Freight-Absorption pricing

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Definition: Freight-Absorption pricing

This is a pricing method in which the manufacturer bears some or most of the of the freight or transportation costs involved in transporting the goods to the customer.

Here a manufacturer quotes a distant customer the factory price plus the freight cost. Since freight absorption helps cover fixed costs by generating additional customers, this is a good model for a firm with high fixed cost(s) and low variable costs.

It thus helps the firm to expand its market far beyond its normal reach and acquire more customers.

 

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