The Untold Story of the ZIP Code

April 1, 2013

Prepared by U.S. Postal Service Office of Inspector General

Report Number: RARC-WP-13-006
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

i

The Untold Story of the ZIP Code

Executive Summary

In 1963 the Post Office Department introduced and vigorously promoted the use of the

Zone Improvement Plan (ZIP) Code. The code was originally intended to allow mail 

sorting methods to be automated but ended up creating unimagined socio-economic 

benefits as an organizing and enabling device. The ZIP Code became a social tool for 

organizing and displaying demographic information, a support structure for entire 

industries such as insurance and real estate, and even a representation of social 

identities as observed in the television series Beverly Hills, 90210. Today, the ZIP Code 

is much more than a tool for moving mail efficiently, and its positive spillover effects are 

enormously beneficial to society. Consequently, it is time for the Postal Service to 

explore new ways to improve the ZIP Code, both to save postal costs and to enhance 

the opportunity for third party innovators to discover new uses and applications. This 

paper estimates the economic value of the ZIP Code and examines potential 

enhancements to strengthen it for the digital age.

One such enhancement would be to combine the ZIP Code with the precision of 

geocodes (latitude and longitude coordinates). This could have a direct impact on the 

U.S. Postal Service’s bottom line by facilitating delivery route reconfiguration. 

Historically, the Postal Service has delivered mail via set delivery routes where each 

carrier visits the same homes every day. With the anticipated growth of parcel delivery, 

including the possibility of same-day delivery, the Postal Service will find it necessary to 

develop dynamic carrier routing. Combining the ZIP Code with the geocoding of 

addresses could ease the processing necessary to improve the efficiency of parcel 

delivery.

Another benefit of linking address geocodes to ZIP Codes would be to facilitate

communication between the ZIP Codes and geographic information system (GIS) 

mapping software packages. Such software can define areas of the country not labeled 

through the addressing system, such as undeveloped land, by associating them with 

latitude and longitude coordinates. For example, the software could theoretically map 

high risk areas for sink holes or forest fires. Those risk areas could then be connected 

to ZIP Code and addressing information to notify residents of risks or identify the risk of 

developing these areas. Additionally, linking geocodes to ZIP Codes and addresses 

could help align government investments to serve public needs by assisting disaster 

recovery efforts, tracking population “flight paths” to unaddressed areas, and increasing

the capability to map demographic information to surface areas.

Another enhancement we recommend is linking demographic information with the 

ZIP Code and offering smaller mailing groupings to improve target mailings. This would 

increase the value of mail for senders and receivers by connecting recipients with more 

precisely targeted mailings and reducing less valuable broad mailings. Naturally, such 
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

ii

programs should be pursued on an “opt-in” basis to protect privacy. Details regarding 

these enhancements are provided in the body of the report.

To understand how best to implement these enhancements, the history of the ZIP Code 

is explored first. Examination of the development of the ZIP Code reveals that its

unanticipated external benefits occurred because the Post Office Department took 

initiative and experimented with a series of steps to ensure the innovation’s adoption 

and success. The Post Office Department embraced a new idea, found executive 

sponsorship, examined foreign posts for successful comparisons, developed a 

consistent stakeholder outreach program, and remained committed to implementing the 

ZIP Code in spite of resistance by mailers. It was only after this extraordinary effort by 

the Post Office Department that other, non-postal innovators were able to conceive new 

applications. The postal initiative was narrow in its originally intended purpose to 

promote the ZIP Code’s use in mail sorting, but ultimately universal and foundational in 

its benefits.

The ZIP Code story also brings to light two interesting aspects of the Postal Service 

when it comes to innovation. On the one hand, the Postal Service is a slow and 

accidental innovator. Twenty years lapsed between conception of the original idea and 

its implementation, although a case can be made that some of the ZIP Code’s success 

is due to the Post Office’s methodical and deliberate implementation. On the other 

hand, because its innovations are offered as a foundational layer on a public open 

platform, Postal Service initiatives have the potential for a tremendous and wide impact. 

This is perhaps not surprising given the Postal Service’s ubiquity, importance in 

facilitating communication and commerce, and public service nature. The ZIP Code 

represents one of these far-reaching initiatives that is a true public service — only a 

small fee based on the cost of maintenance has ever been charged for use of the ZIP 

Code and no specific appropriation has ever been made for its development. It exists 

out of pure good will, and the sheer extent of the impact of the ZIP Code has more than 

compensated for the low clock speed at which it was developed.

This impact was realized through the innovative concept the ZIP Code provided — the 

“digitization” of surface space, not just in the sense of converting names to numbers, but 

also in the grouping of surface spaces into zones for mechanization and ease of mail 

flow. Other organizations and businesses soon realized the ZIP Code possessed an 

elegant simplicity for efficiently organizing data by geography. The U.S. Census Bureau, 

for example, uses the ZIP Code to organize its statistics. Other industries, like real 

estate and target marketing companies, redefined the way they do business by basing 

their informational structure on the ZIP Code. The ZIP Code is solicited or used in a 

variety of transactions, such as buying gas with a credit card at an automated pump. 

Today, a ZIP Code and physical mailing address are widely recognized attributes of an 

individual’s identity.

Yet the full benefits of the ZIP Code are still largely unrecognized. To remedy this 

oversight, the U.S. Postal Service Office of Inspector General worked with IBM to 

present important insights from the history of the ZIP Code, provide an estimate of the 
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

iii

economic value of the ZIP Code system, and discuss ways to further enhance it. 

Preliminary research uncovered no previous attempts to value the ZIP Code.

IBM computed the additional revenues and reduced costs that result directly from the 

ZIP Code, in all of its uses, postal and non-postal. The estimate shows that the 

ZIP Code adds close to $10 billion annually in value across the economy. The 

magnitude of this number is impressive, but some caveats should be kept in mind. 

Providing a precise estimate for the economic value of the ZIP Code is a difficult task. 

Many beneficiaries are inevitably overlooked and not all those identified can have their 

benefits properly estimated due to unreliability or unavailability of information. 

Nonetheless, this rough but conservative estimate is useful for providing insight into the 

important role the ZIP Code continues to play in today’s economy. It shows that its 

value is in the billions of dollars and that the value to external firms and organizations 

far exceeds the internal value to the Postal Service.

The Postal Service has consistently maintained the ZIP Code over the 50 years of its 

existence. It has created and deleted ZIP Codes as needed, and expanded the ZIP 

Code itself from 5 digits to 9 and then to 11. The usefulness of the ZIP Code depends 

crucially upon this continued maintenance. Without the Postal Service’s effort to 

enhance the ZIP Code and increase its utility as a tool in the 21st century it is likely that 

its value as a public good will diminish. For example, if the Postal Service does not take

the opportunity to link geocodes and ZIP Codes perhaps other organizations will no 

longer utilize ZIP Codes in mapping and grouping as they will not have the level of 

precision required. But if history is a guide, the potential societal benefits can be 

expected to exceed the advantages we currently enjoy. The Postal Service should

explore seizing these immediate identified opportunities and open up this new 

enhanced ZIP Code for outside innovators to continue to conceive new uses beyond 

our current imagination. This is the opportunity to innovate anew on an old innovation 

frontier — this is our 1963.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

iv

Table of Contents

Introduction ..................................................................................................................... 1

History ............................................................................................................................. 2

Economic Valuation Model.............................................................................................. 8

Enhancing the ZIP Code System .................................................................................... 9

Enhance Physical to Digital through Geocoding................................................. 11

Improve Targeting Ability for Marketing.............................................................. 15

Maintain the Open Platform................................................................................ 16

Conclusions................................................................................................................... 17

Appendix

Detailed Economic Model.............................................................................................. 19
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

v

Tables

Table 1 Survey of Public Acceptance of ZIP Code............................................. 5

Table 2 Sampling of Industries that Currently Use the ZIP Code ....................... 7

Table 3 Economic Value of the ZIP Code by Use Groups.................................. 9

Table 4 FY 2011 and Estimated Future Values for Attributable 

Cost ..................................................................................................... 25

Table 5 Estimated ZIP Code Values for Different Values of ρ ......................... 26

Table 6 Distribution of the Uses of Postal Services by Economic 

Sector.................................................................................................. 28

Table 7 Calculation of Estimated Proportion of Inputs in Postal 

Services (λi) ....................................................................................... 29

Table 8 Estimate of ZIP Code's Value Added for Important PostalUsing Sectors ...................................................................................... 30

Table 9 Estimate of ZIP Code's Value Added for Important NonMail-Related Sectors ........................................................................... 32

Table 10 Government and Nonprofit ZIP Code Resource Savings .................... 33

Figures

Figure 1 What the Digits Mean ............................................................................ 4

Figure 2 Mr. ZIP................................................................................................... 4

Figure 3 Strategies to Enhance the ZIP Code ................................................... 11

Figure 4 Real Estate Values Grouped by ZIP Code (above) and 

Geocode (below) ................................................................................. 13
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

1

ZIP Codes and physical 

addresses are important 

attributes of individuals, 

companies, and even 

communities in today’s 

data driven society.

The Untold Story of the ZIP Code

Introduction

The Postal Service has a lot going for it: its trusted brand and an advanced 

infrastructure that includes a ubiquitous physical delivery network, facilitated by a 

thorough national Addressing Management System (AMS). A critical but often

overlooked postal asset is the Zone Improvement Plan (ZIP) CodeTM System 

(ZIP Code). The ZIP Code organizes the vast geography 

of the U.S. into well-defined areas for the purpose of 

efficient mail delivery. Evolving beyond its initial intended 

purpose as a mail delivery tool, the ZIP Code has

energized new business, enabled government services, 

and even helped to define communities. Today, a 

ZIP Code and physical mailing address are widely 

recognized attributes of an individual’s identity. They not only connect individuals to the 

mail system, but they also create a framework for social interaction and institutional 

coordination. 

