Geographical Pricing

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Contributed by: Devendra Vyavaharkar

 

Geographical Pricing

PRICE ADAPTATION STRATEGIES

Firms usually do not set a single price for a product, rather they rely on dynamic pricing strategies (price adaptation strategies) that take into account variations such as geographical demand and cost, delivery terms, market-segment requirements, delivery frequencies, etc.

Some examples of price adaptation strategies are:


What is Geographical Pricing? Meaning.

Geographical Pricing (GP) is the technique of adapting prices based on the geographical location of the buyer and the associated shipping costs. There are two major issues associated with this pricing technique: How to set the Price? And: How to get Paid?


How to set the price? Types of Geographical Pricing.

  • UNIFORM DELIVERY or POSTAGE STAMP PRICING: The same price is charged irrespective of the location of the Buyer. Typically, this price includes the average of transportation costs. Local buyers end up paying more, while distant buyers pay up less. Uniform Delivery pricing can be used in case of high transportation costs so that customers located far off aren't discouraged from purchasing the product due to the higher transportation costs. This pricing technique is also used for products of popular brands in order to maintain a uniform price.
  • POINT OF PRODUCTION or FREE ON BOARD (F.O.B.) PRICING: The seller quotes the selling price at the Point of Production (factory/warehouse). Thus, the seller fetches the same amount against a sale of a similar quantity. The ownership of the goods is transferred to the buyer at this point. Note that either the buyer or the seller may actually arrange for the transportation, but the buyer bears the cost of it (and the risk associated with it).
  • ZONE PRICING: The seller marks concentric Zones (or regions) around the plant or warehouse. The price is constant for all destinations within a particular zone. However, as the seller manages the transportation (and thus bears its cost), the price increases as we go further away from the plant or warehouse. Zone pricing is used when the transportation cost is too high to allow uniform pricing. The higher the transportation cost, the higher the number of zones, and the smaller their sizes. Conversely, the lesser the transportation cost, the fewer the number of zones, but the larger their sizes. Zone Pricing finds its application in the Petroleum industry.
  • BASING POINT PRICING: The firm designates certain cities as Basing Points; here product is assigned a Basing Point Price. The final delivered price quoted by the Seller is the sum of the Basing Point Price and the transportation cost (from the nearest Basing Point to the Buyer destination). Thus, the final delivered price for a particular destination is the same irrespective of the source of the delivery. Basing Point Pricing is used for goods that are bulky and expensive to ship, for example, Cement, Steel, Automobiles, etc.
  • FREIGHT ABSORPTION PRICING: The seller may choose to 'absorb' part of the freight cost when trying to penetrate distant markets. For such a scenario, Freight Absorption Pricing proves to be advantageous to the seller over the FOB pricing, as the firm doesn't lose out on the customers who prefer local competitors (to avoid the transportation costs). Thus, the price quoted by the seller is the manufacturing price plus the transportation costs charged by local competitors. This pricing strategy is similar to a promotional price discount.

How to get paid?

Buyers usually pay using some monetary payment (cash, card, bank transfer, etc.) for their purchases. However, when this is not available, they can sometimes resort to a practice known as "countertrade", making payment in part or full through other items instead of currency. The different types of countertrade are:

  • BARTER: The exchange of goods, without money or involvement of a third party.
  • COMPENSATION DEALS: The Seller receives a part of the payment in cash, while the rest in the form of products.
  • BUYBACK AGREEMENT: The Seller sells Capital goods (plant/equipment/technology) to the Buyer, who then pays a part of the payment through products produced through the supplied equipment. The balance amount is paid in cash.
  • OFFSET: The Seller receives full payment in cash but agrees to spend part of that money in buying goods from the Buyer (within a stipulated time frame).

Sources:
Kotler, P. & Keller, K. L. (2016), "Marketing Management", 2016, pp. 522
McCormick (2016), "What is Geographic Pricing?", Black Curve Blog
PriceBeam (2017), "Geographical Pricing: How to Price Different Location", Price Beam Blog
Chand, S. (n.d.), "Geographical Price Differentials (4 Objectives)", Your Article Library


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