Geographical pricing is the process of adjusting the sale price of a product or service according to the location of the buyer. Therefore, geographical pricing is a strategy where the business adjusts the sale price of an item according to the geographic region where the item is sold. The strategy helps the business maximize revenue by reducing the cost of transporting goods to different markets. However, geographical pricing can also be used to create an impression of regional scarcity, novelty, or prestige.
Global businesses understand that no two markets are the same. The target audience in one region may have vastly different interests or needs compared to the audience from another region.
What’s more, there may be a large discrepancy in consumer purchasing power.
Geographical pricing strategies are used by commodities companies, with steel and gasoline the most common examples.
Some primary producers also use the strategy, which helps explain why the price of an avocado is cheaper within avocado-growing regions.
Five geographical pricing types
Geographical pricing is a more general phrase that encompasses a range of more concise strategies.
1 – Zone pricing
This is the strategy most associated with geographical pricing. Customers within designated regions are charged the same price for goods and services, with more distant customers charged a higher price.
Zones are typically represented on a map using concentric circles or other boundaries which reflect population density, geography, or transportation infrastructure.
Gasoline prices in the United States are based on a complex mixture of factors including the number of competing stations, transportation corridors, average traffic flow, and the number of vehicles.
2 – Free on Board (FOB) origin pricing
Here, the buyer pays for variable shipping costs from the production facility or warehouse.
Ownership of the item transfers to the buyer once the item has left the facility, with the seller or buyer able to arrange the transportation itself.
3 – Basing point pricing
In basing point pricing, certain cities are designed as basing points. Shipping costs from these cities are the same, regardless of whether the buyer lives near the city.
Basing point pricing is common practice in the steel and automotive industries.
4 – Uniform delivered pricing
Similar to basing point pricing is uniform delivered pricing, where buyers pay the same freight costs regardless of their distance from the dispatch location.
The exact freight cost is determined by an average and is typically incorporated into the price of the product.
5 – Freight-absorption pricing
Freight-absorption pricing is a strategy where the seller absorbs all or part of the delivery cost to a given region.
This strategy, which is often reserved for when a product is on sale, is essentially a buyer discount because the freight cost is not built into the price.
Other geographical pricing considerations
While geographical pricing is mostly driven by shipping cost, there are a couple of other factors that may influence product prices:
Taxation laws – a business may adjust its product pricing based on different sales tax percentages. If Region A has a sales tax of 15% and Region B has a sales tax of 25%, the business will sell its products for a higher price in Region B to offset the extra sales tax.
Supply and demand – product pricing may also reflect a supply and demand imbalance in the market. When supply is low in a particular region, prices increase.
Consumer purchasing power – those living in rural areas tend to have lower purchasing power than their city counterparts. Purchasing power across different cities also fluctuates, with residents of Zurich and Sydney enjoying more purchasing power than those residing in Manila or Nairobi.
Key takeaways:
Geographical pricing is the process of adjusting the sale price of a product or service according to the location of the buyer.
Geographical pricing types include zone pricing, FOB pricing, basing point pricing, uniform delivered pricing, and freight-absorption pricing.
Geographical pricing is mostly driven by consideration for shipping costs. However, region-specific taxation laws, supply and demand, and consumer purchasing power are also key factors.
What are the disadvantages of geographical pricing?
From an accounting standpoint, having too many geographical pricing models might make the process more complex. That is why it’s critical to understand what geographies impact the business and adapt pricing primarily based on these geographies.
What is the purpose of geographic pricing?
Since geographical pricing is the process of adjusting the sale price of a product or service according to the location of the buyer, that can help the customer better relate to the product and to the business to expand more quickly through various geographies that otherwise would not be able to afford the same product.
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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
