Geographic Pricing Practices

Abstract

Transportation costs are an important consideration in the pricing of most products. The basic question is whether to absorb the costs of getting the product to the customer or to pass the cost along to the customer as a noted extra to the price of the product. Transportation costs and how they are treated relative to pricing also affect the extent of the geographical market served by the seller, the ability to compete beyond the local market on a price basis, as well as the ability to adopt and promote a specific resale price. Thus the policy a manufacturer adopts is an important one. Pricing practices regarding the aspects of transportation can be categorized as geographical or delivered.

Shippers, in the last four years, have been able to cut more than $25 billion from the annual freight costs. In 1984, these costs accounted for 6.8 per cent of the gross national product, a figure lower than the 8 per cent which prevailed in 1981. Part of the reduction is due to changes taking place in the nation’s industrial profile, but many of the gains are resulting from increased efficiency in transportation. How much of the money saved on freight actually benefits consumers, is not certain. It is estimated, however, that perhaps $10 billion of the freight savings are reflected in lower retail prices.

(Daniel Machalaba, ‘More Companies Push Freight Haulers to Get Better Rates, Service’, Wall Street Journal, 12 December 1985, p. 1 courtesy of Dow Jones & Company Inc.)