geographical pricing
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Geographical pricing, in
marketing Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
, is the practice of modifying a basic list price based on the geographical location of the buyer. It is intended to reflect the costs of shipping to different locations. There are several ways to apply the cost of shipping to the prices.


FOB origin

With FOB (
Free on Board FOB (free on board) is a term in international commercial law specifying at what point respective obligations, costs, and risk involved in the delivery of goods shift from the seller to the buyer under the Incoterms standard published by the Inte ...
) origin (or FOB plant) pricing, the shipping cost from the factory or warehouse is paid by the purchaser. Ownership of the goods is transferred to the buyer as soon as it is placed aboard a
common carrier A common carrier in common law countries (corresponding to a public carrier in some civil law systems,Encyclopædia Britannica CD 2000 "Civil-law public carrier" from "carriage of goods" usually called simply a ''carrier'') is a person or compan ...
. Typically the choice of carrier is made by the buyer. FOB pricing is utilized by larger businesses capable of arranging their own logistics and marketing intermediaries. With a variation of the FOB pricing called ''FOB origin-freight allowed'' or ''freight absorbed'', the terms allow buyers to subtract all or part of the cost of transportation from their bills. This amounts to a price discount, and is used as a market expansion tactic by the companies with high
fixed cost In accounting and economics, 'fixed costs', also known as indirect costs or overhead costs, are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or r ...
s.


Uniform delivered pricing

Uniform delivered pricing is the opposite of the FOB origin pricing, as the same price is quoted to all customers. The transportation costs are averaged across all buyers, and the nearby customers are in effect subsidizing the faraway ones (paying more for the delivery than it costs the seller, the difference is called the phantom freight). This approach resembles the fees for the
first-class mail The mail or post is a system for physically transporting postcards, letters, and parcels. A postal service can be private or public, though many governments place restrictions on private systems. Since the mid-19th century, national postal syst ...
service, thus uniform pricing has another name, postage stamp pricing.


Zone pricing

Zone pricing (also zonal pricing) is a variant of the uniform pricing: the prices are the same within a "zone" (a geographical slice of the market), prices increase with the costs of shipping and reflect the average delivery cost inside the zone. This is the approach taken, for example, by the
parcel delivery Package delivery or parcel delivery is the delivery of shipping containers, parcels, or high value mail as single shipments. The service is provided by most postal systems, express mail, private courier companies, and less than truckload shippi ...
services. The zone pricing reduces the phantom freight, yet keeps the pricing structure relatively simple, thus making it easier for the seller to compete in a faraway market. The definition of zones is sometimes done by drawing concentric circles on a map with the plant or warehouse at the center and each circle defining the boundary of a price zone. Instead of using circles, irregularly shaped price boundaries can be drawn that reflect geography, population density, transportation infrastructure, and shipping cost. (The term "zone pricing" can also refer to the practice of setting prices that reflect local competitive conditions, i.e., the market forces of supply and demand, rather than actual cost of transportation.)


Gasoline

Gasoline marketers find it profitable to map out zones by determining what price the local market can bear and charging the gas station owners different wholesale prices depending on the zone. Zone pricing, as practiced in the
gasoline Gasoline (; ) or petrol (; ) (see ) is a transparent, petroleum-derived flammable liquid that is used primarily as a fuel in most spark-ignited internal combustion engines (also known as petrol engines). It consists mostly of organi ...
industry in the United States, is the pricing of gasoline based on a complex and secret weighting of factors, such as the number of competing stations, number of vehicles, average
traffic flow In mathematics and transportation engineering, traffic flow is the study of interactions between travellers (including pedestrians, cyclists, drivers, and their vehicles) and infrastructure (including highways, signage, and traffic control dev ...
, population density, and geographic characteristics. Many businesspeople and economists state that gasoline zone pricing merely reflects the costs of doing business in a complex and volatile marketplace. Critics contend that industry
monopoly A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a speci ...
and the ability to control not only industry-owned "corporate" stations, but locally owned or
franchise Franchise may refer to: Business and law * Franchising, a business method that involves licensing of trademarks and methods of doing business to franchisees * Franchise, a privilege to operate a type of business such as a cable television p ...
stations, make zone pricing into an excuse to raise gasoline prices virtually at will. Oil industry representatives contend that while they set wholesale and ''dealer tank wagon'' prices, individual dealers are free to see whatever prices they wish and that this practice in itself causes widespread price variations outside industry control.


Basing-point pricing

With basing-point pricing, certain locations are designated as basing points. The quoted price includes the freight fees from the basing point closest to the customer (not necessarily being the place the product is actually shipped from). The well-known example was the "Pittsburgh-plus" scheme, where all steel deliveries in the US were priced as if the shipment originated in
Pittsburgh Pittsburgh ( ) is a city in the Commonwealth of Pennsylvania, United States, and the county seat of Allegheny County. It is the most populous city in both Allegheny County and Western Pennsylvania, the second-most populous city in Pennsylva ...
, even as the steel manufacturing moved away from Pittsburgh. The basing-point pricing is unpopular with the buyers.


See also

*
Incoterms The Incoterms or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law. Incoterms define the responsiblities of exporters a ...
*
Geomarketing In marketing, geomarketing (also called marketing geography) is a discipline that uses geolocation (geographic information) in the process of planning and implementation of marketing activities.
* Distribution


References


Sources

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External links


Zones of Contention in Gasoline Pricing
(LA Times) International trade Pricing {{international-trade-stub