking to companies to take on board any concerns they have where possible.
Three-quarters of mail will not be affected by these changes and will cost the same to send as now.

Size Based Pricing
Background

Royal Mail needs to change the pricing of its mail services so that postage prices reflect postal costs. The price of postage will be related to the size of the item sent since size is a key factor in the cost of handling and delivering mail.

Our proposals, submitted to Postcomm in August 2003, would NOT change postage prices for nearly three-quarters or 74 per cent of the nation�s mail. This would continue to fall into the basic letter category � 28p First class and 21p Second class - and be unaffected by these proposals.

There wouldn�t be any overall postal price increase or decrease, so UK plc�s postage bill wouldn�t go up, and the impact would be revenue neutral for Royal Mail.

It makes commercial sense for Royal Mail, as it would relate prices more closely to cost. Royal Mail lost nearly �500 million in 2002/03 on post weighing up to 100g � which accounts for 75 per cent of the 82 million items sent each day.

The new pricing would be sensible in the increasingly competitive and regulatory environment; and would help Royal Mail meet its commercial goals.

Some ordinary letters will be cheaper to post as customers will be able to use 28p for First class and 21p for Second class stamps on letters weighing up to 100g, where currently they can only be used up to 60g. Heavier packets would also be cheaper to post and the maximum weight for Second class mail would be extended from 750g to 1kg.

Royal Mail believes that a size-based system would be simpler and easier for customers once they are used to it. In most cases customers would be able to price their mail at a glance instead of needing to weigh it. There would be only five prices for First and Second-class mail, instead of the current 16 for First and 13 for Second class.

Royal Mail recognises that this would be a major change, and have an impact on some business customers, so it has been talking to them about the proposals for a year and made some amendments to its initial proposals as a result.

Royal Mail estimates, from consultations with companies, that 81 per cent of our large business customers are in favour or neutral about the changes. An impartial research agency, the National Opinion Poll (NOP), found that 74 per cent of ordinary customers and 68 per cent of small businesses were positive or neutral about the changes. We would expect that more people would be in favour when they understand the benefits.

Postcomm has a three-month first consultation on these proposals which closes in July 29 2004, followed by a second consultation (probably lasting about a month). Royal Mail would aim to give customers as much notice as possible before introducing these changes, once the proposals were approved. The aim is to introduce the changes from Sept 2005 at the earliest.

Size-based pricing is not a new idea. Many other most postal administrations already take account of size in their prices, and others are introducing it. The countries which take account of size in their postal prices include Austria, Belgium, Bulgaria, Czech Republic, Denmark, Germany, Greece, Finland, Italy, Ireland, Luxembourg, the Netherlands, Poland, Slovenia, Switzerland, and outside Europe in Australia, Canada, Hong Kong, Japan, New Zealand, Singapore, South Africa, and the USA.

KEY MESSAGES

Why is Royal Mail Making These Changes?
� Royal Mail needs its postage prices to reflect its handling costs, and the size of a piece of mail is a key factor in the cost of processing and delivery. Therefore Royal Mail needs to base its prices more on the size of an item.
� Increasingly we sort mail by machinery and mail that can�t be machine-sorted costs more to handle. Large and bulky items also cost more to handle because they take up more space in trucks and mail delivery pouches so fewer can be carried at any one time.
� Competition is increasing in the UK and Europe, with the mail market being opened up by the UK regulator � Postcomm � and the European Commission, and Royal Mail has to be ready to compete.
� Many postal operators around the world already base their prices on the size of items.
� Before introducing the changes Royal Mail aims to give customers as much notice as possible, so that they can make any changes they need to make.

What would be the Impact on customers?
� Three quarters of mail wouldn�t cost any more to send, and people will still be able to use ordinary stamps.
� The proposed system is easier and simpler as the price could be determined �at a glance�.
� Overall the proposals are fairer as mail prices would more closely reflect our costs, so customers sending compact heavier items would not continue to cross-subsidise those sending bulkier lighter items.
� Although most mail won�t change in postal price, there would be some winners and some losers.
� Winners � customers sending heavy compact items such as catalogues and books eg the recent Harry Potter book.
� Losers � customers sending large light items such as very large cards, posters, and CDs in plastic cases. A couple of sheets of paper posted in an A4 envelope rather than folded into an A5 envelope would cost more BUT there are solutions � eg: fold letters, design mailings with size in mind.

Is this a price increase?
� Absolutely not. This change is not about putting overall prices up. The change will be revenue neutral for Royal Mail. Apart from anything our regulator, Postcomm, controls our prices via the postal licence.

Business customer research
� Royal Mail has spent a year carrying out an extensive consultation with its business customers to find out how changing to a size-based pricing system would affect them, and what it could do to reduce the impact. (For over 80 per cent there wouldn�t be any change in their postal bill, and many other companies could make simple changes, such as folding paper so that it fits into A5 envelopes instead of A4, to avoid paying any more).

Other Information:
Postcomm�s Timetable for Opening of Postal Market

Postcomm�s policy for achieving effective competition within the postal market for items weighing less than 350g and costing less than �1.

There will be a fully competitive market in postal services in the UK from April 2007 � one year later than originally proposed. Competition was introduced gradually, beginning on 1 January 2003.

In a decision document, which took account of almost 2000 responses to its consultation on competition, Postcomm said that competition will be introduced in three phases, as follows:

� Phase 1, from 1 January 2003 � 31 March 2005: bulk mail above 4000 items (from a single site in a similar format), around 30% of the UK letter market by value, together with consolidation services and niche services.

� Phase 2, from 1 April 2005 � 31 March 2007: the bulk mail threshold will be adjusted to open up a total of 60% of the market by value.

� Phase 3, from 1 April 2007: all restrictions on market entry abolished