What Is Geographical Pricing?
Let me explain geographical pricing directly to you: it's the practice where I, as a seller, adjust the sale price of an item based on where you, the buyer, are located. Sometimes, this difference comes from the cost to ship the item to your area. But it can also stem from what people in your location are willing to pay. As a company, I aim to maximize revenue in every market I operate in, and geographical pricing helps achieve that.
Key Takeaways
- Geographical pricing means the same goods and services get priced differently based on your geographic location as the buyer.
- The price difference might come from shipping costs, taxes in each location, or how much people there are willing to pay.
- Prices also vary with demand, like a product facing many competitors in one market versus being exclusive in another.
Understanding Geographical Pricing
You should know that most often, I use geographical pricing to account for varying shipping costs when transporting goods to different markets. If your market is close to where the goods come from, I can set a lower price than in a distant market where transport expenses are higher. I might also lower prices if the goods are in a crowded market with plenty of quality options for you.
By charging higher prices to cover elevated shipping to remote areas, I can stay competitive and reach more customers like you. However, those higher costs might push local buyers to choose cheaper, nearby alternatives instead of my shipped product.
Another factor is whether I'm a price taker or a price maker. As a price taker, I have to accept the market-determined price because I lack the influence to set it myself. But as a price maker with strong market share, I can dictate the price.
Geographical Pricing Strategy
It's entirely up to me as the seller to decide how to price my product, and that choice leads to different outcomes. For instance, I might choose to sell in a far-off location and absorb the shipping costs, making my product competitively priced there. This could mean lower profits or even losses initially, but it builds brand awareness for future gains.
On the other hand, I could pass shipping costs to you through higher prices, which might cause various results. The product could sell poorly if it's pricier than competitors, or I might market it as a luxury item to justify the cost. In that case, only a small segment of buyers might purchase it, but that could still be profitable enough.
Special Considerations
Taxes play a role too, even without shipping involved. Take a product made in Massachusetts and sold in Washington versus Oregon: shipping costs might be similar, but since Oregon has no sales tax, I could price it higher there than in Washington, which has high sales taxes.
Additionally, if there's a supply and demand imbalance in a market—even temporarily—I might price my product or service at a premium or discount compared to another location.
Real-World Example
Consider zone pricing, a form of geographical pricing common in the gasoline industry. Here, oil companies charge gas station owners different prices for the same gasoline based on station locations.
Beyond excise taxes, the wholesale and retail prices depend on local competition from other stations, the traffic volume at the station, and average household incomes in the area—not primarily on gas delivery costs.
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