Module 12

PLACE AS A RPICE-SEGMENTATION FENCE

Place as a Price-Segmentation Fence
• The place where a product is used or purchased is another type of
purchase-situation characteristic that can serve as an effective price-
segmentation fence.
• Price segmentation based on geography can also make sense when it
is the place of the product’s purchase that serves as the price-
segmentation fence.
• Different purchase locations may involve differences in the product’s
value to the customer (VTC), the product’s costs, and/or the
customer’s price sensitivity.

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SHIPPING COSTS FOR INDUSTRIAL PRODUCTS
• For many industrial products, the costs of shipping them from the
manufacturer’s plant to the location where they will be used by the
purchasing firm is a substantial portion of what the buyer must pay to
acquire the products.
• Steel, gasoline, automobiles, wheat, sugar, coal, lumber, and cement
are examples of such products.
• Some sellers will set prices that cover only the product.

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SHIPPING COSTS FOR INDUSTRIAL PRODUCTS
• The buyer is responsible for arranging to ship the product from the
seller’s plant to the buyer’s location and the buyer pays for this
shipping
• This practice known as FOB-origin pricing, a traditional term
indicating that the product is “free on board”—that is, free of the
seller’s responsibility—where it is produced. The product becomes
the buyer’s property—and the buyer’s concern—when the seller
loads it onto the buyer’s carrier.

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Delivered Pricing
• Despite the simplicity of FOB-origin pricing, it is more common for
sellers of industrial products to use some form of delivered pricing.
• In delivered pricing, the price that the seller quotes to the customer
includes the transportation of the product to the customer’s location.
• Delivered pricing gives the seller a greater degree of pricing control.
• As we will see, the bundling of a product’s shipping along with the
product can provide the product’s producer with an additional means
of managing the price that the customer pays for the product.

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Delivered Pricing
• Delivered pricing involves using location of product use as a price-
segmentation fence.
• Those customers whose use of the product requires it to be shipped
to a location farther from the producer will be charged more for the
product than those customers who use the product at a location
closer to the producer.

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Delivered Pricing
• There are a number of alternative formats for communicating a
delivered price.
• FOB destination is a product price that includes shipping
• Freight charge is a price that is separate from shipping
• Basing-point pricing is freight charges quoted to the buyer are the
costs of shipping the product from a place other than the producer’s
location.

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Absorption of Shipping Costs
• The use of delivered pricing helps make it possible for a seller to
address a common problem resulting from high shipping costs.
• Shipping costs can make it difficult for a seller to successfully compete
at the more distant customer locations.
• Freight absorption pricing is when delivered prices are set so as to
absorb at least some of the shipping costs

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Absorption of Shipping Costs
• Note that when delivered prices involve partial seller absorption of
shipping costs, there are two price- segmentation fences in use.
• Place-of-use fence allows the delivered product to be sold at a higher price to
the more distant purchasers
• Pricing of the product in a bundle that includes both the product and its
transportation to the buyer that allows the seller to be competitive at the
farther locations.

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Absorption of Shipping Costs
• Some companies accomplish this price segmentation between
different geographic areas by the bundling fence alone
• Uniform delivered price is including shipping in the product’s price
and charge the same price to all customers, regardless of location.

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RETAIL PRICE ZONES
• Zone pricing is geographic price segmentation in retailing
• The management of a chain of retail outlets will classify the chain’s
outlets into zones based on their location.
• The prices charged by any particular outlet in the chain will depend
on its zone.
• The zones may accomplish price segmentation between different
types of locations (such as shopping centers, office buildings, or
college campuses), between different towns or neighborhoods, or
between different national regions, such as Philippines or the United
States.
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Convenience-Based Price Zones
• In some types of retailing, the use of zone pricing is based on
differences between retail outlets in the convenience they provide to
customers.
• The goal here would be to capture the value created by locating an
outlet in places that are easily accessible to customers as they pursue
activities that bring up the need for the outlet’s products.
• Higher prices for products sold at convenient locations are
appropriate not only because the convenience gives the products a
higher VTC but also because selling at convenient locations is likely to
involve higher costs.

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Convenience-Based Price Zones
• Designing appropriate convenience-based price zones for a product
depends on gaining an understanding of the places where customers
are likely to be when they have needs for the product.
• This involves knowing where potential customers live and work and
knowing the locations of their shopping centers, churches, hospitals,
and entertainment activities.

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Price Zones Based on Other Factors
• Retail price zones are often defined by factors that are important in
determining customer price sensitivity.
• One key factor in determining price sensitivity is the customer’s
income level.
• Customers in affluent neighborhoods are often less price-sensitive than
customers in more middle-income neighborhoods.
• A second important price-sensitivity factor that is used in defining
retail price zones is the intensity of the competition.
• Prices are likely to be lower in those outlets of a chain that are close to low-
price competitors.

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Price Zones Based on Other Factors
• A third price-sensitivity factor is the consumer’s ability to engage in
price information search in order to take advantage of the price
competition that does exist.

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Constraints on Zone Pricing
• There are several difficulties that may need to be dealt with in order
for zone pricing to be used successfully.
• When consumers observe that the prices in a store are higher than
the prices in another store of the same chain just a few miles away,
they are likely to feel that they are being treated unfairly.
• Fear of negative consumer reactions leads many retailers to be
reluctant to talk about their use of zone pricing.

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Constraints on Zone Pricing
• In addition to the issue of fairness, there are three other possible
constraints that may need to be addressed in a retailer’s
consideration of zone pricing:
1. Difficulty in managing pricing zones
2. Conflicts with advertised prices
3. Conflicts with Internet pricing

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PRICING IN INTERNATIONAL COMMERCE
• When a product is sold in more than one country, it is commonly sold
at prices that differ between the countries.
• This geographic price segmentation is accomplished by using country
of sale as the price-segmentation fence.

