Geographical pricing strategy is widely used by some of the world’s biggest companies across most industries. However, many businesses overlook its benefits. Worse yet, some businesses don’t appreciate the potential downsides of a poorly implemented strategy.
In this article, we investigate geographical pricing, how it works, its benefits, and potential drawbacks.
What is geographical pricing?
Geographical pricing means adjusting a product’s price based on the buyer’s location. This pricing strategy calls for charging what people in different locations are willing to pay while maintaining a profit.
Geographical pricing strategy takes into account:
- Market demand
- Shipping costs
- Local economic conditions & incomes
- Regulatory differences
- Different consumer patterns
- Currency conversion adjustments
Companies trying to maximize profits in multiple markets may opt for a geographical pricing strategy. This strategy accounts for different costs of providing the product while satisfying customers. However, geographical pricing has many unique challenges, , which we will cover in this article.
When to use a geographical pricing strategy?
We recommend a geographical pricing strategy to businesses serving customers in many regions. Several specific circumstances may call for a geographical pricing strategy.
• Market Segmentation
Businesses sometimes discover market segments that include geographic components. When looking at these markets, they must consider:
- Differing local demand
- Local purchasing power
- Different preferences
- The costs of delivering the products or services to that segment
These differences often make geographical pricing necessary to stay competitive. The strategy will cover all these differences and enable you to adjust to them over time.
• International expansion
Any attempt to expand internationally will demand geographic considerations. Even for purely digital solutions, it is a mistake to overlook geographical factors. In these cases, there may be economic factors that produce a large market segment that is willing to pay more. If the destination is an uncrowded market, this is even more true.
• Additional costs
The regulatory and tax environment will partly determine the selling costs in an international market. Tariffs, taxes, duties, and other regulatory costs will change the cost structure. Even in one country, there may be extra regulatory costs.
There are also indirect costs in different locations:
- Distances that must be travelled
- Infrastructure quality
- Logistical efficiency
Because these costs affect your business’s financial structure, they must affect your approach to pricing.
One typical example is “zone pricing” in the petrol industry. Companies charge gas station owners different prices for the same gasoline based on their zone (location). They do so to:
• Account for excise taxes
• Make up for different wholesale prices
• Account for local competition with other gas stations and companies
• Adequately accommodate the regular traffic gas stations get
• Accommodate local consumers based on average household incomes in that zone
This is one of the best examples of geographic pricing strategy at scale. It’s a well-established and thoroughly maintained process.
• Competitive pressure
Geographical pricing can be used to respond to competitive pressures in markets. Implementing the strategy helps keep prices competitive and profits maintained.
A big part of geographical pricing is tailoring pricing to local competition and customer demand. With this focus, you can remain competitive in each market you are active in.
• Brand positioning
Different products, brands, and services are perceived differently in other locations. These differences often arise due to cultural differences and deliberate marketing.
• For example, in the US, Starbucks is more expensive and luxuriously branded than many other large coffee shop chains. However, this effect is even more powerful in many international markets. In some countries, Starbucks shops are much better decorated, and the service quality is much higher. Due to this branding approach, the prices they charge are correspondingly high.
Where your product, service, or brand can be positioned as more premium, you can charge higher prices. Determining these factors, however, requires thorough market research and testing. Discovering opportunities for premium branding with a lower price sensitivity may lead to a geographical pricing strategy.
Geographical pricing challenges
Maintaining multiple price points across different regions can be complex.
We know that geographical pricing can be valuable for tailoring pricing strategies to specific market conditions and customer preferences. However, you must consider other potential issues and implement risk mitigation measures.
Negative perceptions
First, people may notice that your prices are different in one location. This can lead to perceptions of unfairness or even discrimination. Customers in different regions may feel slighted and complain.
This does not suggest avoiding geographic pricing. Instead, we recommend conducting localized market research. Understanding the specific dynamics of each geographical market helps you avoid many problems.
Geographic pricing is more risky for some industries and products. You need to be careful not to unintentionally appear callous or out of touch.
Conflicts with distribution channels
Balancing the interests of channel partners while maintaining the best price can be challenging. A geographic pricing strategy may conflict with existing distribution channels. Consider different channels serving overlapping geographical markets with different prices.
For example, imagine a manufacturer offering lower wholesale prices to one distributor in an area. Other distributors may feel disadvantaged. There is even a risk of channel cannibalization, where sales shift from one channel to another over pricing differences.
Jurisdictional complexity
Operating in separate jurisdictions also requires you to navigate different regulatory environments. Some jurisdictions have laws or regulations on pricing practices. This can complicate your efforts to implement a profitable geographical pricing strategy.
You will need to pay attention to anti-competition and anti-price discrimination regulations. These types of rules vary in scope, but may include anti-competitive behavior regulations:
- Price fixing
- Collusion
- Market allocation agreements
Anti-price discrimination regulations may cover a much more comprehensive range of practices. What is considered unfair or discriminatory pricing varies by jurisdiction. What is completely fine in one jurisdiction may run afoul of regulations elsewhere.
These considerations add to the investment required to implement a geographic pricing strategy.
Key differences
When strategizing with geographical pricing, you must understand different:
- Demand drivers
- Competitive landscapes
- Customer segments
This means that your company has much more homework to do than with more straightforward pricing strategies.
Demand drivers
Demand drivers may be different in some geographic markets you are looking at. For example, consider local weather conditions if you’re selling landscaping tools. Homeowners may have different needs and price sensitivities.
Competitive landscapes
You need to assess the competitive landscape of every geographic market you operate in. That means researching:
- Competitors’ pricing strategies
- Competitors’ branding
- Different cultural sensitivities
- Market positioning
Optimize your geographical pricing strategy with Simon-Kucher's expertise
At Simon-Kucher, we offer comprehensive pricing solutions to assist companies in optimizing their geographical pricing strategies. We help businesses tailor their pricing models to suit specific geographic locations, considering local demand, market share objectives, and profit margins.
By understanding the nuances of regional markets and considering elements like local laws and consumer willingness to pay, we help companies maximize revenue through adjusted price points and dynamic pricing strategies.
Whether implementing a zone-based pricing model or adopting location-based pricing adjustments, we enable companies to effectively enhance their product pricing strategies, ensuring competitiveness and profitability across diverse markets.
Reach out to discuss your pricing strategy, and we will connect with our expert team.
