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Basics of Marketing - Kotler Philip

Setting prices by geographical principle

Geographical approach to pricing involves the decision to establish a firm of different prices for consumers and different parts of the country. Delivering goods to a far-located customer costs the firm more than a client located nearby. Is it expedient to charge higher transport costs for remote customers with higher fees for the goods, thus risking losing clients? Or maybe it is better to charge the same fee from all consumers, regardless of their remoteness? We will consider the five main options for setting prices on a geographic basis in relation to the following hypothetical situation:

The paper production company Pirless, based in Atlanta, Georgia, sells paper products to customers from all over the United States. The cost of delivery is high and influences the choice of the supplier by the customer. The company "Pearless" wants to develop a price system on a geographic basis. The management is trying to determine what amounts should be requested for the same batch of goods costing $ 100 from the customer "A", located in Atlanta, the customer "B" from Bloomington, Indiana, and the customer "B" from Mr. Compton, California.

PRICE FORMING FOB IN PLACE OF ORIGIN OF GOODS . Firm "Пирлесс" can demand from clients of payment of charges on transportation of the goods from the enterprise in Atlanta up to a site of the customer. For the goods, each of them will pay the selling price from the factory in the amount of $ 100. In addition, they will have to pay for the transportation of the goods: to customer A, say $ 10, customer B - $ 15 and customer B - $ 25. Is called "setting the price of FOB (free on board) at the place of origin of the goods" and means that the goods are transferred to the carrier on the terms of the franco-wagon, after which all rights to this product and responsibility for it pass to the customer who pays all transportation costs from Location of the plant to the destination.

Proponents of setting the FOB price in the place of origin of goods consider this method to be the fairest measure of transportation costs, as each customer pays for himself. The disadvantage is that for remote clients, "Pearless" is an expensive company. And if its main competitor is located in California, it will bypass it on the California market. By the way, he will bypass it in most western states, leaving behind "Pearless" 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 prices and transportation costs will be the same for both firms. To the east of this vertical, the price advantage will be neither to the side of the firm "Pearless", to the west - on the competitor's side.

SETTING A SINGLE PRICE WITH DELIVERY COSTS INCLUDED IN IT . The method of establishing a single price with shipping costs included in it is the complete opposite of the FOB price setting method at the point of origin of the goods. In this case, the firm collects a uniform price with the inclusion of the same amount of transportation costs, regardless of the client's remoteness. The transportation fee is equal to the average amount of transportation costs. Suppose that it is $ 15. Using this method, the client in Atlanta will pay more ($ 15 for transportation instead of 10), and the client in California - less ($ 15 instead of $ 25). In this case, a client from Atlanta will most likely prefer to purchase paper from another local supplier who uses the FOB price method at the point of origin of the goods. On the other hand, the firm "Pearless" will have more chances to attract a Californian customer. Among other benefits of this method is the relative ease of use and the ability for a firm to advertise a single price on a nationwide scale.

ESTABLISHMENT OF ZONE PRICES . The method of establishing zonal prices is something between the FOB price method at the point of origin of goods and the method of a single price with shipping costs included in it. The firm identifies two or more zones. All customers within the boundaries of a single zone pay the same total price, which becomes higher as the zone is remoter. Firm "Pearless" can establish an eastern zone and charge all its customers with transportation costs of $ 10, the mid-western zone with a transport cost of $ 15 and a western zone with a rate of $ 25. Thanks to this, buyers within the boundaries of each individual price Zones do not receive any price advantages to each other. Clients in Atlanta and Boston will pay the firm "Pearless" the same total price. However, claims are not excluded that in this case, the customer from Atlanta takes over part of the client's transportation expenses from Boston. In addition, the customer on the western side of the border between the eastern and mid-western zones will pay more to the customer on the east side of the section, although they may be just a few miles apart.

PRICE INSTALLATION FOR THE BASIC ITEM . The pricing method applied to the basis point allows the seller to select a particular city as a base and to 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, the company "Pearless" can choose such a base point of Chicago and expose to all customers accounts in the amount of $ 100 for the goods plus the cost of its delivery from Chicago to its destination. This means that a client from Atlanta will pay for the transportation costs of Chicago-Atlanta, although it may be shipped to Atlanta itself. The advantage of using a basic point outside the location of the enterprise is that, simultaneously with the increase in the total price for customers located near the enterprise, for remote customers, this price is reduced.

If all sellers choose the same city as the base point, the price including shipping costs will be the same for all customers and the price competition will be eliminated. In such industries as sugar, cement, steel and automotive, pricing 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 firms today choose to base several cities. In this case, transportation costs are calculated from the nearest base point to the customer.

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