What Is Geographical Pricing?
Geographical pricing is the practice of adjusting an item's sale price based on the location of the buyer. Sometimes the difference in the sale price is based on the cost to ship the item to that location. But the difference may also be based on what amount the people in that location are willing to pay. Companies will try to maximize revenue in the markets in which they operate, and geographical pricing contributes to that goal.
Charging higher prices to account for higher shipping charges to faraway locations can make a seller more competitive, as their products will be available to a bigger number of customers. But higher shipping costs may make local customers avoid buying the product that is shipped from far away in favor of cheaper, local products.
Understanding Geographical Pricing
Most typically, geographical pricing is practiced by companies in order to reflect the different shipping costs accrued when transporting goods to different markets. If a market is closer to where the goods originate, the pricing may be lower than in a faraway market, where the expense to transport the goods is higher. Prices may be lower if the goods compete in a crowded market where consumers have a number of other quality options.
Prices are also impacted by whether the manufacturer is a price taker instead of a price maker. A price taker is a company or individual that has to settle for whatever price the market has determined for the product, as they lack the market share or influence to determine the price. A price maker has the market share to set the price.
Taxes can also 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.
- Geographical pricing is a practice in which the same goods and services are priced differently based on the buyer's geographic location.
- The difference in price might be based on the shipping cost, the taxes each location charges, or the amount people in the location are willing to pay.
- Prices are also varied based on demand, such as a product that is competing with many rivals in a market versus a product that is exclusive to a market.
Example of Geographical Pricing
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.