To understand the importance of an addressing system, consider for a moment what 

conditions are like in countries that do not have one.1 The clear societal benefits derived 

from proper addressing systems and efficient logistics services are absent, limiting the 

prospects for success in multiple sectors. An effective addressing system can deliver 

benefits well beyond mail delivery, such as coordinating disaster relief, tracking the 

spread and patterns of disease, catalyzing commerce, and supporting critical public 

sector functions. There is strong evidence that implementing addressing systems in 

impoverished neighborhoods can actually increase the overall quality of life by allowing 

basic infrastructure, such as electricity, water, communication, and government services 

to be delivered to the area.2 This was seen in the slums of Calcutta, for example, where

spray-painting unique addressing numbers on houses yielded significant positive effects 

on overall quality of life in the city’s neighborhoods. This effort has allowed the local 

 1 Current estimates show as many as 4 billion people worldwide are unaddressed and approximately sixty Universal 

Postal Union countries have no postal code system. James Cartledge, “Addressing the world: How geocodes could 

help billions start using the mail,” Post& Parcel, November 9, 2011, http://postandparcel.info/43564/indepth/addressing-the-world-how-geocodes-could-help-billions-start-using-the-mail/. 2 Universal Postal Union, Addressing the world – An address for everyone, 2012, 

http://www.upu.int/fileadmin/documentsFiles/activities/addressingAssistance/paperAddressingAddressingTheWorldA

nAddressForEveryoneEn.pdf and Alberto Chong, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, 

Letter Grading Government Efficiency, National Bureau of Economic Research, Working Paper No. 18268, 

August 2012, http://www.nber.org/papers/w18268.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

2

The ZIP Code grew beyond 

its use as a mail delivery 

facilitator into improving the 

national infrastructure.

government to organize the delivery of water and electrical utilities to the slums and 

residents now have the legal identities required to apply for bank accounts and jobs.3

The United States possesses one of the most mature addressing systems in the world 

with one of the most developed postal code systems 

— the ZIP Code. The ZIP Code has taken on a life of 

its own, acquiring independent value that extends 

beyond its role in facilitating postal delivery services. 

Its contribution to the nation’s soft infrastructure is as 

significant as the Postal Service’s contribution to the development of highway, railroad, 

and air infrastructures.

4 Furthermore, despite declining mail volumes, use of the 

ZIP Code by individuals and businesses has expanded over the years. 

The purpose of this paper is to explore the importance of the ZIP Code through an 

examination of its historical creation, intended use, and positive spillover effects. The 

ZIP Code is revealed to be a public good that has far surpassed its original intent. The 

paper also presents an initial estimate of the economic value of the ZIP Code to the 

U.S. economy. Finally, it outlines potential enhancements to this vital Postal Service 

asset to ensure its continued usage and reap additional social benefits.

History

Currently, the Postal Service delivers 40 percent of the world’s mail to 5 percent of the 

world’s population, a task made more daunting by the geographical size of the United 

States.5 The Post Office Department’s original sorting methods depended solely on

local addresses and hand sorting.

6 But this became impractical as the country 

expanded westward and the population boomed. Before the advent of the ZIP Code and 

automated sorting mechanisms, the average mailed letter was handled by eight to 10

postal employees.7 This manual sorting became even more laborious as customers’ use 

of the mail grew by almost 160 percent from 1940 to 1965.

8

With the examples of industrialization and standardization in trades like the automobile

fresh in their minds, forward thinking Postmasters General envisioned using automation 

 3 Go Code and the Hope Foundation, Addressing the Unaddressed: Case Study, 2012,

http://www.globaladdress.org/wp-content/uploads/downloads/2012/07/Addressing-the-Unaddressed-Project-forHope-Kolkata-Foundation-2.pdf. 4 U.S. Postal Service Office of Inspector General, Postal Service Contributions to National Infrastructure, Report No. 

RARC-WP-12-012, July 9, 2012, https://www.uspsoig.gov/foia_files/rarc-wp-12-012.pdf. 5 U.S. Postal Service (John Mazzone and Samie Rehman), The Household Diary Study: Mail Use & Attitudes in FY 

2011, April 2011, http://about.usps.com/studying-americans-mail-use/household-diary/2011/fullreport-pdf/usps-hdsfy11.pdf. 6 The Post Office Department was a cabinet-level department responsible for post offices and mail services up until 

1971 when it was reorganized into the current independent establishment of the executive branch: the United States 

Postal Service.

7 U.S. Post Office Department, The Last Word in Mail Addressing, 1963. 8 U.S. Congress, House of Representatives, Committee on Post Office and Civil Service, Subcommittee on Postal 

Facilities and Modernization, Hearings on H.R. 5180, [H.R. 9551], ZIP Code System in the United States Postal 

Service, 89th Cong., 1st Sess., March 24, 1965.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

3

Postal Inspector Robert 

Moon proposed the idea and 

Postmaster General Edward 

Day spearheaded the 

initiative for the modern 

ZIP Code.

to handle this increased workload. The Post Office identified best practices for 

mechanization to further the goal of increased efficiency and used them to establish the 

Nationwide Improved Mail Service (NIMS) program. This program, started in 1961, 

standardized the physical dimensions of the mail through the establishment of envelope 

sizes and shape limitations.9 The next step was to establish some type of machinereadable code to facilitate the sorting of the mail on a national level.

A nationwide standardized coding system for mail would increase processing efficiency.

Consider just a few examples. A code could resolve problems associated with 

nonspecific references such as multiple cities in the United States with the same name.

A code could also allow further mail grouping for easier distribution, logistics handling, 

and transportation routing. For example, the code would increase cross country 

shipping densities while allowing mail to be sorted into smaller groups than the city 

level. Lastly, a code is easier for computerized equipment to recognize than addresses. 

To develop this nationwide code, the Post Office Department looked to a sorting system 

that it had started using in a limited capacity in 1943. This system divided up large cities

into multiple 2-digit postal zones, which were written by mailers in the lower line of 

addresses and called local zone numbers.10 The 2-digit code was successful in gaining 

sorting efficiencies but was limited to large cities, was not a mailing requirement, and 

was used primarily by large mailers. 

Philadelphia Postal Inspector Robert Moon saw the value of coding early on and in 

1944, he submitted a proposal to create a new national 3-digit code system to assign

the country to various processing hub centers represented by sectional center codes.

He strongly believed that a national coding system

was “necessary for the post office to keep up with the 

mail volume after WWII.”11 After persistent 

submissions of his proposal to management, Moon 

finally found an audience in Postmaster General 

Edward Day. Day was intrigued by Moon’s idea and 

combined it with the 2-digit local zone numbers to 

create the 5-digit ZIP Code that is utilized today as shown in Figure 1.

12 This system 

served as the basis for future postal code expansion and mechanical sorting.13

 9 Edward Day, Mr. ZIP and how he came to be, U.S. Post Office Department,1963. 10 U.S. Congressional Research Service, Changing Postal ZIP Code Boundaries, by Nye Stevens, Report No. 

RL33488, June 23, 2006, accessed at http://www.dtic.mil/cgi-bin/GetTRDoc?AD=ADA462043. 11 Datasheer, LLC, “The Two ‘Mr. ZIP Codes,’” http://www.zip-Codes.com/mr_zip.asp. 12 There are five types of ZIP Codes: (1) the standard ZIP Code, which refers to a post office for a city or a division of 

a city that has mail service; (2) the P.O.-Box-only type is used for P.O. boxes at various facilities; (3) the military ZIP 

Code given to military bases overseas and also often to ships; (4) unique ZIP Code types given to organizations that 

receive large quantities of mail; and (5) Legacy ZIP Codes, which are those which are no longer in use but retained 

for old data purposes. Uniform Data System Mapper, http://www.udsmapper.org/ziptozctacrosswalk.cfm. 13 Edward Day. Today, addresses are read by optical character readers (OCR) and can be sorted through a remote 

coding system to determine the destination of each address. Despite this capability, the OCR first reads the 5-digit

ZIP Code to process a destination sort in 180ms and avoid the time consuming remote coding system. The speed 

gain from reading the 5-digit ZIP Code and efficiency gain is only possible through the innovation of the ZIP Code. 

Managing Automation for Postal Supervisors (MAPS) Student Training Manual, April 2008, Book 1, p. 8-14.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

4

Figure 1: What the Digits Mean

Executives at AT&T warned Day that they had experienced difficulty getting people to 

use area codes for telephone numbers and that the public might likewise be hesitant to 

adopt the ZIP Code. But Day had reason to believe otherwise; in his study of the West 

German postal code in the early 1960s, he was amazed that the country achieved an 

80-percent public adoption rate in its first year of use.14 The West German postal 

service’s extensive promotion campaign was credited for the successful introduction of 

the new system.

Day learned from his international colleagues that a pre-introduction public campaign to 

educate and excite the public about the ZIP Code was crucial. When Day unveiled the 

nationwide 5-digit ZIP Code at a postmasters’ convention in October of 1962, he 

simultaneously introduced the world to “Mr. ZIP” — the cartoon character whose body 

language symbolizes speedy delivery. Mr. ZIP touted the ZIP Code for its power to 

increase the accuracy and speed of delivery, thereby allowing the Postal Service to limit 

future rate increases. 

Figure 2: Mr. ZIP

 14 Edward Day.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

5

Large mailers were skeptical 

that the $72 million savings 

from the ZIP Code justified 

their implementation costs 

of $200 million.

This extensive campaign should be credited with much of the ZIP Code’s popularity and 

successful adoption. The Post Office Department adopted a “saturation campaign,” and 

distributed promotional materials to Post Offices around the country. Mr. ZIP could be 

seen on posters in every Post Office, on decals on mail trucks and carrier bags, and 

even on buttons postal employees were instructed to wear. The Post Office Department 

partnered with AT&T to put images of Mr. ZIP in their offices and on their service trucks 

and ZIP Code maps were frequently included in the local yellow pages. Public service 

announcements were broadcast on radio and TV, one of which featured a group called 

the Swingin’ Six singing the benefits of the ZIP Code.15 Lesson plans were designed to 

encourage teachers to introduce the ZIP Code to young children. Mr. ZIP was 

seemingly everywhere, and his whimsical characteristics helped win over the American 

public — by 1969 the vast majority of Americans were in favor of the ZIP Code 

system.16 Mr. ZIP had helped the Postal Service achieve almost 100 percent ZIP Code 

compliance before he was retired in 1983.17

Table 1: Survey of Public Acceptance of ZIP Code

Survey Questions 1966 1969

Good Idea for ZIP Codes 67% 90%

Currently Use ZIP Codes 50% 83%

Will make an effort to learn more ZIP Codes 33% 67%

Source: Roper Research Associates. Study on public opinion of the 

Postal Service, 1969

While Mr. ZIP was finding popularity among the general public, large mailers, on the 

other hand, were less than pleased to be told they would be required to use ZIP Codes 

by 1967. In fact, shortly after the 5-digit ZIP Code was implemented, a survey of over 

1,900 mailers found only 25 percent supported the 

ZIP Code plan.18 They expressed initial skepticism 

that the Post Office Department’s estimated $22 to 

$72 million in annual savings would justify their own 

costs — estimated to be a one-time expense of over 

$200 million — to comply with the new requirements.19

At Congressional hearings in the spring of 1965, the large mailers expressed their 

desire to push the conversion requirement to a later date than 1967. Congress, 

however, ultimately maintained the 1967 requirement. The Postal Service fought hard 

for their new system and won, possibly because it had earned the public’s support for 

 15 A video of the Swingin’ Six is available at the National Postal Museum’s YouTube site at 

http://www.youtube.com/watch?v=QIChoMEQ4Cs. 16 Roper Research Associates, Study on public opinion of the Postal Service, 1969. 17 Much of this discussion of the history of Mr. ZIP comes from the National Postal Museum’s exhibit on the subject, 

which can be accessed online via http://postalmuseum.si.edu/zipcodecampaign/. 18 U.S. Congress, House of Representatives, Committee on Post Office and Civil Service, Subcommittee on Postal 

Facilities and Modernization, Hearings on H.R. 5180, [H.R. 9551], ZIP Code System in the United States Postal 

Service, 89th Cong., 1st Sess., March 24, 1965. 19 Ibid.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

6

There are no intellectual property 

fees for use of the ZIP Code.

the ZIP Code through the extensive public outreach program. Ironically, by 1970, 84 

percent of the large business mailers agreed that the ZIP Code was a good idea.20

In 1983 the Postal Service, which replaced the Post Office Department in 1971,

expanded the number of digits in the ZIP Code to nine (ZIP + 4). These additional digits 

identify a side of a street or an office building. The Government Accounting Office 

concluded in 1983 that this 4-digit expansion coupled with new automation equipment 

would save the Postal Service and external mailers a total of $5.26 billion over the next 

sixteen years.

