DEFINITION of Basing Point Pricing System
Basing point pricing is a pricing system in which a company bases its prices off of two components. First, the company sets a price for the product itself. Next, the company establishes a freight or shipment price that is based upon where the customer who is buying the product is located and how far away the customer is from a pre-determined location. The freight cost based upon the distance of the customer from this pre-determined, or "base point," is intended to cover the additional cost of shipping something that is very heavy, bulky, and expensive such as steel or cars. The buyer ends up paying a base price plus a set shipping price depending on the distance from the base location. Typically, the basing point is the same location as the manufacturing point, and the shipping charge is determined based upon the customer or delivery location's distance from that point. However, this can become controversial when the basing point is different from the actual location from where the item is shipped.
This may occur if a good is produced in a factory but then stored in a warehouse. if the factory is the basing point, the distance between the warehouse and the delivery location may not be the same as the factory and the delivery location and the freight fee may be inaccurate.
Basing point pricing is also known as base point pricing.
BREAKING DOWN Basing Point Pricing System
Basing point pricing is a system of pricing that incorporates a fee for a good sold, plus a freight fee that is calculated based upon the customer's distance from a starting, or base, point. Since inception, the basing point pricing system has encountered opposition due to its collusive, cartel nature. Large companies with an oligopoly over a good can establish similar initial pricing for their product. Next, once a basing point is set, there is little incentive to set up manufacturing plants in locations outside of the area. Therefore, competition tends to cluster in one region with few price differences.
An Example of Basing Point Pricing
For example, the a basing point for a ABC Coal company is set at mining facility in City XYZ because ABC's coal is produced there. Company D is located 100 miles west of City XYZ. When Company D purchases coal from ABC Coal, it pays a per pound price for its order and then an additional shipping charge based upon Company D's distance from City XYZ. Customer E is located only 50 miles away from City XYZ, so their total price for coal purchased from ABC Coal will be less than Company D's total price, because their coal has to travel less distance for delivery, reducing the freight portion of Company E's total bill.