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After 350 years Royal Mail has finally lost its stranglehold over the postal market, and judging from the number of firms that have applied for licences, it would seem that operators in the field have been waiting for this moment.

In January the postal service became fully deregulated, ending Royal Mail's monopoly and offering choice to businesses and consumers for the first time. This follows a partial deregulation in 2003 that permitted private operators to deliver business mail in batches of 4,000 or more.

The long overdue change is already cutting costs and raising the quality of a service seen by many as indifferent. With savings on offer of about five per cent, and more in some cases, many bulk mailers have jumped at the chance to slash their postal bills for at least part of their needs.

Business mail makes up about 80 per cent of the market, and recent research by mailing and fulfilment house Corporate Mailing Matters indicates that 17 per cent of this will shift to competitors over the next three years.

Other effects of competition include greater flexibility in collections and timings, and the ability to track the mail's progress. Private firms also provide reports that help monitor service levels.

Even those who stick with Royal Mail are likely to enjoy a more predictable and reliable service, as the challenge has forced the incumbent to raise its game considerably over the past 18 months.

However, since only Royal Mail owns a domestic delivery network, consumers will have to wait a while for a comparable alternative. For the moment, private operators are primarily collecting pre-sorted business mail and giving it to Royal Mail to carry the final mile.

One of the main new entrants is TNT, which already numbers Sky, Npower, Next and Express Gifts among its clients. Another is UK Mail, which now routinely carries more than 3.5 million items a night for companies such as Royal Bank of Scotland and GE Capital.

A third major player, DHL Global Mail, is handling mail for Debenhams and John Lewis, among others. A total of 14 companies are licensed to carry mail by the regulator Postcomm and also include Target Express and B2B services DX and Citispeed AMP.

Since most operators have long been active in the courier market, it is a relatively small step to deliver letters as well as parcels. TNT CEO Nick Wells says the brand is well trusted and claims there have been no negative perceptions about it as an alternative to Royal Mail.

Several customers have been quick to concur. Sky says it is "extremely impressed" with TNT's service, which it is using for a sizeable part of its business, while Express Gifts praises the company's flexibility in providing a tailored operation.

Typically, the private companies offer a guaranteed two-day service as an alternative to Royal Mail's Mailsort One and Mailsort Two options, which promise delivery within one and three days, respectively. An item collected on Wednesday, for instance, will be delivered on the following Friday morning.

As well as offering a small cost saving, the operators aim to score by giving clients guarantees on the day, and even the time, the mail will be delivered. This will be a big advantage to direct marketers, who will be able to plan their response mechanisms with far greater precision.

Ian Paterson, strategy and regulatory affairs director of UK Mail, says: "Knowing exactly when the mail will arrive on the consumer's doorstep helps to manage call centres, fulfilment houses and other resources. It also offers the opportunity to link mailing campaigns with above-the-line advertising, to co-ordinate a mail piece with a press coupon or TV campaign more realistically."

Mail order clients in sectors such as computers and wine are taking advantage of the service to ensure their catalogues and letters arrive on a Saturday morning, when they are most likely to be read. That is already increasing response rates, Paterson claims.

There is still no cheaper option than Royal Mail's Mailsort Three service, which offers delivery in seven days. However, the operators hope that the ability to predict timings will tempt some to trade up.

Two of TNT's clients have switched from Mailsort Three and the higher price has been more than compensated for by the increased response, Wells claims. "Direct marketers are interested not just in the cost of the postage, but also price per acquisition and conversion," he says.

Not all companies offer exactly the same deal or capability, and it will pay companies to do their homework. For instance, some will be able to benefit from the different pricing structures offered for various parts of the country.

Consultants can advise on a pick-and-mix approach that reaps the best of all worlds. "If you have the right type of mailing lists with the right profile, you can avail yourself of opportunities for cost savings," says Graham Cooper, managing director of Onepost.

The consultancy uses special software to determine the best fit based on such factors as postcode, delivery network, weight and format, and the required delivery time. In some circumstances this might mean using a different Royal Mail product rather than switching to a competitor, Cooper points out.

Deregulation has also created new opportunities for business-to-business mail delivery. As well as its two-day delivery via Royal Mail, DHL offers Smartmail Citispeed, an end-to-end, one- or two-day collection and delivery service to defined city postcodes. According to DHL's UK managing director, John Ivers, the service is reliable and easy to use as clients do not need to frank or sort the mail.