21 The magnitude of this savings highlights the Postal Service’s foresight 

and puts into context the $200 million initial implementation cost borne by mailers. As 

this paper shows, a stamp would cost significantly more had the Postal Service not 

introduced the ZIP Code system when it did.

Today, the 9-digit ZIP Code has been expanded to 11 digits which allow ordering by 

carrier-walking sequence. The average customer only needs to supply the 5-digit ZIP 

Code to the Postal Service for mailing, but the additional digits increase accuracy,

provide better service, and are partially responsible for worksharing. From 1992 to 

2012, the amount of mail accurately delivered was reflected through the improved rates 

for on-time overnight First-Class Mail deliveries, which increased from 82 to over 

96 percent.22 Worksharing represented over 80 percent of mail volume in fiscal year 

(FY) 2008.23 All of these developments, which increased delivery speed and savings, 

have their roots in Moon and Day’s 5-digit ZIP Code.

The ZIP Code was established as an open use 

product publicly accessible from the outset. In 

fact, the Postal Service only filed a trademark for 

the “ZIP Code” name in 1973.24 The openness of the ZIP Code as a platform for 

economic activity is part of the reason for its immense success far beyond its initial 

conception. Unlike most commodities, the ZIP Code is not rivalrous; use by one party 

does not exclude its use by any other. The Post Office took no steps to make the 

ZIP Code exclusive but rather provided it as a public good for use by any party, free of 

charge.25

The Postal Service’s efforts in creating the ZIP Code can be seen as a pioneering 

“digitization” of surface space, converting names to numbers and dividing space into 

 20 Roper Research Associates, Study on opinions of the Postal Service among high volume business mailers, 1970. 21 General Accounting Office, Conversion to Automated Mail Processing Should Continue: Nine-Digit ZIP Code

Should Be Adopted If Conditions Are Met, Report No. GAO/GGD-83-24, January 6, 1983, 

http://www.gao.gov/assets/140/139259.pdf, pp. ii-vii and 151-158. 22 U.S. Postal Service, 2004 Comprehensive Statement on Postal Operations, http://about.usps.com/strategicplanning/cs04/, p. 65. 23 U.S. Postal Service Office of Inspector General, Assessment of Worksharing, Report No. RARC-WP-10-005, 

July 12, 2010, http://www.uspsoig.gov/foia_files/RARC-WP-10-005.pdf. 24 U.S. Postal Service, ZIP CODE, U.S Patent 1,042,499, filed September 7, 1973 and issued June 29, 1976. 25 The Postal Service only charges a small fee when providing ZIP Code information to cover the cost of 

maintenance. The Postal Service has contributed many open initiatives to national infrastructure development 

including support of railroads, stage coaches, and commercial air transportation as discussed in U.S. Postal Service 

Office of Inspector General, Postal Service Contributions to National Infrastructure, 

http://www.uspsoig.gov/foia_files/RARC-WP-12-012.pdf. 
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

7

zones for ease of mail and information flow. Other organizations and businesses soon 

realized the ZIP Code possessed an elegant simplicity for efficiently organizing 

geographic data and began to use it in ways far outside the sorting, routing, and 

delivery of mail. 

The U.S. Census Bureau (USCB) was one of the first entities to utilize the ZIP Code 

innovatively. Instead of a strictly name-based system, USCB utilized the ZIP Code to 

efficiently identify households that had not responded to its surveys and cost-effectively 

persuaded these households to respond. The USCB also uses the ZIP Code to create 

their “ZIP Code tabulation areas,” their methodology for displaying and organizing 

demographic information by localized geographic areas.

The use of the ZIP Code outside the Postal Service exploded and the ZIP Code evolved 

into a public good that is part of the national infrastructure. For example, real estate 

firms utilize the ZIP Code in order to organize their listings and homebuyers can then 

also search by ZIP Code.26 The key spillover benefits and uses by many entities in a 

variety of economic activities touch everyday commerce and provide a framework, in 

some cases, for entire industries. A sampling of today’s many uses of the ZIP Code 

appears below in Table 2.

Table 2: Sampling of Industries that Currently Use the ZIP Code

Industry Spillover Uses of the ZCS

Federal Agencies IRS, FBI, Policy Decisions; Allocating Funds and 

Resources

Local Governments Fire-Fighting and Emergency Services

Public Utility Companies Phone, Gas, and Electricity

Public Health Organizations Epidemiological Databases

Banks and Financial Services Calculate Risk Profiles for Mortgage and Loan 

Applications by Geography

Insurance Providers Calculating Risk Premiums by Geography

Retailers and Professionals Optimally Locate Businesses Based on Demographic 

Data

Merchants and Self-Service Stations Validate Card Users Prior to Approving Transactions

Directory Services Internet Searches, Geographical Categories

Real Estate Companies Pricing and Listing Properties for Rent and Sale

Marketing Companies Targeted Marketing to Demographic Groups

U.S. Armed Services Targeted Recruitment

Universities Diversifying the Student Body; Tracking the Migration 

of Graduates

 26 See, for example, www.trulia.com and www.mls.com.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

8

The ZIP Code has energized and enabled business and other commerce well beyond 

anything imagined at the time of its invention, often in ways that have been largely 

unnoticed. It has saved, and continues to save, the Postal Service billions of dollars by 

streamlining the processing of mail. It is important to recognize, though, that the Postal 

Service did not just invent the ZIP Code and leave its success to chance. The Post 

Office Department took important steps to ensure the ZIP Code’s success by 

implementing the technology to use the ZIP Code for mechanical sorting, and 

embarking on a comprehensive public education campaign that lasted two decades. 

Further, over the 50 years of the ZIP Code’s existence, the Postal Service has devoted 

consistent maintenance and care to the ZIP Code brand. It has created and deleted 

ZIP Codes as needed, and has expanded the ZIP Code itself from 5 digits to 9 and then 

to 11. Without consistently updating ZIP Codes and linking them to the address 

management system, the ZIP Code would quickly lose its utility and spillover would

decline. This vital Postal Service maintenance will, if history is a guide, continue to 

deliver potential societal benefits that exceed the advantages we currently enjoy.

Economic Valuation Model

The ZIP Code is an intangible asset currently owned by the Postal Service and utilized 

by the public. It has value to the Postal Service and also value across the economy at 

large. An attempt is made here to estimate the economic value of the ZIP Code. 

In considering its overall value, it is useful to first list the groups of “economic agents” 

that derive value from the ZIP Code. There are four main groups:27

 The Postal Service;

28

 Firms that use the ZIP Code to enhance mail-related products, such as courier 

firms (UPS/FedEx) and catalog merchandisers;

 Firms that use the ZIP Code to enhance non-mail-related products, such as real 

estate firms that use the ZIP Code to organize their listings; and

 Consumers, government agencies, and the nonprofit sector that use the ZIP 

Code for informational purposes.

The capitalization method was used to calculate the economic value of the ZIP Code.

29

This method relies upon computing the discounted present value of the future economic 

benefits that would be created by the ZIP Code over the next ten years. The future 

benefits may arise from additional revenues generated by the asset, from a reduction in 

 27 It is important to keep in mind that one business may belong to more than one group as they may use the 

ZIP Code in more than one way. 28 The benefits “to the Postal Service” flow through to its customers, who would otherwise face higher prices. 29 There are a variety of economic evaluation techniques to value an intangible asset. The Appendix includes a full 

discussion of why the capitalization method was chosen.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

9

The ZIP Code itself was an early 

effort to link the physical and digital 

— by coding analog addresses into 

a series of digits that were meant to 

be read by computer technology.

cost caused by the asset, or from both. This method was applied to each of the four 

groups listed above. The results of this valuation are displayed in Table 3. For a full 

discussion of the methodology and how these results were obtained, see the Appendix.

Table 3: Economic Value of the ZIP Code by Use Groups

User Type Categories

Value in the 

First Year 

(in billions)

10 Year Value 

(in billions)

Value To The Postal Service $2.2 $16.8

Value To Firms that Enhance Mail-Related 

Products $2.1 $21.3

Value To Firms that Enhance Non-MailRelated Products $2.4 $24.4

Value To Consumers, Governments and 

Non-Profits $2.9 $30.6

Total $9.5 $93.1

A number of important caveats must be kept in mind when assessing these values. 

First, there are many other uses for the ZIP Code that could not be calculated due to a 

lack of data, such as entire unquantifiable sectors and inseparable uses such as 

worksharing. Second, in many instances, it was necessary to make assumptions about 

critical factors such as percentage of operational cost savings due to the use of the ZIP 

Code. For these assumptions, conservative values were used. Third, in some instances, 

the data that are available are dated and may not fully reflect current conditions. For 

these three reasons, the estimate likely understates the true economic value.

These caveats notwithstanding, this initial estimate is useful for providing insight into the 

important role the ZIP Code continues to play in today’s economy. It shows that the 

value to external firms and organizations has exceeded the internal value to the Postal 

Service by over four times. 

