Geographical pricing is known as a practice of regulating items’ sale price on the basis of the geographical regions of the buyer. Sometimes, the difference in the sale price is determined on the basis of the shipping cost of the item to that location. However, difference may further be based on the amount which buyers in that specific location are willing to pay.
In such cases, companies will intend to maximise their profits in the markets where they mainly execute their business operations and locational pricing also raises the possibility of achieving the goal. Geographical pricing is mainly practised by business enterprises to reflect the varied costs of shipping accrued when transporting merchandises to several markets. There are several types of geographical pricing namely, Zone pricing, FOB origin, Uniform Delivery Pricing
Examples of Geographical Pricing
Some of the examples of geographical pricing are that being charged a higher price for placing an order of any product from Netherlands and Germany or having a minimum order limit on abroad product shipments.
Types of Geographic pricing
FOB origin -
FOB origin implies that the purchaser takes complete ownership i.e. Title or control at the trader’s region location and is thus accountable for it at that point. At this point the customer can file any type of claims. FOB Origin refers to the authorized fact that buyer assumes title or control of goods the time when freight carrier receives or signs the bill of landing at the origin pick-up location. FOB Origin thus refers to the legal fact that purchaser will take full accountability during the time of carrier delivery.
Uniform delivery pricing -
Uniform delivery Pricing (UDP) includes all expenses of transportation and place where the seller recollects the control and responsibility of the group until they are delivered to the customer. The two primary kinds of UDP are single-zone valuing where all buyers regardless of their distance from the seller and pay them same amount of delivered price. This price is known as postage stamp pricing. The second type of UDP is multi-zone pricing where the location is separated into regions as per the distance from the seller’s dispatch zone. While, different prices are charged for different regions, prices which remain same within a region.
Zone pricing -
Zone pricing is known as a pricing method where all consumes within a distinct area of region is charged equal prices. More distant buyers tend to pay higher prices in comparison to the ones closer to company’s dispatch point. Prices tend to elevate with the rise of the shipping distances. Such an increase in prices is done by drawing concentric circles on a map with the manufacturing plant or warehouse at the centre as well as at each circle which explains the boundary of price region. Rather than using circles, inconsistently influenced price boundaries can be drawn which reflect geography, transportation infrastructure costs, size of population and shipping expenses. It also refers to the way of determining prices which reveal local competitive standards related to market demands of supply and demand instead of original transportation expenses.
Prices tend to rise as shipping increases. This increase is often done by drawing concentric circles on a map with the manufacturing plant or warehouse at the centre as well as at each circle defining the boundary of a price zone. Rather than using circles, inconsistently developed price boundaries can be drawn which reflect geographical regions, population density in addition to transportation infrastructure and shipping expense. It also refers to the way in which prices are determined explaining local competitive conditions that is market demands of supply and demand instead of actual expenditure of transportation. Zone pricing practiced in the gasoline sector situated in the United States is mainly executed on the basis of complex and unstable assessment of factors related to the number of vehicles, standardized traffic distribution, population density along with geographic attributes.
Basing point pricing -
Base point pricing also known as delivered pricing refers to a process where a customer must pay a price for a product which includes freight costs which do not depend on the location of the trader. Freight expenses may be estimated from a particular location. The basing point is similar location as the manufacturing point and the shipping expense is determined as per the location distance of the purchaser from that point. However, this can turn up to be controversial when the basing point is different from the actual zone from where the item is shipped. Basing point pricing is known as a system of pricing which includes a fee for a product purchased plus a freight fee that is estimated on the basis of customers’ distance from starting or base point.
Freight-absorption pricing -
In this pricing method, manufacturers takes into account some or majority of the freight or transportation expenses involved in transporting the products to the customers. Freight absorption pricing is also known as a geographic pricing strategy where an organization absorbs all or part of the freight expenses in delivering products to acquire the business. The buyer might understand that if it can acquire greater proportion of business, its average expenditure will decline and more than compensate for its additional freight costs. Thus, freight-absorption pricing is utilized for market penetration and also to hold on to increasingly competitive markets.
Also to enter into distant markets, a trader may be willing to fascinate part of the freight cost. As a result, under freight-absorption pricing, a manufacturer will give a particular price to the buyer which will be equal to its factory price and also the freight expense which would be charged by a rival dealer located near that customer. A Freight-absorption strategy is used to counterbalance the competitive benefits of FOB factory pricing.
With FOB factory price, a business enterprise usually is positioned at a price disadvantage position while trying to sell to purchasers located in markets near a rival’s plants as buyers pay the expenses of freight as per the FOB factory pricing. An immediate supplier tends to have a benefit over highly reserved suppliers at least in relation to freight expenditure. Freight Absorption Pricing removes any type of price advantage owing to the differences in freight expenses. It also amounts to a price concession and is applied as a promotional strategy.
Things to consider while setting up geographical price for any product or service
One of the most commonly debated strategies for determining geographical pricing strategy is the skimming strategy. This strategy mainly refers to the aim of an organization to skim the market, by selling at an exceptional price. To implement this strategy, the product or service has to be exceptional and the target market should be ready to pay the high price. Achievement of this strategy relies on the capacity and quickness of competitive reaction. In implementing the skimming strategy the objective of the organisation is to attain an early break-even point and to capitalize on profits in shorter time duration or look for profits from a niche.
Geographic Pricing Strategies:
This strategy aims to use economies of scale by pricing the product below the contender’s in one market as well as implementing a penetration strategy in the other. Second market discounting is an essential part of the differential pricing strategy where the organization leaves or sells below its cost in the market to use its current surplus capacity. Thus, in geographic pricing strategy, an organization may charge a finest in one market, penetration price in another market in addition to a discounted price in the third.
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