At least some clients agree. Tim Norman, development director at Mail Marketing International, says the service has made an enormous difference to the reliability, cost and management of its mailings.

"Competition is healthy for the market and we have reaped the benefits of getting our mail handled by a company that can provide a consistently reliable delivery service to the standards we expect," says Norman.

With established operators already creaming off some profitable business, the future for Royal Mail might seem to be less than rosy. But postal deregulation in Sweden and New Zealand has barely dented the incumbent's grip in either country, suggesting that Royal Mail is unlikely to lose more than 15 per cent of its business.

However, the company is taking no chances and has been fighting back.

"We are easier to do business with as an organisation and are working hard to improve services," asserts Alex Batchelor, marketing director at Royal Mail.

Two years ago, Royal Mail failed all the 15 performance targets set by Postcomm, but now claims to be meeting almost all of them, some by a substantial margin. For instance, 94 per cent of first class letters now arrive the next day, a dramatic improvement over the 88 per cent figure registered in August 2004.

Batchelor claims competitors have unfairly exaggerated the unpredictability of Royal Mail's delivery times. "We can tell you the drop pattern with remarkable consistency and have been able to for a while," he says. He also says he is not aware of any customer that has switched to a competitor because its delivery forecasting is any better.

Any company thinking of switching to a private operator is well advised to take the needs of its suppliers into account. For agencies and mailing houses used to dealing with Royal Mail, the complexities thrown up by liberalisation are likely to be a headache, at least in the short term.

"Direct marketers need to look beyond the headline savings," says Alex Walsh, head of postal affairs at the Direct Marketing Association. "The nightmare scenario for suppliers is to have to deal with six different companies and run the risk of putting the wrong mail into the wrong bags."

Some suppliers may absorb the cost of this restructuring, but others could pass it back to the client, Walsh suggests, wiping out any cost savings from making the switch. "If you are looking for an alternative don't take the decision on your own but talk to your suppliers as well," he recommends.

Worries about potential technical problems are voiced by Darren Lyall, head of mailing services at Dataforce. He believes private operators are still a way from providing the level of service and equipment required to sustain a long-term challenge.

"For each competitor, a mailing house will need a different computer system and different containers for transporting mail," Lyall explains.

"It will almost certainly find itself having to load several half-empty articulated lorries from different companies on a daily basis, instead of two or three full ones from a single company, as at present."

Varying systems in one production environment inevitably leads to reduced efficiency, Lyall argues. However, Lyall adds that this is likely to be a short-term issue, and that in time dealing with different suppliers will become second nature.

For mailing service suppliers the benefits of competition can't come soon enough. Typical complaints against Royal Mail include a lack of generous discounts and poor credit facilities, also a failure to compensate adequately for errors.

Alan Timothy, CEO of data-engineering consultancy Rocket Science, says: "Mistakes seem to happen more often than they should with Royal Mail, but the organisation won't give compensation even if a mailing is so severely affected that the client refuses to pay for the postage."

Royal Mail denies that its compensation terms are scant, arguing that bulk business posters can get back a proportionate share of their spend on each product used which fails to meet promised quality targets. In the past financial year, more than £23m was paid out in this way, it points out.

The company also insists that credit terms are granted according to normal criteria, based on payment records and assessments by independent credit referencing agencies.

On the other hand, a company that holds a monopoly faces little pressure to make concessions. In a free market, competitors could try to win customers by being more generous on all three counts, forcing it to improve its own terms.

Arguably the complaint that sticks most is the lack of anyone to talk to at Royal Mail if things go wrong. Timothy thinks that having proper account handlers will be one of the biggest benefits offered by new competitors.

"Even if the issue was out of their remit they would find someone else who could help, rather than having to chase around to talk to anyone and never having your calls returned," he says.

Royal Mail recognises that this is a frustration for customers, and says it is making significant investment to improve matters. New operational managers in each mail centre have been employed to work directly with local customers, and technology will be used to help resolve problems.

With deregulation already well established, what difference will this year's full liberalisation make? For a start, the changes have hitherto only affected bulk mailers, but now companies with smaller mailing requirements can also benefit.

Full deregulation is also likely to bring specialist suppliers into the market. Some will be operators providing a limited service in specific locations, such as the M25 area, or between big cities. Others will deliver mail for particular sectors, such as hospitals and government departments.