Enhancing the ZIP Code System 

The estimate above illustrates the extent to which the ZIP Code system adds value to 

the economy. But why does it have such 

monumental value? As mentioned earlier, 

although the ZIP Code was intended to 

categorize regions to ease mail sortation, it 

additionally allowed for simple geographic 

groupings to which demographic information 

could be applied. This provided an important translation between the physical world and 

the computer databases that describe geographically based demographics and many 

other characteristics of the population. The ZIP Code remains the principal vehicle in 
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

10

this decoding process, allowing the messy “real world” to be described in a quantifiable 

manner. Some strengths of the ZIP Code are listed below:

1) The ZIP Code allowed the Postal Service to automate their sorting process – The 

ZIP Code continues to be the best system to sort mail efficiently and has been a 

model for countless other posts.

2) The ZIP Code groups geographies – As described above, the ZIP Code creates

groups that include their contents: addresses, people, businesses, landmarks, 

and more.

3) The ZIP Code allows analog information to be categorized in a digital manner –

Evidence suggests that people think in “analog” terms and not digital. This

creates a significant challenge in moving reference information to the digital 

space. When asked about their residential location, people are more likely to 

respond with a city or state than a ZIP Code. People’s references to analog 

terms may, in fact, never go away, meaning that the analog addressing 

infrastructure may never be rendered entirely obsolete. Yet computers are also 

here to stay, so the ZIP Code provides a transition from one medium to the other.

4) The ZIP Code evolved into a widely referenced system – Similar to other 

technology such as modern computer keyboards or the combustible engine, the 

ZIP Code is so widely used and efficient at so many tasks that implementation 

and learning costs of alternatives outweigh any savings from alternatives. For 

example, packages sent through FedEx and UPS utilize the ZIP Code because it 

would not be economically efficient to replace it with another system. Another 

example would be the potential to replace ZIP Codes with latitude and longitude 

data from Google and other mapping services. Despite this technology’s 

existence, the ZIP Code remains the prevailing preferred reference due to such 

vast acceptance.

5) The Postal Service has tremendous reach – Everyone has day-to-day 

experience with using the ZIP Code. This means Postal Service actions, 

especially if they involve infrastructural improvements, have an inherent potential 

to affect the future of the national economy. This is a fundamental reason for the 

widespread adoption of the system and is a strength, in and of itself, when 

considering the ZIP Code’s placement in our future economy.

This list helps identify opportunities to enhance the ZIP Code that would supplement 

these strengths. The history of the ZIP Code demonstrates that it is the openness of the 

ZIP Code platform and serendipitous by-products, rather than the Postal Service’s initial 

intended strategy, that have created positive spillover. However, that added value was 

only possible after the Postal Service initiated the innovation.

None of the positive spillover would have taken place if the Postal Service did not have

the foresight to establish the ZIP Code, the openness to examine foreign posts’ 

successes, the wisdom to popularize the innovation via public outreach, and the 
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

11

Positive spillover is only possible if the 

Postal Service initiates a strategy to 

adapt to new innovative technologies or 

an enhancement to an existing system

and has the persistence and foresight to 

navigate the rough seas of stakeholder 

resistance. 

persistence to educate the vast stakeholder 

network about the ZIP Code’s benefits. In 

today’s environment, the stakeholder 

network has multiplied. The Postal Service 

touches so many aspects of the country and 

our economy that there will almost always 

be numerous stakeholders affected by any 

innovative proposal introduced. Therefore, this recognized pathway to success learned 

from Mr. ZIP, where a high investment in stakeholder engagement was of utmost 

importance, is especially relevant in today’s entwined environment. 

Now is the time for the Postal Service to seize opportunities. The Postal Service can 

undertake low risk, potentially high reward initiatives in this area, further linking physical 

to electronic information and improving the ZIP Code’s utility as a tool for commerce 

and information.

Figure 3: Strategies to Enhance the ZIP Code

The Postal Service can initiate some enhancements in the near term, but its major 

challenge will be to anticipate the types of postal products and services future 

generations will consume and how the ZIP Code could facilitate their delivery. One 

certainty is that keeping the ZIP Code as an open platform is essential if further 

innovation and ideas are to emanate from the economic agents using the ZIP Code. 

While it is clear there are widespread opportunities, it is likely the ideas with the greatest 

potential influence and impact are yet to be envisioned. The openness of the platform 

encourages these unknown, serendipitous events and also allows for pertinent new 

technologies to be integrated with the ZIP Code as they develop. 

Enhance Physical to Digital through Geocoding

The ZIP Code itself was an early effort to convert, link, and relate physical addresses to

digital information. This has expanded over time, but there remains unmet demand for 

additional physical-to-digital translation. This presents an opportunity for the Postal 

Service to increase the accuracy and precision of their addressing system. 
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

12

Geocoding the AMS 

could assist government 

services, such as 

disaster tracking, and 

provide a means for 

faster alert notification.

The Address Management System (AMS) is the Postal Service’s master database of 

addresses and is maintained with the help of business mailers and other organizations 

in order to promote address quality. It represents an exhaustive list of every delivery 

point in the United States. Using ZIP Codes, groups of addresses can currently be 

created for use quite easily in high-power computer modeling, point-to-point analytics, 

and targeted marketing. However, finer levels of grouping precision than the address 

system currently provides, could enhance group creation and spark future innovations.

Geographic information system (GIS) mapping software packages, such as ESRI’s 

ArcGIS, provide spatial analysis for areas of the country potentially not labeled through 

the addressing system. These GIS mapping packages provide powerful analysis for 

critical society needs. For example, tectonic shifts can be mapped to identify high risk 

earthquake areas. If the high risk areas could be easily linked to communities through 

addresses and ZIP Codes, public community notification would be eased and value 

might be gained. Similar applications include emergency planning, weather hazard 

identification like fire or flood hazard zones, and community planning. These are just a 

few practical solutions these GIS mapping applications can provide. These GIS 

applications categorize space through geocodes and if they could be easily linked to the 

AMS, unforeseen value might be recognized.

Geocoding is the process of associating precise geographic latitude and longitude 

coordinates with physical addresses, including street addresses and ZIP Code

boundaries. As of December, 2012, the AMS had not 

been geocoded, and there were no plans to incorporate 

geocoding technologies.30 This information can be 

coded into GIS and used by technology tools in myriad 

ways with clear benefits outside the mail industry. For 

example, imagine a large hurricane is approaching the 

outer banks. The regions of highest risk could be 

identified through GIS mapping software. Then, if the AMS were geocoded, citizens in 

ZIP Codes of the high risk areas could be identified and alerted through the Postal 

Service’s vast communication network. This is the type of unintended societal benefit 

that may be realized through enhancing the ZIP Code and AMS with geocodes.

Some benefits are already realized with the current ZIP Code and addressing system, 

but geocoding would allow the construction of more meaningful geographical groupings.

For example, real estate values in the United States, currently, are largely grouped by 

ZIP Code so analysis is limited to this restriction. Adding geocodes (available in the UK) 

allows for more precise analysis across grouping boundaries. The difference of these 

analyses can be seen in the comparison shown in Figure 4 where values of real estate 

are demonstrated through colors (red is the highest and green is the lowest). The two 

pictures illustrate the level of detail observable using the UK ZIP Code equivalent 

grouping for downtown London, UK, which is shown on the top, versus using geocoding level grouping for the same area, which is shown on the bottom. As is noticed in 

 30 Interviews with multiple Postal Service officials in December 2012.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

13

the pictures, the ZIP Code groupings create large blocks with one average home value.

The level of variation in each ZIP Code is unknown. The bottom picture illustrates the 

granularity of specific points of interest if the values are derived from points or 

geocodes. The UK ZIP Code equivalent area W2, for instance, has within it high value

and low value areas, so the average real estate value for W2 is not very meaningful. 

Home buyers, businesses, and others might find a higher value in more detailed 

information than a ZIP Code can provide.

31

Figure 4: Real Estate Values Grouped by ZIP Code (above) and Geocode (below)

Downtown London shown

above, then magnified below

to demonstrate additional geocode details

Source: Top Image: ft.com, 2013. Bottom Image: zoopla.co.uk, 2013

Enhancing addresses and ZIP Codes with geocoding can also have great benefits for 

the mail industry, since “addresses complement these technologies by providing 

 31 Home prices for London grouped by the United Kingdom’s equivalent to a ZIP Code can be found at 

http://www.ft.com/cms/s/0/06b9f73c-48f9-11e1-974a-00144feabdc0.html#axzz2OgDqrRgV. Home prices for London 

by geocode can be found at http://www.zoopla.co.uk/heatmaps/.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

14

Geocoding could allow 

for faster and more 

widespread dynamic 

delivery implementation.

baseline information that serve to more efficiently locate places for delivering services, 

streamlining internal government administration, and linking physical and electronic 

addresses.”32 Examples from foreign posts illustrate geocoding’s capacity to improve 

address hygiene and optimize routing of delivery services.33 For instance, faced with an 

existing address structure that lacked precision and standardization, the United 

Kingdom’s Royal Mail assigned geocodes to every delivery point. The ability to more 

efficiently locate places has had a big financial impact in the UK, as “research has 

suggested that a 1% improvement in the government’s own address data would bring a 

€25 billion reduction in costs.”

34 Ireland utilizes a 7-character GO Code that identifies 

any location to the accuracy of 5 square meters.35 In South Africa, there was a mandate 

to understand how to deliver mail in the absence of an address structure, especially in 

smaller townships. The country implemented a system that assigned geocodes to 

delivery points and created a tool to simplify the process of complex route planning,

significantly reducing the overall costs of delivery.

36

These examples illustrate the potential geocoding brings as an enhancement to pointto-point information. This feature could be extremely useful in calculating optimized 

routing of delivery services, and allowing for dynamic delivery. Dynamic delivery 

represents a break from traditional fixed carrier routes to delivery routes that change 

depending on the daily volume at each delivery point, including same-day delivery 

services. This is a new business arena with high demand 

and many businesses, including Amazon, Google, and WalMart, are experimenting with the delivery model currently. 

The Postal Service has created a same-day delivery pilot 

called MetroPost. This pilot program, limited to the San 

Francisco area, utilizes the ZIP Code first to set the boundaries of what delivery points 

are eligible for same day service. Then each address that has a package to be 

delivered is geocoded so that an optimized point-to-point route can be set. This 

represents yet another way that ZIP Codes and geocodes can work together to improve 

a product. 

Although the current address system and ZIP Code are very advanced in the United 

States, geocoding represents an opportunity to enhance these existing systems. 

Combining the widely used traditional addressing and ZIP Codes systems with the more 

flexible abilities of geocoding may produce a whole greater than the sum of its parts. It 

is likely that this coupling will enable the creation of expanded uses and benefits well 

into the future, just as the uses of the ZIP Code have evolved since its creation.

