Markets in two different regions can’t be the same. The target audience in one market can have different interests, needs, and levels of purchasing power as compared to the other market. Entering into different locations requires you to diversify the revenue stream by bringing a wide range of buyers.
When a business determines its pricing strategy, one of the significant factors to be considered is the geographic location. Using a geographical pricing strategy can help a business foray into different markets along with developing a loyal customer base and earning profits.
What is a Geographic Pricing Strategy?
Geographical pricing is a strategy that helps businesses in pricing their products or services differently on the basis of the target customer’s geographical location. Companies might adjust the prices on the basis of several factors related to a location such as taxes, shipping costs, manufacturing costs, or the price that buyers in that location are willing to pay. Geographical pricing is a wider term that encompasses various strategies.
Here’s a look at some geographical pricing examples:
- A company manufactures product X in Dan Diego, California. They set separate zones across the U.S.A. – West, East, and Midwest. The transit cost is the lowest for the West zone, so it might charge $10 for the product there while $12 in the Midwest zone and $14 in the East zone.
- Geographical pricing is a common practice in the gasoline industry. The oil companies charge the gas station owners different prices for the same gasoline based on where the station is located.
Benefits of Geographical Pricing
1. Tailor Prices Based on the Region
The geographical pricing strategy allows you to tailor prices based on the location. It considered the interests, demands, and needs of the local buyers along with their paying capacity and willingness. Thus, a business can prevent any type of loss on the product by lowering the profit margin in regions where buyers are willing to pay less. On the other hand, they can benefit by increasing the price of their products in areas that have high perceived value.
2. Increase Perceived Value
The geographical pricing tactic can boost the perceived value of their product in certain locations. A brand can charge higher for their product in the regions with higher demand and boost the brand’s image. Location pricing can be connected to prestige pricing which relies on creating an impression of scarcity for elevating the value and increasing the prices.
3. Reduced Operational Costs
With a geographical pricing strategy, a business can reduce its shipping charges, transportation expenses, and freights. And this is beneficial for the customers as well. They can get cheaper products and you get reduced costs.
4. Expand into New Market
A geographical pricing strategy makes it more viable financially for any business to expand into new geographical markets.
5. Improve Customer Trust
Localizing the prices helps boost customer satisfaction and enhances their trust in your business. When the buyers in different geographical regions perceive a company as credible, they are highly likely to become local buyers and even recommend the company to others in the area.
6. Optimize Profits in Various Regions
Establishing different pricing in different locations with a geographical pricing strategy can help a business generate maximum profit within each region. It helps improve the company’s overall revenue and allows them to expand and further develop their business.
Types of Geographical Pricing Strategies
1. Freight-absorption Pricing
In this type of geographical pricing, the company selling the product pays for the shipping cost. Though the shipping arrangements are managed by the manufacturing plant or warehouse, the retailers/ product creators pay for the shipping cost. This strategy makes the buyer feel satisfied with the low-cost shipping alternatives. Businesses might offer an express shipping option which enables the buyers to pay extra if they want to receive quicker delivery of the products.
2. Zone Pricing
Businesses that apply this type of geographical pricing strategy charge higher shipping costs from the buyers in the areas where shipping costs are expensive. These businesses develop different prices for different zones where they ship. They draw concentric circles by placing the businesses, factories, and plants in the middle. After that, they can create boundaries on the map representing different pricing zones. Several factors affecting the prices in different locations can influence these boundaries such as transportation infrastructure, population density, and shipping cost.
3. Basing Point Pricing
Companies that use basing point pricing calculate two different costs for shipping their products. One cost of the base price which is the uniform expense that all the consumers ordering products from a particular plant or warehouse pay. The second cost is the shipment or freight cost which is the cost that fluctuates depending on the buyer’s location. Customers near the base point pay lower shipping costs owing to reduced shipment costs.
For example, if a customer in the U.S. and a customer from China order products from a warehouse located in the U.S.A. If the seller uses a basing point strategy, both customers will pay the same base fee. However, the customers from China will pay more shipment costs as they are further away from the warehouse geographically.
Challenges of Geographical Pricing
Despite the benefits of geographical pricing, there are some associated challenges as well. Here’s a look at them:
1. Complex Accounting and Book-keeping
Different pricing strategies for various regions need a lot of paperwork. Local prices might also differ in terms of currencies used in that specific region. When there is a higher degree of variability, bookkeeping can be challenging and cumbersome. It can be especially tough for new and small businesses with limited manpower and resources.
2. Local Regulations
When working with different geographical locations, a business must take into consideration local rules, regulations, and legal compliances. Geographical pricing strategy has to deal with local laws. There can be situations where the accounting of regional taxes might want a company to boost the prices of the end product. Also, if a business doesn’t adhere to the local laws, it can lead to litigation, fines, and penalties that can bring a significant financial burden.
The Future of Geographical Pricing in the Digital Age
PriceIntelGuru’s Price intelligence tools, help in identifying the locations that work best for your business. Providing discounts for a price sensitive market and adapting premium pricing for one can actually create a good balance in profitability and business growth. As 2023 is about to end, you can see that millions of shoppers are online users and they prefer to check every link there is to have a better deal. This makes it possible to have a segmented target without much of a hassle. Geotargeting and geographical pricing go hand in hand. Now harness the power of fostering loyalty in your customers according to their preferences.
Map Your Business in The Online World with Us
Geographical pricing is beneficial for customers and businesses equally. As it invents tailor made service costs and products according to the area specific to the online shopper. A remarkable milestone to move ahead in 2024 is to adapt the best practices for your business and also to make it relevant. You can now take complete power of adjusting the offers and pricing in every location with just a few clicks. And if you still feel the need to get more information, then contact us today!