This page has been robot translated, sorry for typos if any. Original content here.

Marketing Basics - Kotler Philip

Geographical pricing

The geographic approach to pricing involves making a decision on the firm setting different prices for consumers and different parts of the country. Delivery of goods to a far-reaching client costs the company more expensive than a client located nearby. Is it reasonable to charge higher customers for remote goods to cover higher transportation costs, thereby risking losing their clientele? Or is it better to charge the same fee to all consumers, regardless of their remoteness? We will consider five main options for setting prices on a geographical basis in relation to the following hypothetical situation:

Pearless Paper Company, based in Atlanta, Georgia, sells paper products to customers from all over the United States. Delivery cost is high and affects the choice of the supplier company by the client. Pirless wants to develop a geographic pricing system. Management is trying to determine what amounts should be requested for the same batch of goods worth $ 100 from customer A, located in Atlanta, customer B from Bloomington, Indiana, and customer B from Compton, California.

FOB PRICE AT THE PLACE OF ORIGIN OF THE GOODS . Pirless may require customers to pay shipping costs from the Atlanta facility to the customer’s location. Each of them will pay a selling price of $ 100 for the goods from the factory. In addition, they will have to pay for transporting the goods: for client A, say, $ 10, for client B - $ 15 and for client C - $ 25. This system is called "setting the price of the FOB (free on board) at the place of origin of goods" and means that the goods are transferred to the carrier on a free wagon basis, after which all rights to this goods and responsibility for it are transferred to the customer who pays all transportation costs from the location of the plant to its destination.

Proponents of FOB pricing at the place of origin of goods consider this method to be the fairest method of estimating transportation costs, since each customer pays for himself. Its disadvantage is that for remote clients, Pearless is an expensive company. And if its main competitor is located in California, it will bypass it in the California market. By the way, he will bypass it in most western states, having left Pirless a dominant position in the eastern regions of the country. On the map, you can draw a vertical line connecting cities in which the total costs in the form of price and transportation costs will be the same for both firms. East of this vertical price advantage will be neither to the side of Pirless, to the west - to the competitor.

ESTABLISHING A SINGLE PRICE WITH THE DELIVERY COSTS INCLUDED IN IT . The method of establishing a single price with the delivery costs included in it is the exact opposite of the method of setting the FOB price at the place of origin of goods. In this case, the company charges a single price with the inclusion of the same amount of transportation costs, regardless of the remoteness of the client. The transportation fee is equal to the average amount of transportation costs. Suppose it is $ 15. Using this method, a customer in Atlanta will pay more ($ 15 for transportation instead of 10), and a customer in California will pay less ($ 15 instead of 25). In this case, a client from Atlanta will likely prefer to purchase paper from another local supplier who uses the FOB price method at the place of origin of the goods. On the other hand, Pirless will have a better chance of attracting a California customer. Among the other benefits of this method are its relative ease of use and the ability for a firm to advertise a single price nationwide.

SETTING ZONE PRICES . The zone pricing method is a cross between the FOB price method at the place of origin of the goods and the single price method with shipping costs included. The company allocates two or more zones. All customers located within the boundaries of a separate zone pay the same total price, which becomes higher with the distance of the zone. Pirless can establish an eastern zone and charge all its customers $ 10 transportation costs, a mid-western zone with a transportation rate of $ 15, and a western zone with a rate of $ 25. As a result, buyers are within each separate price range. zones do not receive any price advantages over each other. Customers in Atlanta and Boston will pay the same total price to Pearless. However, claims are not ruled out that in this case, the customer from Atlanta assumes part of the transportation costs of the client from Boston. In addition, the customer on the western side of the border between the eastern and midwestern zones will pay more than the customer on the eastern side of the partition, although they may be only a few miles apart.

ESTABLISHMENT OF PRICES APPLICABLE TO THE BASIC ITEM . The method of pricing in relation to the base point allows the seller to choose a city as the base and charge all customers transportation costs in the amount equal to the cost of delivery from this point regardless of where the shipment actually comes from. For example, Pirless may choose Chicago as such a base point and invoice all customers in the amount of $ 100 per item, plus shipping costs from Chicago to destination. This means that the client from Atlanta will pay for the transportation costs of Chicago-Atlanta, although the goods may also be shipped to him from Atlanta itself. The advantage of using a base point outside the location of the enterprise is that at the same time as the total price increases for customers located near the enterprise, for remote customers this price is reduced.

If all sellers choose the same city as the basis, the price including shipping costs will be the same for all customers and price competition will be eliminated. In industries such as sugar, cement, steel and automobiles, the pricing method has been used for a single base point for many years, but now it is becoming less popular. To achieve greater flexibility, a number of companies today choose several cities as the basis. In this case, transportation costs are calculated from the base point closest to the customer.

ESTABLISHING PRICES WITH ACCEPTANCE OF DELIVERY COSTS . A seller who is interested in maintaining a business relationship with a particular buyer or with a specific geographic area can use the pricing method with the delivery costs. In this case, to ensure the receipt of orders, the seller partially or fully assumes the actual costs of delivery of the goods. Perhaps he believes that he will be able to expand the scope of activities and average costs will decrease, more than covering the additional transportation costs. This method of pricing is used to penetrate new markets, as well as to maintain their position in markets with increasing competition.