 32 Universal Postal Union, Addressing the world – An address for everyone, 

http://www.upu.int/fileadmin/documentsFiles/activities/addressingAssistance/paperAddressingAddressingTheWorldA

nAddressForEveryoneEn.pdf. 33The United States. has significantly better addressing systems than most other countries, including those 

mentioned here; however, maintaining address quality and hygiene is still a concern for the Postal Service.

34 James Cartledge, “Addressing the world: How geocodes could help billions start using the mail,” 2011, 

http://postandparcel.info/43564/in-depth/addressing-the-world-how-geocodes-could-help-billions-start-using-the-mail/. 35 Go Code, http://www.gocode.ie/. 36 IBM consultants interview with Dave Bowne, Director of Software Architecture at Address Vision, Inc. See also 

Serena Coetzee and Antony Cooper, “What is an address in South Africa,” South African Journal of Science, 103, 

2007.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

15

Improve Targeting Ability for Marketing

Direct mail advertising is an ever-growing portion of the mail stream, and a key metric 

for direct mailers is the return on investment (ROI) for each piece of a mailing 

campaign. The overall goal of a mailing campaign is to achieve a greater response rate, 

so it is critical that the direct mail pieces are appropriately targeted to the most 

appropriate audience. Much of this targeting currently is done by the ZIP Code, and 

demographic information tied to each ZIP Code. However, improving targeting abilities 

would help increase the value of the mail to both senders and receivers, avoiding the 

connotation of “junk” mail and possibly allowing the Postal Service to provide more 

desired service and therefore higher value to direct mailers. 

One way to identify that mail is being delivered to the desired targeted audience is to 

gain more information about the recipients. By linking consumer preferences and 

demands to their actual physical address, great value could be added, not only to the 

ZIP Code, but also mail in general for both recipients and senders. The Postal Service 

has strict privacy laws that prohibit it from selling information about its customers, but 

potentially recipients might want to opt-in and benefit from sharing their preferences so 

they could receive a larger portion of mail tailored to their interests. The value of mail to 

senders would increase as they would have a higher probability of connecting with 

interested receivers. The Postal Service could consider expanding its data gathering of 

the already implemented Intelligent Mail barcode (IMb) which currently allows senders 

to track their mail through all stages of the mail system but doesn’t necessarily capture 

consumer demand information. Supplementing the IMb with more recipient demand 

information would add value to the ZIP Code. However, any informational pursuit should 

place individual privacy as the critical important factor to any considered solution. 

The ZIP Code has frequently and successfully been used as a means to organize 

consumer demographic information. For example, marketing companies often send 

mass mailings to households in high-income ZIP Codes. This ability to communicate 

with a higher percentage of their target audience is valuable to companies and other 

organizations, and could be enhanced further. Utilizing average measures for each ZIP 

Code can unfortunately ignore the heterogeneity contained in each ZIP Code, as seen 

with the previously discussed real estate values example from Figure 4 above. The 

most useful way to draw demographic boundaries may be to collect and organize data 

by more precise clusters. A larger number of homogeneous groupings of demographic 

data will help raise the ROI potential for all direct mail by better matching recipients with 

information they desire. This variety of grouping could be done in multiple ways – by 

carrier route, ZIP+4’s, or even geocodes.

The Postal Service has recently implemented a new saturation advertising product 

based on tighter clustering via carrier routes called Every Door Direct Mail (EDDM). 

Previously, for example, the owner of a new restaurant might send a mailing to people 

that live in the nearest 5-digit ZIP Codes. With EDDM, he or she can narrow the 

campaign to the nearest carrier routes (which also happen to be organized by ZIP 

Code). However, each carrier route still services up to hundreds of delivery points and 

that grouping is constrained by the Postal Service carrier route assignment. 
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

16

The Postal Service can best 

realize the full potential of its 

innovations by continuing the 

deep history of the open platform.

An alternative opportunity to facilitate more precise grouping and increase mail value 

would be to create groups based on the last 4 digits of the 9-digit ZIP Code. These 

digits would provide smaller grouping than carrier routes as they often represent one 

side of a street or larger buildings. 

The most precise grouping mechanism would be the use of geocodes to create tighter 

clusters. Geocoding allowed The Holistic Centre, an alternative health center based in 

Surrey, UK, to focus on areas more receptive to a particular message and save £1,000s 

in marketing costs. In addition to saving money, this better targeting has resulted in a 

20-percent increase in business.37

Grouping data into more homogeneous clusters will eliminate a large portion of the 

“noise” in a dataset and create commensurately better analysis, leading to better 

hypothesis testing and predictive modeling.

Maintain the Open Platform

Innovation is driven by business needs and opportunities, whether cost-driven, revenueseeking, or simply a matter of enduring and surviving. Openly collaborating with 

stakeholders by “mashing up” continues to be a valuable strategy to identify innovative 

opportunities to transform businesses and their assets.38 While the closed innovation 

approach has worked well for some firms, the Postal Service will be better served by 

employing a collaborative approach to explore the opportunities to enhance and protect 

the ZIP Code. For example, the Postal Service could follow the “Apps for Democracy”

approach and use crowdsourcing as a means of exploring additional valuable uses and 

enhancements for the ZIP Code. In 2008, Washington, D.C.’s Office of the Chief 

Technology Officer (CTO) launched an Apps for Democracy contest to solicit ideas on 

the best means to utilize a comprehensive catalog of school test scores, poverty 

indicators, real-time crime feeds and other data. The contest cost Washington, D.C. 

only $50,000 and resulted in the creation of 47 iPhone, Facebook, and web applications 

with an estimated value in excess of $2.6 million to the city.”39 Like the Office of the 

CTO in Washington, D.C., the Postal Service possesses a valuable asset and could 

realize new benefits from outside ideas for enhancing it.

As a public institution, the Postal Service has myriad stakeholders and must operate in 

a transparent manner. The Postal Service needs to have open systems that invite the 

“wisdom of crowds” to create innovative uses of 

its assets, such as the ZIP Code. Like other 

successful firms that openly collaborate and 

crowdsource, the Postal Service can continue 

to mash-up firms and industries that are 

 37 Aligned Assets, “Geocoding,” accessed January 4, 2013, http://www.alignedassets.co.uk/solutions/geocoding.html. 38 “Mashing up” describes a collaboration, perhaps including leading thinkers, stakeholders, businesses, developers, 

and end users to develop new innovative ideas. 39 Apps for Democracy, http://www.appsfordemocracy.org.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

17

significant consumers of the ZIP Code. The economic valuation of this paper points 

toward industries and firms that inherently value ZIP Code information. The Postal 

Service might collaborate with and engage in future mash-ups with these stakeholders

to best understand the desired direction and continued evolution of the ZIP Code and 

geocoding technology. Furthermore, the Postal Service can collaborate with 

Postmasters in new neighborhoods to explore how addresses are allocated, how 

Postmasters interact with the public and local businesses, and what opportunities to 

create additional value have been identified through collaborating with local 

stakeholders. The future enhanced ZIP Code should continue to be a shared resource

with the purpose of continually creating more uses via external and internal innovations. 

Conclusion

The evolution of the ZIP Code from Robert Moon’s vision to today’s practical and very 

valuable use is telling. This innovation saved the Postal Service billions of dollars in

costs, which they passed along in savings to customers. But in addition to these cost 

savings, the unforeseen positive externalities have been monumental and helped to

reframe American economic expansion throughout the 20th century.

The ZIP Code is also an example of the phenomena of localized innovations 

implemented as an open system and then adopted by a wider network. The Postal 

Service assists the communication growth of the country through many channels. The 

scale and size of the Postal Service enhances the potential for great innovative 

successes like the ZIP Code to grow as nearly everyone in the country is affected. The 

Postal Service would best learn from the ZIP Code story to initiate innovative programs 

and expand already successful ones.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

18

Appendix
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

19

Detailed Economic Model

Statement of Issue

The ZIP Code System (ZIP Code) can be thought of as an intangible public asset 

currently owned by the United States Postal Service. It has value to the Postal Service 

and, because it is a public asset, it has value across the broader economy. In this 

context, a public asset is one which is noncompetitive in use, meaning one person’s use 

does not reduce the asset’s value and does not preclude others from using it. It thus 

continues to be fully available for subsequent uses. To the extent that the knowledge 

generated by an intangible asset is noncompetitive, then there will be positive 

externalities generated by the asset. This means that its social value will exceed its 

private value and a broad measure of its value to society would be appropriate.

In considering the overall value of the ZIP Code, it is useful to enumerate the groups of 

“economic agents” that derive value from the ZIP Code. Note that these groups of 

economic agents are defined by the activities they undertake and an individual person 

or firm could be in more than one category. For example, consider a household that is 

also the sole proprietor of a small business. Depending on its actions, that household 

could sometimes be considered a “consumer” and at other times a “firm.” Similarly, an 

individual firm, depending on its actions, could participate in more than one of the 

following four categories of users of the ZIP Code:

 The first category includes the Postal Service.

40

 The second category includes producers that make use of the mail system and 

benefit from the ZIP Code for reasons other than its capacity to provide efficient 

postal services and lower rates. For these firms, the ZIP Code allows them to 

provide a better version of their mail-related product. Examples include a clothing 

firm that uses the ZIP Code to target the recipients of its catalogs, a direct 

marketing firm that uses the ZIP Code to construct customized mailings for 

specific groups of customers and a restaurant that uses the ZIP Code to identify 

where to send its advertising fliers.

 The third category includes firms for whom the use of the ZIP Code allows them 

to provide a better, more efficient product without major use of the mail system.

Examples include a real estate firm that uses the ZIP Code to organize its listings 

and help it determine offering prices and an insurance company that uses the 

ZIP Code to determine the risk and thus set appropriate premiums for subsets of 

its customers.

 40 Although the first category includes just the Postal Service, the benefit of the ZIP Code does not end with the 

Postal Service but flows to mailers and, possibly, the general public. This flow of benefits arises because the Postal 

Service is a public institution which has been, at best, a break-even organization. This means there are no owners of 

the Postal Service to benefit from the ZIP Code and its impact shows up in the form of better service and/or lower 

rates.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

20

 The last category includes those that use the ZIP Code for informational 

purposes other than sending mail but do not use it to provide a good or service. 

These users are not directly producing additional economic value through their 

actions; rather, they benefit through a more efficient use of their time and/or other 

resources. This group includes the non-profit sector, government agencies, and 

consumers. Examples of usage include scientists that use ZIP Codes in their 

research, governments that use ZIP Codes to allocate funds, nonprofit 

organizations that use the ZIP Code to target fundraising or households who use 

ZIP Codes as a locating device.

