Zone pricing is a pricing method in which consumers within one zone are charged one price. Clients who are located closer to the company's dispatch point pay less, whereas distant customers pay a higher price as shipping distances increase. To set prices for different zones, companies always consider the local conditions such as competition and costs associated with shipping and storage.
Advantages and Disadvantages of Zone Pricing
Prices in zones are set within certain geographic areas. The more distant the area from the place of production, the higher the transportation costs and, accordingly, the higher the price. Now, before we get into the implementation and examples of zone pricing, let's talk about its pros and cons.
Advantages of zone pricing:
- helps you divide customers into useful segments;
- enables you to pay transportation costs;
- allows you to recoup shipping costs.
Disadvantages of zone pricing:
- customers on borders of different zones may suffer from different prices;
- distant clients may prefer competitors over your company;
- it adds extra layers of bookkeeping to keep track of different prices in different zones.
The technique is very popular among businesses due to the benefits mentioned above. Let's proceed to the steps to consider when implementing this strategy.
How to implement zone pricing
- Use information effectively
- Consider competitor alternatives
- Integrate item-specific strategies
- Consider technological solutions
Let's get into how to implement zone pricing in your business.
1. Use information effectively
When giving a thought to a zone pricing strategy, ensure that you're using data that can help you do it correctly. Find out how much money customers are willing to pay for your products or services. This willingness is influenced by the following factors: income level, cost of living, and whether it’s easy for your customers to buy the same product elsewhere.
Analyzing your local customers' characteristics and demographics information allows you to understand the preferences of local customers, price sensitivities, and product affinities across stores.
2. Consider competitor alternatives
Once you understand what drives customers to pay for certain products, analyze your business rivals and the alternatives they offer your consumers. You should understand which competitors matter the most in your industry. The composition of retailers, their price levels, and logistics costs will define your local price level.
3. Integrate item-specific strategies
Mass retailers with multiple departments, restaurants, or specialty retailers can adjust to item-specific strategies. Let’s take sporting goods, for example. The sections with apparel and shoes will be more influenced by nearby stores with shoes and apparel than basketballs and sections for other basketball equipment.
People have high price awareness on certain key value items (KVIs) that influence total store value perception and customer traffic. Products with less price awareness and sensitivity can float up a little to support the investment into KVIs. For example, grocery stores use the "everyday low prices" approach on reference products while prices on less popular products remain the same or even rise. Zone pricing strategies enable specific categories to follow a different set of zone rules than others.
4. Consider technological solutions
Once the strategy has been developed, pay attention to its functioning. Third-party tools enable your pricing teams to handle the problems. You can simplify the process by using deep analytical tools that provide you with the agility and nimbleness necessary for retailers.
Now that you know how to implement this marketing technique grab some inspiration from the examples below.
Examples of Zone Pricing
The following examples will give you a better understanding of how you can incorporate zone pricing in your greater marketing strategy.
Let’s take the gasoline industry, for example. Suppliers often sell the same brands of gasoline to retailers at different costs. The price is based on the “price zone” in which the retailer is located. These zones aren’t established by the law but by suppliers' needs (transportation costs, additional fees, etc.).
Let’s imagine a home decor manufacturer based in Mexico that ships lamps, paintings, mirrors, and vases into the US. The manufacturer can create four pricing zones, and people from different locations will have to pay different costs based on the company's criteria (transportation costs, additional fees). Eventually, a client in Texas who has ordered 10 paintings will receive a smaller bill than a client who has placed the same order but from New England.
All in all, zone pricing is a marketing strategy that enables companies to segment their product offerings into individual "price zones" based on local preferences, habits, and price sensitivities. Usually, the higher transport costs, the greater the number of zones.
Last Updated: 11.03.2021