New Zealand Post said the rise, from the current cost of 80 cents, will come into effect on 1 July.
Spokesman Malcolm Shaw said the amount of mail being sent has been plummeting recently by 60 million items each year.
He said this has been leaving a shortfall of up to $30 million annually.
"It is serious, it's a big gap, we've had a number of initiatives to reduce costs to make the network more efficient, those are ongoing.
"Increasing prices is sort of the last thing we want to do but it is one of the options that we have to go to," he said.
The state-owned company reported last year it made $143 million in the year to June, an increase of 34 percent compared with the previous year.
But it was largely due to the success of Kiwibank, which offset what was then a 10 percent drop in letter volumes.
Stripping out asset sales and writedowns, New Zealand Post's underlying profit rose 3 percent to $128 million, with Kiwibank accounting for $127 million of that.
The company's overall revenue dropped slightly, down 0.5 percent to $1.6 billion.
Mr Shaw said the price rise announced today has been made reluctantly, but it is one that is needed.
"The postal business is more or less break-even at this stage, so starting behind each year 20 to 30 million dollars is a big gap and we have to look at all the options."
New Zealand Post last raised the price of sending a standard piece of mail in 2014, when the cost rose from 70 cents to the current 80 cents.
It means the latest rise is double the previous increase.
"Twenty cents takes the price to dollar for a standard letter, it's an easy number to work with... it's not practical to make small pricing adjustments with stamp prices.
"We think a dollar represents good value for money for a letter to be delivered anywhere in New Zealand from Kaitaia to Bluff and still be delivered within three working days," Mr Shaw said.
Sending mail by FastPost is going up 40 cents to $1.80, and there are also changes to international and business mail.
Mr Shaw said New Zealand Post has no current plans to raise the price again, and will not do so unless it "absolutely has to".
Grey Power responds
Grey Power's Auckland director Bill Rayner said the price increase would impact seniors and how they were communicated with.
"That's significant to the community groups that still work with older people and rely on New Zealand Post for their communication."
Mr Rayner said the 25 percent price increase comes at the same time that sending mail was becoming less accessible for some people.
"Certainly where I live in Devonport the little road-side mailboxes have been disappearing, so it's getting harder and harder for people to work with New Zealand Post," he said.
Bill Rayner said his own Grey Power branch already spent $8000 each year sending mail to its members on Auckland's North Shore alone.
The full list of price changes is available here.