Note that the first three categories reflect what is called “value in production,” because 

these categories relate to economic agents that use the ZIP Code when producing 

additional goods and services to be sold. The last category represents “value in use,”

because these uses of the ZIP Code generally do not lead to production of other goods 

and services for sale.

Methodologies for Valuing Intangible Assets

Intangible assets can be classified into three general types:41

1) Innovation-related intangibles, such as research and development or new 

products.

2) Human resource intangibles, such as the knowledge and skills embodied in a 

firm’s workforce. This is sometimes called the firm’s human capital.

3) Pure organizational intangibles, like management schemes or the ZIP Code.

Although it can be difficult in practice to value intangible assets, the theory valuing them 

is really no different from the theory for valuing tangible assets, like buildings. There 

have been four main approaches for valuing either type of asset. We introduce and 

briefly discuss each these main approaches below.

The Original Cost Method

This approach determines the value of an intangible asset as the original cost of 

acquiring or producing the asset. The original cost method has the advantage of 

simplicity and relatively low data requirements, but is generally considered to be the 

least accurate. This is because it does not reflect any current or future economic 

benefits associated with the intangible asset.

The Replacement Value Method

In this approach, the value of an intangible asset is identified as the cost to currently 

recreate that asset. The recreation exercise can be applied to either the original 

 41 See Baruch Lev, Intangibles: Management, Measurement and Reporting, (Washington, D.C.: Brookings Institution 

Press, 2001).
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

21

intangible asset or to another intangible asset that is functionally equivalent. In either 

case, the estimated value represents what it can cost the firm to replace the asset.

While the replacement value approach does recognize the current economic cost of the 

intangible asset, it does not account for economic benefits created by the asset.

The Capitalization Method

This method relies upon computing the discounted present value of the future economic 

benefits that would be created by the intangible asset. The future benefits may arise 

from additional revenues generated by the asset, from a reduction in cost caused by the 

asset or from both. One application of the capitalization method uses additional or 

incremental future profits to identify the economic benefit. That is, it estimates the 

discounted vale of any additional future profits that accrue to the firm as a result of 

owning the intangible asset. 

The Market Value Method

This approach determines an intangible asset’s value by estimating the price at which 

the intangible asset could be sold or licensed in the open market. It makes this estimate 

by examining the sales prices for similar intangible assets and inferring the value for the 

asset at hand. This method depends upon having market transactions for intangible 

assets that are sufficiently similar to the asset being investigated.

In considering which method would be best for valuing the ZIP Code, several issues 

arise. First, the ZIP Code was developed a long time ago, so data on the cost of its 

construction are not available. This fact rules out use of the original cost method. In 

addition, because of the unique nature of the ZIP Code, it is difficult to think of a 

functionally equivalent intangible asset that could be used to proxy replacement cost, 

ruling out that method. The uniqueness of the ZIP Code also reduces the utility of the 

market value method because it is unlikely that a sufficient number of similar intangible 

assets have been sold on the open market that would permit inferring the value of the 

ZIP Code.

Taken together, these considerations suggest that the capitalization method is most 

likely to be the best approach for valuing the ZIP Code. This is fortunate because this is 

generally thought to be the most theoretically sound method even if it can be difficult to 

calculate. This is the method we will apply to valuing the ZIP Code. 

Estimating the Value of the ZIP Code for the Postal Service

In this section, we first describe, in general terms, the existing methodologies for finding 

the value of an intangible asset within an individual firm. We then modify the approach 

to make it applicable to the Postal Service.

We estimate the value of the ZIP Code using the capitalization method. Conceptually, 

the capitalization method attempts to estimate the economic benefit to the firm from 

acquiring or developing the intangible asset. Typically, that benefit is captured by the 

change in the firm’s profits that is caused by acquiring the intangible asset.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

22

To make the approach more concrete, we start with a mathematical expression for the 

discounted present value of a firm’s future profits. In the following equation, we identify 

that discounted value as Λ. It is calculated as the difference between the firm’s future 

revenues and its future costs. The firm’s revenues are determined by the product of the 

firm’s future prices, pt+j, for t years from current period and product j, and its future 

volumes sold, υt+j. The future volumes sold are themselves functions of the firm’s price.

In general, total revenue is calculated across all the firm’s products, but for simplicity we 

will assume that the firm is selling a single product.42 Also, to simplify the notation, we 

will assume that the firm has constant marginal cost, ψt+j, so the firm’s total cost is just 

the product of that marginal cost and the firm’s volume plus any fixed cost, Γt+j, that it 

incurs. Finally, βj is the discount factor used to convert future profits to current values.

With this mathematical structure in place, the discounted present value of future profits 

can be expressed as

Λ = �βj�pt+jυt+j�pt+j� − ψt+jυt+j�pt+j� − Γt+j�

T

j=0

Now suppose that the firm acquires or develops an intangible asset, like the ZIP Code, 

which allows it to provide its products more efficiently and therefore at a lower cost. We 

capture this in our analytical structure by specifying a new marginal cost, ψ�t+j, which is 

less than the original marginal cost. In addition, we allow for the possibility that the 

intangible asset may allow the firm to provide new services, st+j, such as address 

management, at price pt+j s and at marginal cost ψt+j s .

43 The discounted present value of 

profits, after the introduction of the intangible asset is given by44

Λ̂ = �βj�pt+jυt+j�pt+j� − ψ�t+jυt+j�pt+j� − Γt+j + pt+j s st+j(pt+j s ) − ψt+j s st+j(pt+j s )�

T

j=0

The value of the intangible asset is just the difference between the two discounted profit 

streams. For private-sector firms, one of the important mechanisms for increasing profit 

is taking advantage of the cost reduction to lower the profit-maximizing price and 

increasing the total quantity sold. Thus, to implement the capitalization method for a 

 42 Note that υt+j can be thought of as the vector of the firm’s products and pt+j as a vector of the firm’s prices without 

forcing any change in the approach. 43 It is also likely that the Postal Service could use the ZIP Code in the future to enhance existing services and to thus 

increase the demand for its existing products, such as advertising mail. We do not include this additional benefit in 

our analysis because we know of no data to estimate the impact of the ZIP Code on future mail volume. If such data 

becomes available this additional aspect could be added. This is not to say that ZIP Code did not enhance mail 

volumes in the past. One could argue that the tremendous growth in workshared volume is linked directly to the 

existence of a numerical system that enabled presorting. In this way the ZIP Code may have been a primary 

contributor to expansion of total volume through worksharing.

44 It is a possible that when a firm acquires new intangible capital, it could also incur additional new fixed costs. In the 

case of the ZIP Code, such cost is negligible, so we omit an additional fixed cost term from the mathematical 

formulation.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

23

private-sector firm requires finding the profit-maximizing prices for both profit streams 

with and without the intangible asset. Once these profit-maximizing price vectors have 

been found, they are substituted back into the above valuation equations to find each 

total discounted present value.45

In contrast, the Postal Service is constrained from charging the profit-maximizing price 

by the price cap regulation that exists under the Postal Accountability and Enhancement 

Act (PAEA).

46 We will thus take the price vector as given by the cap. In other words, our 

model assumes that prices for mail products did not change due to the ZIP Code and 

this is indicated in the analytical model by designating the product price vector as p̅

t+j.

47

With these specifications in place, we can write the value of the ZIP Code as the 

discounted value of the difference between the two profit streams:

Λ̂ − Λ = �βj�p̅

t+jυt+j�p̅t+j� − ψ�t+jυt+j�p̅t+j� − Γt+j + pt+j s st+j − ψt+j s st+j�pt+j s �

T

j=0

− p̅

t+jυt+j�p̅t+j� + ψt+jυt+j�p̅t+j� + Γt+j�

Cancelling like terms allows us to write the expression in simpler terms:

Λ̂ − Λ = �βj�(ψt+j − ψ�t+j)υt+j�p̅

t+j� + pt+j s st+j − ψt+j s st+j(pt+j s )�

T

j=0

This equation shows that the value of the ZIP Code is the sum of the discounted cost 

savings and any additional profits generated by new services that the ZIP Code

introduced. We can use this equation to generate an estimate of the value of the 

ZIP Code to the Postal Service. Because we know of no information about the amount 

of value of additional services that the Postal Service provides as a result of the ZIP 

Code, we omit that part of the value from the calculation. However we can form an 

estimate of the cost savings portion of the valuation.

We start that valuation by recognizing that the product of the Postal Service’s marginal 

costs and its volume sold generates a measure called “attributable” or “volume variable” 

cost.48 In our analytical model, this is given by the term ψ�t+jυt+j. Note that because the 

Postal Service already has the ZIP Code in place, its reported attributable cost already 

includes the benefit of that intangible asset. This means that to apply the capitalization 

 45 The profit maximizing prices are found through solving a series of first order conditions. A complete explanation of 

this optimization process can be found in any advanced microeconomic theory textbook. For example, see

Geoffery A. Jehle, Advanced Microeconomic Theory (Englewood Cliffs, NJ: Prentice Hall, 1991), p. 241. 46 Evidence that the Postal Service has been constrained from charging the profit-maximizing price is given by the 

fact that the elasticity for the market dominant products are well below 1 in absolute value. A profit-maximizing 

monopolist will always charge a price along the elastic portion of the demand curve. 47 Prices for postal products could change for reasons other than the ZIP Code. 48 Technically, attributable cost is slightly larger than volume variable cost because it contains a very small amount of 

something called product-specific cost. However, the difference is so small it can safely be ignored. In FY 2011, 

volume variable cost was 99.9 percent of attributable cost.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

24

method, we must calculate an estimate of what the attributable cost would have been in 

the absence of the ZIP Code. Clearly, no actual estimates of this counterfactual cost 

exist, but we can calculate such a measure under different possible scenarios. We do 

this by making use of the mathematical relationship between attributable costs with the 

ZIP Code in place and attributable costs without the ZIP Code. We let ρ represent the 

percentage reduction in attributable costs that the ZIP Code generates. Then, the 

mathematical relationship between attributable costs with the ZIP Code and without the 

ZIP Code is given by

ψ�t+jυt+j = (1 − ρ)ψt+jυt+j

This equation can be rearranged to provide an estimate of the volume variable cost 

without the ZIP Code, which is

ψt+jυt+j = (1/(1 − ρ))ψ�t+jυt+j

We are now ready to estimate the value of the ZIP Code through the cost savings 

channel. To do so, we use the following version of the capitalization equation:

Λ̂ − Λ = �βj ��� 1

1 − ρ

� ψ�t+j − ψ�t+j� υt+j�p̅

t+j��

T

j=0

Four additional specifications are required to use this equation to estimate the value of 

the ZIP Code. First, we must specify a value for the time horizon over which the value is 

calculated. We do so by specifying a 10-year horizon (T=9) on the basis that 10 years is 

a conservative guess as to how much longer the Postal Service will be using the 

ZIP Code. Second, we must specify the appropriate discount rate. We will the current 

U.S. Treasury Bond 10-year rate, which is 0.016, because it matches our time horizon.

