If another member can find a service like this, I too would like to know about it. The US Postal Service has always been the cheapest for my light-weight packages. Paying through Paypal gets you a discount off first class parcels but the cheapest parcel price you will get is $1.93.
If you want to ship your item as a letter, here is a very good site with USPS postage information with weight and size information.Link hidden: Login to view
You will probably see that once you get above on ounce or two, your postage will cost more than $1.00 no matter where you go. And 3.5 ounces looks like the maximum size for a letter size package. And if tracking a package is important to you (or required to stay in the good graces of your listing service), you won't get it on letter size deliveries.
Sorry to seem like a naysayer and I too would like to know if there are cheaper light weight shipping options :-) Nearly everything I sell right now, I currently send USPS First Class mail (13 ounces or under).