What it means
The simplest version passes on freight exactly as it is incurred, so a buyer far from the factory pays more than one next door. This is honest and easy to defend, but it makes quoting slow and it can price the business out of distant markets entirely.
The opposite approach is uniform delivered pricing, where every customer pays the same landed price regardless of distance. Nearby customers effectively subsidise distant ones, which the seller accepts because a single national price list is simple to advertise and simple to administer.
Zone pricing sits between the two. The seller divides the map into a handful of zones and applies one freight charge per zone, which keeps quoting quick while still reflecting the broad shape of transport costs.
Two older variants still turn up in heavy industry. Basing-point pricing quotes freight as if goods always shipped from one nominated location, and freight absorption is where a seller quietly swallows some or all of the delivery cost to win business in a market it wants to enter.
None of this is only about transport. Currency, import duty, local purchasing power and the strength of local competitors all push prices apart between countries, and the internet has made those gaps far more visible to customers than they used to be.
In practice
Real-world examples.
Example
A building materials supplier quotes a single delivered price within 50 miles of its depot and adds a fixed surcharge per 25 miles beyond that. The surcharge structure is printed on the price list, which removes arguments with the sales team about who is allowed to discount freight.
Example
A software company charges different subscription prices by country, using purchasing power rather than shipping cost as the basis. It prices at $60 per user per month in high income markets and $22 in several lower income ones, and it restricts sign-ups by billing address to stop resellers buying cheaply and selling on.
Example
A brewery absorbs the whole delivery cost for a new region for twelve months to get its kegs into 200 bars. The freight absorption costs about $180,000 over the year, which the board treats as a marketing investment rather than a permanent price cut, and prices step up to the standard zone rate afterwards.
Formula
Calculation
Zone price per unit = ex-works price + freight cost for that zone
Uniform delivered price = ex-works price + weighted average freight per unit
A garden furniture maker sells at an ex-works price of $40 per unit. Freight costs $2 per unit into Zone A, $5 into Zone B and $9 into Zone C, and annual volumes are 50,000 units in Zone A, 30,000 in Zone B and 20,000 in Zone C.
Under zone pricing the delivered prices are $42, $45 and $49, and revenue is (50,000 x $42) + (30,000 x $45) + (20,000 x $49) = $2,100,000 + $1,350,000 + $980,000 = $4,430,000.
For a uniform price, total freight is (50,000 x $2) + (30,000 x $5) + (20,000 x $9) = $100,000 + $150,000 + $180,000 = $430,000 across 100,000 units, which is $4.30 per unit. The uniform delivered price is $40 + $4.30 = $44.30, giving revenue of 100,000 x $44.30 = $4,430,000.
Total revenue is identical at $4,430,000, so the real question is behavioural: the uniform price makes Zone A customers pay $2.30 more than their true delivery cost and lets Zone C customers pay $4.70 less, which may win distant volume while irritating the nearest and often largest customers.Case study
Seen in the real world.
This illustrative and fictional case concerns Pelham Tile Works, an invented supplier of ceramic tiles selling from one plant. For years it used a single national delivered price of $28 per square metre, which was easy to advertise and easy for the sales team to quote.
The problem surfaced when the finance team costed deliveries by region. Customers within 60 miles cost $1.10 per square metre to serve, while customers at the far end of the country cost $6.40, so the near customers were producing a contribution of $26.90 per square metre and the far ones only $21.60. The distant business had grown fastest precisely because the uniform price made it the best deal in the market.
The fictional company moved to four freight zones with a $1, $3, $5 and $7 supplement. It lost roughly 15% of its most distant volume, kept nearly all of the nearby volume, and raised total contribution because the volume it lost had been the least profitable it had. The lesson the invented management team drew was that a simple national price is a marketing decision with a hidden cost structure underneath it.
Watch out
Common mistakes.
- Setting a single delivered price without ever measuring what delivery actually costs by region, which hides the fact that distant business may be barely profitable.
- Treating geographical price differences as automatically legal, when competition and pricing rules in some markets restrict discriminating between similar customers.
- Forgetting that customers talk to each other, so a big gap between two neighbouring zones invites buyers to place orders through the cheaper address.
Questions
People also ask.
Is geographical pricing the same as price discrimination?
It is one form of it, since the same product sells at different prices to different buyers, though the differences are usually justified by real cost differences rather than by willingness to pay alone.
Why do some sellers absorb freight instead of cutting the product price?
Because freight absorption is easier to withdraw later and it does not reset the customer's view of what the product itself is worth.
How many zones should a business use?
Enough to reflect real cost steps and few enough for the sales team to quote from memory, which for most national sellers means somewhere between three and six.
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