Posted in Operations and Supply Chain Terms, Total Reads: 3728
Definition: Zone Pricing
Zone pricing takes into consideration the distance between the warehouse and the point of purchase by the buyer . The transportation costs are charged from the purchaser on the basis of these distances. The areas are classified into zones for calculating these distances .These distances are measured in radial direction with the warehouse or point of dispatch being the common center of the concentric circles. However measurements are also done taking into consideration the topography of the place , the population distribution , shipping infrastructure .
However argued by its critics the reason behind the zone pricing is a means to control prices based on the demand and supply . The figure below gives the various zones used for classification.
In some of the monopolistic industries it is also used to create high entry barriers by imposing territorial restrictions. It prevents the prices from falling by restricting the size of the market as price is inversely proportional to it.
It is practiced in the gasoline industrywhere there is a collaboration between themarketer and the retailers . The prices are governed on the basis of the local environment . The independent distributor needs to take approval of the marketer for selling gasoline in the same territories as theirs this is done to prevent him from free riding on the initial investments done in setting up the distribution outlets. The independent distributor is known as a jobber who is owner of multiple brands and also leases them to the dealers. These jobbers can also participate in zone pricing like the brands by imposing conditions on their dealers from keeping other products.