What is Geographical Pricing

Geographical pricing is adjusting an item's sale price based on the buyer's location. Sometimes the difference in sale price is based on the cost to ship the item to that location or what the people there are willing to pay. Companies will try to maximize revenue in the markets in which it operates, and geographical pricing contributes towards that goal.

BREAKING DOWN Geographical Pricing

Commonly, geographical pricing is practiced to reflect different shipping costs. If a market is closer to where the goods originate, the pricing could be lower than in a faraway market, particularly if the goods compete in a crowded market and the manufacturer is a price taker instead of price maker. However, taxes can be a consideration even if shipping costs are not a factor. A product made in Massachusetts and sold in Washington may be priced differently than that same good in Oregon. While the shipping costs would be roughly equivalent, the fact that Oregon has no sales tax could lead the company to price the product higher in that state than in Washington, which has one of the highest sales tax rates in the country. Also, where there may be a supply and demand imbalance in a market, even if a temporary phenomenon, a company may respond by pricing its product or service at a premium or discount in the market versus another geographical spot.

A type of geographical pricing called "zone pricing" is common in the gasoline industry. This practice entails oil companies charging gas station owners different prices for the same gasoline depending on where their stations are located. Aside from excise taxes, the wholesale price, and thus the retail price, is based on factors such as competition from other gas stations in the area, the amount of traffic the gas station receives, and average household incomes in the area — not on the cost of delivering gas to the area.