No two regional markets are the same. Your target base in one area might have fundamentally different interests, needs, and degrees of buying power than your ideal prospects in another location. Tapping into multiple regional markets means diversifying your revenue stream and potentially bringing on a wider range of customers.
But as I touched on, regional markets are unique, and some are further or less accessible than others. In many cases, your pricing strategy needs to reflect that variability. That process — folding location-based considerations into your pricing strategy — is known as geographical pricing.
Let's take a closer look at the concept, review some different types of geographical pricing, see some examples, explore how you can leverage this kind of strategy, and go over some of the concept's pros and cons.
What is geographical pricing?
Geographical pricing is a pricing strategy where a business adjusts the price at which it sells a given product on a regional basis — charging different prices in one area than it does in others. It's typically used to recoup shipping costs or create the impression of regional scarcity, novelty, or prestige.
Geographical pricing — or geo-pricing — is a catch-all term that encompasses a wide range of strategies. Here are some of its more prevalent examples.
Zone pricing is the strategy that's typically associated with the term "geographical pricing." It's a method where all customers within designated regions are charged the same, localized price. With zone pricing, more distant customers generally pay higher prices for a company's products or services.
FOB Origin Pricing
FOB (or Free on Board) origin pricing is where a buyer pays for any variable shipping costs from a seller's factory or warehouse on top of the original price. Ownership is transferred to the buyer as soon as the products in question have left their original facility. With this strategy, the buyer or the seller can arrange transportation.
Freight absorption is a strategy where a seller assumes (or absorbs) all or part of the cost of delivery to a given region — essentially amounting to a discount for buyers. In most cases, this method is reserved for promotions.
Now that we have a baseline understanding of these strategies, let's see what they might look like in practice.
Geographical Pricing Examples
Zone Pricing Example
As I mentioned, a company's zone pricing strategy typically revolves around shipping distances and the costs that stem from them. For instance, a company might manufacture a product in San Diego, California and set three separate "zones" across the United States — West, Midwest, and East.
Since the West Zone involves the lowest transit costs, it might charge $10 for its product there — as opposed to $12 in the Midwest Zone and $14 in the East Zone.
FOB Pricing Example
Imagine a company that manufactures toy robots in Boston. The business sells a shipment of its product to a storefront in San Francisco. With FOB pricing, the owner of the storefront — the buyer — would immediately assume the shipping costs of and liability for the toy robot shipment as part of its purchase.
Let's say that the toy robot manufacturer from the previous example is trying to breach the San Francisco Bay Area market. To get there, they might try adopting freight-absorption pricing for its sales to storefronts in that area.
In that case, the manufacturer would eat the shipping charges and assume the corresponding liability while the shipment is in transit. Those extra costs wouldn't be reflected in the price — essentially amounting to a discount.
Geographical Pricing Strategy
The methods I just listed are more or less specific to manufactured products — but the value of geo-pricing pricing, as a concept, doesn't end there. SaaS products can also benefit from being sold at localized prices. In those cases, a company's geographical pricing strategy should be dictated by local currency and demand.
The first side of that token is relatively straightforward — prospects are naturally more inclined to buy a product they can purchase with the currency they're used to. It makes the purchasing process simpler and more familiar.
The second is a bit trickier. Understanding local demand and landing on price points that consumers in a given area will be receptive to is a delicate, finicky, potentially complex process that will likely require some trial and error.
When you try to breach a new market in a different country or domestic region, you need to have a grasp of which alternatives are available to those users, what your competitors are charging, the need for your kind of product in the area, and your local market share. From there, you can start to piece together an appropriate pricing strategy.
Companies That Use Geographical Pricing
Businesses across a wide range of industries use geo-pricing strategies — particularly ones that need to ship their goods. Commodities like steel and gasoline are typically charged based on geographical pricing strategies.
Companies that sell agricultural products often leverage geographical pricing as well. That's why California avocados tend to be less expensive in Los Angeles than they would be in Des Moines, Iowa. And as I just mentioned, some SaaS companies sell their products at varying price points in different regions.
Ultimately, virtually any business looking to tap into new markets can benefit from at least trying a geographical pricing strategy. If you can create the impression of scarcity, prestige, or novelty in a given area, you can probably charge a different price point there than you would elsewhere.
Geographical Pricing Advantages and Disadvantages
It gives you local appeal.
Certain geographical pricing strategies allow you to avoid treating prospects across various markets with some blanket, one-size-fits-all sales strategy. It considers local interests, sensitivities, needs, and demand.
If you can thoughtfully tailor your pricing to reflect those elements, you can appeal to individual markets more effectively — making for more sales, more users, local clout, and a firmer presence in a wider breadth of markets.
It can help you recoup shipping costs.
This one is pretty straightforward. Geographical pricing strategies that revolve around shipping manufactured goods are specifically designed to help companies account for shipping costs — so if you correctly leverage one, you can recoup those potential losses.
It can be used to boost perceived value in certain locations.
When done right, using a geographical pricing strategy to price up in certain locations can boost your product's perceived value in those areas. If you charge a higher price in a region that matches demand, you can enhance brand perception.
Geographical pricing can essentially support regional prestige pricing strategies — heightening perceived value in a given area by giving the impression of scarcity and high-esteem through higher prices.
But be careful, prestige pricing can be finicky. If you sell at a price point that's too high and fail to convey value that justifies it, you might turn consumers off — even ones that are more inclined to spring some extra cash for premium goods.
It can complicate accounting and bookkeeping.
Charging different prices in different regions — sometimes in different currencies — puts more balls in the air when it comes to accounting and bookkeeping.
That kind of variability in your revenue stream means more bases to cover —something that can make things a little trickier when it comes to getting your books in order.
You have to consider local regulations.
Local laws can often complicate certain geographical pricing strategies. You might find that a certain price point will be effective in a given region, but regional taxes or regulations might force you to boost prices beyond it just to break even.
Expanding into new regions with varying prices often takes considerable research to get a grasp of the legal strictures that will dictate how much you need to charge — that can be a major headache for businesses looking to implement a productive geographical pricing strategy.
A well-constructed, effective geographical pricing strategy can be a major asset for any business looking to expand or make the most of its reach. Putting yours together will likely take considerable research, thought, and experimentation — but if you pull it off, you can capitalize on multiple markets and see significant returns as a result.
Originally published Nov 3, 2021 7:00:00 AM, updated November 03 2021