A manufacturer has to spend a substantial amount in transporting goods from one place to another. And it is difficult to transport heavy goods. So manufacturers follow different geographical pricing policies. These are four different strategies for geographical pricing:
(1)Free-on-Board Factory Pricing (F.O.B): In this strategy, seller bears the cost of goods till they are loaded in the carrier as referred by the buyer. After that, buyer has to bear the freight charges. Seller charges the from the buyer.
E.g. If the selling Price is Rs. 200 and is Rs. 50, seller will charge Rs. 250 from the buyer.
Advantage: Equitable allocation of freight charges.
Disadvantage: For a distant customer will rise the price and they can switch to competitor located nearby.
(2)Uniform Delivery Pricing: This method is also known as postage stamp method. In this method all the customers are charged same price irrespective of the location. Average of total and sale price is used to determine the uniform price.
For example,
The selling price is Rs. 200
CASE I: is 25
CASE II: is 50
CASE III: is 75.
Selling price will be uniform in all the three cases.
Advantages
Easy to understand and calculate.
Serve all customers equally.
Maintain a uniform price.
Disadvantages
Local customers may prefer F.O.B. Pricing method.
(3)Zone Pricing: In this method, a boundary is drawn in concentric circles keeping the warehouse in the centre. Market is divided into different number of areas/zones and each zone has certain set price. Boundaries can be drawn in any shape. The entire customer falling less than one zone are charged same price. Average is used to determine the zone price.
Advantage
Easy to calculate
Fair method of charging
Maintain advertised price for every zone
Disadvantage
Border customer may suffer
Distant customers can switch to competitors
(4)Freight Absorption Pricing: In this method, seller bears the freight charges and charges only the sale price from the customer. is not added in the sale price. Seller does this to attract more buyers and grab a competitive advantage by penetration. Seller often charges high fixed selling prices that compensate him the . So he can use this strategy in three cases:
1.When he fixes high selling prices that can earn him profit even after bearing
2.He wants a competitive advantage.
3. He wants to dominate the market.
Differentiate between market skimming pricing strategy and penetration pricing strategy.
Skimming Policy: Product is introduced at high price and reduced later gradually.
Inelastic demand of product.
Less competition in the market.
Penetration Policy: Product is introduced at low prices.
Charging low price leads to consumer surplus.
It is used when R and D and marketing costs are low.