European Postal Operators’ Diversification Strategies and Implications for Cost Allocation

For many European postal operators the growth in parcel and express segment does not outweigh letter revenue decline. Postal operators should find new growth drivers. They are actively pursuing growth opportunities in new business areas, mainly in logistics and freight, financial services, digital services and telecommunications, which are the largest sources of global postal revenues after traditional letter post and parcels and express delivery services. Postal operators also invest other markets such as local services or silver economy.When diversifying or entering new markets postal operators should firstly cover incremental costs. Determining incremental costs implies to establish adequate methods to allocate fixed and common costs in the case of multi-product firms. Allocating indirect costs such as overheads and network costs is not an easy task. While some costs can be easily identified and traced to individual product or line of business, there are common costs between historical and new activities that need to be allocated between the different products sold by postal operators.Knowledge of the costs can ensure the compliance with competition law and is a key to success and efficiency in new markets. Postal operators should therefore develop proper allocation cost methodologies. There exist several cost allocation methodologies. This presents the advantages and disadvantages of three different types of cost allocation methods: proportional cost allocation methods; methods based on game theoretical concepts and methods based on the value of the activity.