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Factors Supporting International Price
Segmentation
• A product may have a different best price in different countries
because of any or all of the three factors that determine best price:
1. VTC;
2. Costs; and
3. Price sensitivity.
• There are innumerable aspects of the cultures, lifestyles, attitudes,
and tastes of the consumers in a country that could lead those
consumers to value a product more or less than those in other
countries.

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Factors Supporting International Price
Segmentation
• There are also a number of reasons for differing costs of providing the
same product to customers in different countries.
1. Distribution costs may differ between countries
2. There may be differences in the taxes to carry out operations in a country or
in the costs of complying with governmental regulations
3. The risks of doing business in the country may differ.

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Factors Supporting International Price
Segmentation
• Consumers in different countries may also differ in price sensitivity.
• Economic factors play a major role in these price-sensitivity
differences.
• Consumer buying power—a combination of their income and
wealth— differs greatly between countries.
•.

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Factors Supporting International Price
Segmentation
• For the average consumer in a developing nation, the prices of many
common products are such a large proportion of their incomes that
they will show a higher degree of price sensitivity than will consumers
in developed nations
• In some cases, price competition from local competitors is made
more difficult to handle because of subsidies given to those
competitors by local governments.

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Gray Market Importing
• Gray market commerce - This is the practice of selling products
through unauthorized international distribution channels.
• For example, a Swiss watch manufacturer might sell watches to an authorized
U.S. retailer for a high price, reflecting the prestigious image of Swiss watches
in the United States. The manufacturer might also sell the same watches for
considerably less to a retailer in Italy, where there is less prestige to Swiss
brand names. The Italian retailer might find it profitable to quickly unload the
watches by selling them to an unauthorized U.S. retailer at price low enough
to enable this unauthorized retailer to undercut the authorized U.S. stores.

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Gray Market Importing
• Black market refers to commerce that is illegal.
• Gray market commerce is not illegal in most countries but is
unauthorized and ethically questionable.
• It violates the manufacturer’s intentions and often violates contracts
with a country’s authorized distributors.
• Gray market importing, also called “parallel importing,” is responsible
for billions of dollars of annual sales worldwide and is expected to
increase.

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Managing the Gray Imports Problem
• There are two general approaches to dealing with the problem of gray
market imports.
• The first approach is to take steps to make gray importing more difficult.
• The second approach to reducing the problem of gray market imports is to
decrease the size of the price differential between countries.

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Other Constraints on International Price
Segmentation
• The actions of governments often limit the ability of an international
marketer to sell a product at the price that is best considering the
product’s VTC, costs, and customer price sensitivity in each country.
• Price controls – government mandating of maximum prices
• Protective tariffs – schedule of import taxes known as duties that are
designed to protect the local sellers of a product against low-priced
competition from foreign producers
• Dumping - is judged to occur when an imported product is sold at a price that
harms local competitors and is lower than the imported product’s price in the
producing country.

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Pricing to Base-of-the-Pyramid Consumers
• One of the challenges of pricing in international commerce is the
issue of how to set prices low enough to appeal to the large number
of people in developing nations who have very little buying power.
• The huge size of this market segment has led it to be referred to as
“the base of the pyramid.”

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Pricing to Base-of-the-Pyramid Consumers
• How can a product’s price be set low enough in developing countries
to enable such low-income people to buy and yet still be profitable?
• One approach to doing this is to manage a product’s nominal price,
which is its price in currency (e.g., dollars) as opposed to, say, its unit
price (e.g., price per pound).
• By keeping a product’s nominal price extremely low, the product can
become affordable to the poor.

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Pricing to Base-of-the-Pyramid Consumers
• For consumable products, this can be done by selling the products in
small, single-use package sizes.
• For durable products, low nominal prices can be achieved by what
has been called “the shared-access model,” where access to the
product is separated from ownership.
• For services, low nominal prices can be accomplished through
advances in automation and telecommunications.
• As a form of price segmentation, it involves the use of both purchase
quantity and country of purchase as fences to separate the segments.

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THE GEOGRAPHY OF CYBERSPACE
• The vast computer network known as the Internet is also often
referred to as “cyberspace,” which indicates that it is comprehended
as a realm with a spatial aspect.
• Each webpage is a specific location in this space, all of the pages of a
company’s website are an area in this space, and the websites of
similar types of companies comprise a region in this space.

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THE GEOGRAPHY OF CYBERSPACE
• The website where a customer commits to a purchase could be
considered the cyberspace location of his or her purchase.
• Selling the same item for different prices when purchased at different
Internet locations would constitute using the Internet place of
purchase as a price- segmentation fence.
• One type of web-location price segmentation is between a seller’s
branded site and a shopping site.

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THE GEOGRAPHY OF CYBERSPACE
• A branded website is the Internet location of a product’s
manufacturer (e.g., Sony.com) or of an online retailer (e.g.,
Amazon.com).
• For a particular product, a branded site gives only one price.

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THE GEOGRAPHY OF CYBERSPACE
• By contrast, shopping websites (also called “shopping agents”), such
as Lazada, Zalora, and Shopee, show the prices of many sellers of an
item in a format that facilitates price comparison.
• Because it is likely that visitors to shopping sites are more price-
sensitive than visitors to branded sites, retailers or manufacturers
who sell directly to consumers will sometimes list an item at a lower
price on shopping sites than on their branded sites.

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Reference and Copied from:
• Schindler, Robert M. 2012. “Pricing Strategies: A Marketing
Approach” SAGE Publications, Inc.

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