Zone Pricing

Posted in Operations and Supply Chain Terms, Total Reads: 3399
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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.

Examples :

It is practiced in the gasoline industry where there is a collaboration between the marketer 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.

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