Definition Of Geographical Pricing
Geographical pricing is known as a practice of regulating items' sale prices based on the geographical regions of the buyer. Sometimes, the difference in the sale price is determined based on the item's shipping cost to that location. However, the difference may further be based on the amount 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. Business enterprises mainly practice geographical pricing 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 examples of geographical pricing are that being charged a higher price for placing an order of any product from the 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 the buyer assumes title or control of goods when the freight carrier receives or signs the bill of landing at the origin pick-up location. Thus, FOB Origin refers to the legal fact that the purchaser will take full accountability during 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, pay the 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 remain the same within a region.
Zone pricing is a pricing method where all consumers within a distinct region area is charged equal prices. More distant buyers tend to pay higher prices than the ones closer to the company's dispatch point. This is because prices tend to elevate with the rise of 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 and at each circle which explains the boundary of the price region. Rather than using circles, inconsistent price boundaries can be drawn, reflecting geography, transportation infrastructure costs, size of the population, and shipping expenses. It also refers to determining prices that 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 that reflect geographical regions, population density, transportation infrastructure, and shipping expense. It also refers to how prices are determined, explaining local competitive conditions that are 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, and 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 that includes freight costs that do not depend on the trader's location. Freight expenses may be estimated from a particular location. The basing point is similar to the manufacturing point, and the shipping expense is determined as per the location distance of the purchaser. 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 a system of pricing that includes a fee for a product purchased plus a freight fee that is estimated based on customers' distance from starting or base point.
In this pricing method, manufacturers consider some or the 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 a 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 equal to its factory price and the freight expense charged by a rival dealer 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 is usually positioned at a price disadvantage position while trying to sell to purchasers located in markets near a rival's plants as buyers pay freight expenses 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.
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Things To Consider While Setting Up Geographical Price For Any Product Or Service
One of the most commonly debated strategies for determining geographical pricing strategyis the skimming strategy. This strategy mainly refers to an organization's aim 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 a 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 may charge a finest in one market organization, penetration price in another market in addition to a discounted price in the third.
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Most Frequently Asked Questions By Students
Q1. Why do companies use geographical pricing?
Geographical pricing is used by companies to take into account the differences in costs associated with serving different regions. For example, a company may charge a higher price in a region where it has higher transportation costs, or where there are higher taxes or duties.
Q2. Is geographical pricing legal?
In most cases, geographical pricing is legal as long as it is not used to discriminate against certain customers or regions. However, it is always advisable to check with local laws and regulations to ensure compliance.
Q3. Can customers negotiate geographical pricing?
In some cases, customers may be able to negotiate geographical pricing, particularly if they are purchasing a large quantity of goods or services. However, this will depend on the company's policies and practices, as well as the specific circumstances of the sale.
Q4. Can geographical pricing be challenged or appealed?
If a customer believes that they have been unfairly charged a higher price due to their location, they may be able to challenge or appeal the pricing. This could be done through the company's customer service department, or through legal channels if necessary. However, it is important to note that the success of such challenges will depend on the specific circumstances of the case.