Third, we must estimate the values for attributable cost for the next 9 years. We do this 

by estimating a trend equation for the fiscal year (FY) 2008 through FY 2011 period.49

We then use that trend equation to forecast future values for attributable cost.

Our estimated trend equation is given by:

ACt = 46,514.3

(46.535) − 1458.6(−3.996) ∗ time, R2 = 0.89

This equation indicates that attributable cost has been declining by $1.46 billion per 

year and we use this estimated change to predict the value for attributable costs for the 

next nine years starting with data for FY 2011, which is the last fiscal year for which the 

Postal Service has calculated attributable cost. The following table provides the 

 49 U.S. Postal Service, Public Cost and Revenue Analysis Fiscal Year 2011, http://about.usps.com/who-weare/financials/cost-revenue-analysis-reports/fy2011.pdf.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

25

attributable cost for the base year (Year 0 which is the FY 2011 actual value) and the 

forecasts for the subsequent nine years.

Table 4: FY 2011 and Estimated Future 

Values for Attributable Cost

Year Attributable Cost

(in millions)

0 $41.3

1 $39.8

2 $38.3

3 $36.9

4 $35.4

5 $34.0

6 $32.5

7 $31.0

8 $29.6

9 $28.1

Finally, we must estimate the percentage of attributable cost saved by the introduction 

of the ZIP Code. (This percentage cost saving is represented by ρ in the valuation 

equation.) 

Cost savings might arise in a number of postal functions. For example, the ZIP Code 

allows for more efficient sorting of mail by automated equipment. Mail can be sorted in a 

logical hierarchy and, as a result, mail sorting can take place at the most efficient 

physical locations. The ZIP Code also facilitated the use of bar coding of mail which 

greatly increased sorting efficiency. The ZIP Code is a natural level of organization of 

carrier delivery, allowing for more efficient use of the carrier workforce and, 

consequently, reducing delivery costs.

The ZIP Code served as an innovative enabling structure that changed the way the 

mailing business was performed. Studies have been done on similar innovations and 

their effects on their respective industries. For example, the use of broadband 

compared to previously used dial-up Internet service, the more recent use of social

technologies and their effects on individuals and communities, and lastly even the 

innovations surrounding the coffee industry over the last decade. The studies concluded 

that these innovative industry changing technologies caused increased value to those 

industries ranging from 40-75 percent.50

 50 Shane Greenstein and Ryan C. McDevitt, “The Broadband Bonus: Estimating Broadband Internet’s Economic 

Value,” Kellogg School of Management and Department of Economics, Northwestern University, April 2010, 

http://www.kellogg.northwestern.edu/faculty/greenstein/images/htm/Research/WP/Broadband%20Bonus%20-

(continued on next page)
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

26

These previous studies serve as a comparison to establish a very conservative range of

values for ρ. The assumed ρ values range from a low of 3.0 percent to a high of 

7.5 percent. The following table presents our estimates of the value of the ZIP Code for 

the range of possible cost savings, using a 10-year horizon. The annualized ZIP Code 

value is the benefit for the first year which is $2.2 billion.

Table 5: Estimated ZIP Code Values

for Different Values of ρ

ρ

ZIP Code Value 

(in billions)

3.0% $9.9

5.0% $16.8

7.5% $25.9

There are number of things to note about these estimates. First, they represent a lower 

bound on the value of the ZIP Code, because they omit any additional profit derived 

from new services or increases in volume of existing products that the ZIP Code may 

generate. In addition, it is quite likely that the Postal Service will continue to use the 

ZIP Code beyond a 10-year horizon. If additional years are included, then the estimated 

valuation would rise substantially under the capitalization method.

Second, although these calculations are designed to estimate the value of the ZIP Code 

for the Postal Service, in reality the benefits likely flow to many sectors of society and 

affect multitudes of stakeholders. The Postal Service is a public institution which does 

not have owners or shareholders, the estimated value of the ZIP Code represents the 

value of the resources the broader economy saves in having ready access to postal 

services. In other words, without the ZIP Code the discounted present value of the 

additional cost to the economy of providing postal services over the next 10 years would 

be between $9.9 billion and $25.9 billion.

Estimating the Value of the ZIP Code for Firms that Use the ZIP Code to Enhance 

their Mail-related Products

Economic agents in this group use the ZIP Code to provide a better version of their own 

mail-related product. In other words, they use the ZIP Code as an input into their 

production process and in this way, the ZIP Code contributes to the value added they 

 %20GreensteinMcDevitt-4.pdf, pp. 43-44; McKinsey Global Institute, “The Social Economy: Unlocking value and 

productivity through social technologies,” July 2012, 

http://www.mckinsey.com/~/media/McKinsey/dotcom/Insights%20and%20pubs/MGI/Research/Technology%20and%

20Innovation/The%20social%20economy/MGI_The_social_economy_Full_report.ashx, pp. 11-12; and Bain and 

Company, “The Great Eight: Trillion-Dollar Growth Trends to 2020,” 2011, 

http://www.bain.com/Images/BAIN_BRIEF_8MacroTrends.pdf, p. 35.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

27

provide. For example, the ZIP Code is probably the most recognized geography known 

to marketers.51

Knowledge of geographic distribution of a firm’s customers may allow it to better design 

systems to service those customers. Moreover, the ZIP Code provides more than

geographic information. This is because people who live within a ZIP Code share 

common associations.52 To analyze this additional source of value, we must therefore 

look within these industries or sectors of the economy that benefit from the ZIP Code.

We start by representing those sectors symbolically through specifying their production 

functions. We employ a widely used production function of the Cobb-Douglas type. For 

a given industry, such a production function would look like:

Yi = Ai Ki

α1i

Ni

α2i Hiα3i

Ri

a4i

Zi

α5i

where:

Y is industry value added or GDP

A is productivity

K is physical capital

N is labor

H is human capital

R is natural resources

Z is ZIP Code

Under conditions of constant returns (∑ αji

5

j=1 = 1), each input’s exponent represents it 

share of the sector’s value added. This means the share of value added attributed to the 

ZIP Code is given by α5i. We can use this parameter to calculate the level of the sectorspecific valued added that the ZIP Code creates as it is given by the product of the total 

sector value added and the ZIP Code’s share. Mathematically, this is given by Yi ∗ α5i.

Collecting the data necessary to estimate industry-specific product functions is beyond 

the scope of this paper, but we can identify relevant sectors and their use of postal 

services in order to make some rough estimates of how much value the ZIP Code

provides. Specifically, we can estimate α5i for each industry by recognizing that it can 

be approximated by the product of two terms. Those terms are the proportion of value 

added attributed to all postal services, λi and the proportion of postal service value 

created by the ZIP Code, σi. In other words

α5i = λi *σi

This means we can calculate the annual value added due to the ZIP Code as:

Yi

ZCS = λi ∗ σi ∗ Yi

 51 Wendy Cobrda, “Zip Codes and Beyond,” American Demographics, March/April 1995, pp. 6-9. 52 Thomas J. Steenburgh, Andrew Ainslie, and Peder Hans Engebertson, “Massively Categorical Variables: 

Revealing the Information in ZIP Codes,” Marketing Science, Vol. 22, No.1 (Winter 2003), pp. 40-57.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

28

The U.S Department of Commerce Bureau of Economic Analysis (BEA) uses a national 

benchmark input-output model to estimate how much of the economy’s inputs various 

sectors use in their production of other goods and services. For example, some postal 

services are used in the production of other goods and some postal services are used 

by final consumers. The BEA’s national input-output model estimates this split.

Table 6 illustrates various sectors’ use of postal services. Note that it includes both the 

use in production and final consumption. The latter measured is identified as “Personal 

Consumption Expenditures.” The table provides both the dollar value of uses by sector 

as well as the percentage of overall postal services provided to the whole economy.

Table 6: Distribution of the Uses of Postal Services by Economic Sector

Economic Sector Use 

(in millions)

Proportion of 

Total

Agricultural and Food Processing $64.2 0.1%

Mining, Manufacturing, Energy Production and Construction $1,497.8 2.3%

Wholesale trade $7,154.1 10.8%

Transportation, Couriers and Warehousing $10,170.8 15.3%

Retail trade $6,521.2 9.8%

Publishing, Music, Software, and Video Publishing $2,080.4 3.1%

Telecommunications, Internet and other Information Services $1,177.1 1.8%

Financial, Banking, Insurance and Real Estate $2,814.2 4.2%

Professional, Management, and Technical Services $5,092.5 7.7%

Educational Services $820.0 1.2%

Medical, Family and Child Care Services $4,706.1 7.1%

Entertainment, Hotel and Recreational Services $4,825.2 7.3%

Food Services and Drinking Places $4,838.6 7.3%

Commercial and Personal Care Services $808.7 1.2%

Religious and Other Non-profits $1,191.3 1.8%

Personal Consumption Expenditures $7,913.8 11.9%

Exports of Goods and Services $237.6 0.4%

Federal State and Local Government Services $4,587.2 6.9%

Total $66,500.8 100.0%

Source: Bureau of Economic Analysis (BEA) 2002

Unfortunately, the most recent benchmark for the BEA national input-output model is 

2002. The last Economic Census was taken in 2007 and the results were processed by 

2010, but the BEA has yet to update its input-output model for this data. Note that the 

$66.5 billion in postal “uses” matches the $66.5 billion in postal revenues the Postal 

Service earned in 2002. For example, BEA estimates that that households’ final 
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

29

consumption of postal services was $7.9 billion in 2002. This represents about 

12 percent of postal services.

Sectors that make heavy use of postal services include wholesale trade, retail trade, 

medical care, food services, entertainment, hotel services, transportation, couriers, and 

warehousing.

Note that not all industries that are heavy users of postal service will be in this group. A 

firm might be a heavy mail user but not use the ZIP Code to enhance its own mailrelated product.

Identifying a complete enumeration of the industries included in this group is beyond the 

scope of this paper, but a number of important industries can be identified. For each of 

the industries in this category, we can estimate the value of the ZIP Code in a two-step 

process. First, we use the 2002 BEA data to calculate the proportion of the sector’s 

inputs devoted to postal services.53 We use that proportion as our proxy for λi. 