TNT has set up a service aimed at small- and medium-sized businesses that collects and sorts mail before giving it to Royal Mail. This uses sophisticated Dutch software that can read postcodes with greater reliability and can even recognise handwriting. "The service provides some cost savings, and is good for direct marketers who are sending a lot of standard second-class mail," says Wells.

TNT also has ambitions to set up a full end-to-end delivery network.

Until recently the firm had a successful partnership with Express Dairies to deliver mail along with milk in big conurbations.

This was welcomed by observers as offering a real alternative to Royal Mail. However, to their dismay, Express Dairies' owner Arla Foods recently pulled out of the postal market on the grounds that this was not a core activity.

The arrival of complete liberalisation in January is also helping raise awareness of new opportunities. That is relevant for direct marketers, many of whom have not yet realised its potential to make savings and increase response rates. "A lot of people are not yet geared up for this, in spite of the sustained campaign that individual operators have been running," says Onepost's Cooper.

Postal deregulation is unlikely to transform the market as fast or as fully as liberalisation in telecommunications and utilities, for instance.

But even limited competition will bring real benefits that large-scale mailers will be considering with keen interest.

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TOP TIPS

- Make sure you understand the detail of your own organisation's posting profile, including specific delivery and service requirements.

- Collect details of the relevant service offerings from all the carriers, or talk to an independent intermediary.

- Check that the profile of services offered by other carriers, including pricing and delivery times, meet your requirements.

- Ask for references or case studies from organisations that have undertaken similar projects.

- Understand fully the requirements for differing postage paid impressions and return addresses.

- Ensure that your mailing service provider can handle any additional data or mail handling work.

- Make sure that any extra steps of this kind do not add to the timing or negate any savings.

- Only sign up to a contract if you believe that the carrier will consistently be able to offer the best value product for the duration of the agreement.

- Check that there is not a Royal Mail product that is more cost effective.

- Ensure you are updated on service changes or additions by all the carriers, or from your independent intermediary.

Source: Onepost

POSTAL FACTS AND FIGURES

- The UK mail market was worth approximately £6.5bn in 2004/05. The licensed area - mail that costs less than £1 to deliver and weighs less than 350 grams - accounts for about 72 per cent of this.

- Businesses send about 80 per cent of all mail in the UK licensed postal market. About 60 per cent of this mail goes from businesses to consumers and 27 per cent from businesses to businesses.

- Consumers post the other 13 per cent of mail in the licensed area. About 10 per cent goes to other households and three per cent from households to businesses.

- The total letters market has continued to grow and accounted for 20.1 billion items in 2004/05.

- About 381 million items were fed by private operators into Royal Mail's network for final delivery in the second half of 2005.

- New operators carried more than 106 million items from collection to final destination in 2004/05.

- Royal Mail still dominates the postal services, accounting for more than 97 per cent of mail volumes in 2004/05. Its revenue grew by 3.8 per cent in the year ending 27 March 2005.

- New operators took £31m, 0.7 per cent of the total market, in 2004/05.

- Almost three-quarters of business mailers polled in September planned to switch some or all of their mail to an alternative supplier to take advantage of five per cent cost savings, as long as quality was assured.

Source: Postcomm

DETAILS OF SERVICES

TNT Mail Services (www.tnt.com) Subsidiary of TGP Post, the Netherlands' state postal operator. Since June 2004 it has offered TNT Mail Premier, a two-day business collection and delivery service delivered by Royal Mail. It has now introduced a two- or three-day sortation service prior to delivery via Royal Mail.

UK Mail (www.ukmail.biz). Subsidiary of Business Post. Since May 2004 it has offered Business Class, a national two-day business collection and delivery service delivered by Royal Mail.

DHL Global Mail (www.dhlglobalmail.co.uk) Rebranded from Deutsche Post in January 2005. It offers Smartmail Suresort, a two-day business collection and delivery service through Royal Mail. Also Smartmail Citispeed, a one or two-day, unsorted B2B collection and delivery service to UK cities via own network.

Target Express (www.targetexpress.co.uk) This service has been operating since January 2006. It offers a two-day business collection and delivery service via Royal Mail.

Citipost AMP (www.citipostgroup.com) A B2B service to defined postcodes in major conurbations (a total of 20 by mid-2006). It offers next day, two- to three- day and three- to five-day delivery via its own network.

DX (thedx.co.uk) Since 1975 it has run the Document Exchange, a membership business mail delivery network for sectors such as legal, accountancy, estate agency and banking. It now also provides a B2B next-day delivery to most UK business addresses.