Geographical Pricing
Geographical pricing refers to the pricing method in which the basic price of a product is modified depending on the buyer's geographical location. The difference of the prices usually reflects the shipping costs needed to deliver the product to different locations.
An example of geographical pricing is a bottle of wine made in France which will cost less in Paris than in Ontario. The purpose of geographical pricing is to earn maximum revenue in the markets in which a company operates.
There exist many types of geographic pricing, some of them being:
FOB origin (Free on Board origin) – which means that the buyer is in charge of shipping costs. The product ownership passes to the buyer immediately after it leaves the point of origin. The transportation can be arranged by the the buyer or seller.
Uniform delivery pricing – (or postage stamp pricing) – the same price is charged to all.
Zone pricing – is explained by the fact that prices boost as shipping distances increase. Zone pricing can also represent the practice when prices reflect local competitive conditions such as the market forces of supply and demand, and not the actual shipping cost.
Zone pricing is also used in the gasoline industry. This practice refers to the fact that oil companies charge gas station owners different prices for the same gasoline depending on where their stations are located.
Basing point pricing – refers to the fact that certain cities are considered as basing point, and as a result all the products shipped from a given basis point are charged the same amount. Usually, the basing point is the same location as the manufacturing point, and the shipping cost is calculated regardless of the actual location of the seller or the buyer. This type of price includes the shipping cost from the basing point, despite the location from which the product is shipped.
Freight-absorption pricing – in the case of this pricing practice the seller pays all the shipping cost or a part of it. This acts as a price discount, and represents a promotional tactic.
Geographical pricing exists because the majority of international companies and multinational corporations work with customers from various geographical locations. As a pricing practice, geographical pricing enables these companies to reduce costs by locating their factories in low-cost jurisdictions, thus having a positive impact on the corporation's revenues.