Table 7: Calculation of Estimated Proportion of Inputs in Postal Services (λi)

Industry or Sector 2002 Use 

(in millions) 

2002 Total 

Input

Estimated 

Proportion of 

Inputs in 

Postal Services 

(λi)

Transportation, Couriers, and Warehousing $10,170.8 $476,315 2.1%

Entertainment, Hotel and Recreational Services $4,825.2 $295,645 1.6%

Food services and drinking places $4,838.6 $364,996 1.3%

Wholesale trade $7,154.1 $753,362 0.9%

Publishing, Music, Software, and Video Publishing $2,080.4 $249,526 0.8%

Retail trade $6,521.2 $858,963 0.8%

Medical, Family, and Child Care Services $4,706.1 $1,031,811 0.5%

Educational Services $820.0 $142,056 0.6%

If we multiply our estimate of λi by the sector’s 2010 value added from the BEA, we 

have a more current estimate of the contribution to value added for all postal services. 

To get the proportion of value added associated with the ZIP Code, we must multiply 

the postal service value added by the proportion of postal value added accounted for by 

the ZIP Code. We are unaware of any estimates of this ratio and collecting the raw data 

to calculate it is beyond the scope of this paper. Thus, we will use an estimated value of 

 53 This proportion is found by taking each sector’s Postal Service input and dividing it by the sector’s total inputs.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

30

5 percent again with the studied effects from innovative industry breakthroughs as a 

basis.

54

Table 8: Estimate of ZIP Code's Value Added for Important Postal-Using Sectors

Industry or Sector

Estimated 

Proportion of 

Inputs in Postal 

Services (λi)

2010 Value 

Added 

(in millions)

Estimated 

Postal Value 

Added

(in millions)

Estimated 

ZIP Code 

Value 

Added 

(in millions)

Transportation, Couriers, and 

Warehousing 2.1% $402,524 $8,595 $430

Entertainment, Hotel and 

Recreational Services 1.6% $139,112 $2,270 $114

Food services and drinking 

places 1.3% $416,693 $5,524 $276

Wholesale trade 0.9% $797,348 $7,572 $379

Publishing, Music, Software, and 

Video Publishing 0.8% $623,472 $5,198 $260

Retail trade 0.8% $884,877 $6,718 $336

Medical, Family, and Child Care 

Services 0.5% $1,109,187 $5,059 $253

Educational Services 0.6% $163,101 $941 $47

Total $4,536,314 $2,094

The total annual estimated ZIP Code value added for all of these important sectors is 

about $2.1 billion. This does not represent the total discounted net present value of the 

ZIP Code. As an intangible asset, that value must be calculated using one of the 

methods described above. As with finding the value for the Postal Service, we will 

employ the capitalization method. That is we will take the expected stream of value 

added created over the next 10 years for the category and discount that to the present.

In other words, we will use the following formula to estimate the value of the ZIP Code 

for this group of economic agents, Φ2:

Φ2 = �βj�Y2,t+j

ZCS �

10

j=0

Note that Y2,t

ZCSis the value added created by the ZIP Code for this group in year “t.” As 

we don’t know the values for this quantity over the next 10 years, we will assume a 

 54 Greenstein and McDevitt, 

http://www.kellogg.northwestern.edu/faculty/greenstein/images/htm/Research/WP/Broadband%20Bonus%20-

%20GreensteinMcDevitt-4.pdf, pp. 43-44; McKinsey Global Institute, 

http://www.mckinsey.com/~/media/McKinsey/dotcom/Insights%20and%20pubs/MGI/Research/Technology%20and%

20Innovation/The%20social%20economy/MGI_The_social_economy_Full_report.ashx, pp. 11-12; and Bain and 

Company, http://www.bain.com/Images/BAIN_BRIEF_8MacroTrends.pdf, p. 35.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

31

conservative 2 percent growth rate. Finally, as before, we will assume a discount rate of 

1.6 percent, which is the current U.S. Treasury Bond 10-year rate. Applying this formula 

provides an estimate of $21.3 billion for the value of the ZIP Code for firms that use it to 

enhance their mail-related products.

Estimating the Value of the ZIP Code for Firms that Use the ZIP Code to Enhance 

their Non-mail-related Products

Firms in this group are not major mail users but still use the ZIP Code to provide a 

better, more efficient product. For example, insurance companies use ZIP Codes in 

determining insurance offerings and rates and real estate companies use ZIP Codes in 

preparing their listings. Additionally, engineering, consulting, and technical services use 

ZIP Codes to organize data instrumental to their industries. Identifying a complete list of 

sectors that fit into this group is beyond the scope of the paper but two major Census 

Department defined sectors are the Professional, Management, and Technical services

sector and Financial, Banking, Insurance and Real Estate sector.

The approach to calculating value added for these firms is similar to the approach used 

for firms that use the ZIP Code to enhance their mail-related projects. The primary 

difference is that the calculation does not directly depend upon identifying the proportion 

of postal services that the firms use, because the product enhancement does not 

directly depend upon a mailing. This means the formula used to calculate the annual 

value added due to the ZIP Code is

Yi

ZCS = α5i ∗ Yi

While that would seem to be a simplification compared with the previous group, it 

actually highlights a limitation of existing data. Without launching a field survey, we have 

no data on the contribution of the ZIP Code to value added for firms and thus we have 

no direct measure of the required proportion, α5i. However, we can calculate the 

average percentage of value added attributable to the ZIP Code in the previous group. 

This is calculated by dividing the estimated annual ZIP Code added value of $2.094 

billion by the total added value of $4.536 trillion to get the average percentage of value 

added attributable to the ZIP Code of 0.0005. In the absence of an alternative figure, we 

apply this average to the two non-mail-related sectors that we identified. Table 9 

presents the two sectors we are examining along with their 2010 value added from the 

Bureau of Economic Analysis and the computed value added due to the ZIP Code.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

32

Table 9: Estimate of ZIP Code's Value Added for Important Non-Mail-Related Sectors

Industry or Sector

2010 Value 

Added 

(in millions)

Estimated 

ZIP Code 

Value 

Added 

Proportion

Estimated 

ZIP Code 

Value 

Added 

(in millions)

Professional, Management, and Technical 

Services $1,782,837 0.0005 $891

Financial, Banking, Insurance, and Real Estate $3,007,185 0.0005 $1,504

Total $4,790,022 $2,395

This approach produces an annual contribution to value added by the ZIP Code of 

$2.4 billion. It does not represent the total discounted net present value of the ZIP Code.

As an intangible asset, that value must be calculated using one of the methods 

described above. As with the previous two groups, we will use the capitalization method 

to estimate the value of the ZIP Code for firms that use the ZIP Code to enhance their 

non-mail-related products, φ3. It is calculated through the following formula:

φ3 = �βj�Y3,t+j

ZCS �

10

j=0

Applying this formula provides an estimated value of the ZIP Code in this group of 

$24.4 billion.

Estimating the Value of the ZIP Code for Consumers, Governments, and Nonprofit

Organizations

Economic agents in this last group are not directly producing additional economic value 

using the ZIP Code but benefit through a more efficient use of their time and/or other 

resources. For example, nonprofit organizations use the ZIP Code to more efficiently 

solicit donations.

55

Similarly, federal, state, and local government make use of ZIP Codes in carrying out 

their functions. For example, the federal government makes extensive use of the ZIP 

Code in both collecting and disseminating the information contained in the decennial 

census. Finally, consumers make use of ZIP Codes for a variety of functions such as 

use as identification for debit and credit card transactions and use as a search tool for 

find commercial and retail establishments.

Calculating the economic value for the first two sub-groups of final users of the ZIP 

Code — nonprofit organizations and government agencies — can make use of methods 

 55 Michael Sexauer and Mildred S. Myers, “The Value of a Zip Code,” Nonprofit World, Vol. 30, No. 4 (July/Aug 2012),

pp. 8-10.
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

33

similar to what we applied above. These methods, however, are not directly applicable 

to the third sub-group, consumers. This is because consumers use the ZIP Code as a 

time-saving device, and thus a formula for calculating its value requires not only an 

estimate of the amount of time consumers use the ZIP Code (for reasons other than 

mailing letters) but also the total time they use in broader consumer activities in which 

the use of the ZIP Code takes place (like using credit cards or searching for residents). 

To our knowledge, there are no measures of the time consumers use the ZIP Code for 

purposes other than mailing so it is not possible to calculate an estimate of the resulting 

economic value to consumers.

We can calculate estimates for the other two sub-groups, however. The nonprofit sector 

uses the ZIP Code to target potential donors and can thus increase the efficiency of 

their fundraising efforts. The value of the ZIP Code to these organizations is that it frees

resources from fundraising and allows them to be applied to the organizations’ goals.

Data from the BEA indicates that just under 1 percent (0.0074) of nonprofits’ inputs 

were made up of postal services. Given the importance of targeting donors, it is likely 

that the ZIP Code substantially reduces the cost of reaching a specific fundraising goal;

to reflect this, we are going to assume that the amount the ZIP Code saves the nonprofit 

sector equals 25 percent of its postal resources. Combining these two numbers 

provides an overall annual savings, as shown in the following table.

We have less information about government agencies’ usage of the ZIP Code in 

carrying out their duties but suspect that the ZIP Code does permit them to save 

resources in ways similar to those in the private sector proportion of 0.0019. However, 

without any specific information, we propose taking a conservative approach and 

assume that the ZIP Code allows governments to save an amount equal to one-tenth of 

1 percent of their expenditures.56

Table 10: Government and Nonprofit ZIP Code Resource Savings

Industry or Sector

2010 Resource 

Consumption 

(in millions)

Estimated ZIP 

Code Resource 

Savings

Estimated ZIP 

Code Resource 

Savings

(in millions)

Nonprofit Institutions $723,300 0.0019 $1,338

Federal Government $468,500 0.0010 $469

State and Local Government $1,067,700 0.0010 $1,068

Total $2,259,500 $2,874

Source: Bureau of Economic Analysis (BEA) 2010 for resource consumption

The final step is to turn these annual economic benefits in to a single capitalized value.

We apply the same method as used before, with one exception. Because the nonprofit 

 56 Note that these government spending figures include expenditures on resources like labor or energy and do not 

include transfers. 
U.S. Postal Service Office of Inspector General April 1, 2013

The Untold Story of the ZIP Code RARC-WP-13-006

34

and government sectors have been growing faster than the economy, we use a 3-

percent growth rate for them. With the growth rate in place, the formula for calculating

the economic benefit is similar to the one used above where “Z,” the annual resource 

savings, replaces the value added used for the previous two groups:

φ4 = �βj�Z4,t+j

ZCS �

10

j=0

Applying this formula provides an estimated value of the ZIP Code in this group of 

$30.6 billion.