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What is basing point pricing?
Base point pricing is a pricing system directed at setting prices for products and services based on the factors like base cost and transportation cost within a given market. Such a strategy is often used in the automotive and steel industries. It is determined that basing point pricing operates to gain a competitive advantage by setting a particular location for the transportation of goods.
Essentially, there are several key elements within the basing point pricing system. Namely, it includes point pricing, rebate pricing, and bond pricing. In its essence, basing point pricing involves designating a specific geographic location as a certain basing point. The next step is setting a base price to charge customers as a freight cost from the basing point to the customer’s location. The crucial thing to understand is that a base point can be chosen arbitrarily. However, as a rule of thumb, the location of a company’s manufacturing unit is often considered a base point.
Basing point pricing system is often used by oligopolies. These are market structures with a small number of companies. Usually, such an environment does not include significant competition, which means firms do not need to strive for competitive advantage as fierce as in other industries. In terms of goods, basing point pricing is often applied to bulky products and extremely to transport. Often, businesses appealing to basing point pricing system refer to two particular components:
- Setting the base price for a product. The notion shows how much a product unit costs during the manufacturing stage.
- Establishing a shipment price. The customer’s location determines the component corresponding with a pre-selected base point.
These two components represent the core of basing point pricing. There can be an additional charge to the components if a product being shipped is very heavy and expensive. For instance, it can be steel, automobiles, or cement. For these types of goods, the base price includes both transportation costs and an additional cost.
One of the things to consider when setting the shipment price is the correlation between the actual location of manufacturing and a base point. As it was mentioned above, usually, those two locations coincide. However, when the basing point from which a product is shipped to a customer is located in a different location than a manufacturing plan, consumers may raise a claim suggesting that a shipping price was set inadequately.
Base point pricing examples
Basin point pricing systems can be applied in various industries. Respectively, one can mention several key examples of basing point pricing. One of the first apparent examples comes from shipping. Imagine New York is the basing point. In such a case, the shipping within New York will reflect the base price. In turn, shipping outside New York will cost the base price and the preset shipment rate depending on the shipping’s destination.
If a consumer is located 100 miles from the basing point, it means that it will be reflected in the transportation fee under the principles of basing point pricing. Respectively, it does not matter how many customers from the same location order the product. The shipping fee should remain the same.
The interesting part of the example correlates to customers located in different locations. If one client is located 100 miles from the basing point and another is located 150 miles, they will pay the same transportation fee. It all depends on the standard publishing freight schedules. Some may argue that under such a system, a customer located nearer to the basing point is discriminated against. They are charged so-called “phantom” shipping costs. Customers situated farther from the basing point pay less because a seller absorbs parts of shipping costs.
The resolution of the problem was found in establishing particular price zones within which shipping costs do not alter dramatically. In such a case, people know they are in one specific zone, and certain goods are transported for a special price. Interestingly, setting price zones can also be used to deter other entrants. Namely, companies coming to the new market will not be able to offer the same shipping costs as those that established their presence and have particular basing points.
Basing point pricing is extremely important for shipping companies. It shows how a business can determine the base price and the transportation fee based on the factors like location and goods themselves. Establishing distinct shipping zones allows for sharing spheres of influence and creating conditions when companies are not pushed to compete with every bit of land and every customer. Basing point pricing systems help regulate the shipping business and make the environment in which both companies and clients benefit.
What is base point pricing?
Base point pricing is a pricing system directed at setting prices for products and services based on the factors like base cost and transportation cost within a given market.
Which markets are best to use base point pricing?
Basing point pricing is often used by oligopolies. These are market structures with a small number of companies. Usually, such an environment does not include significant competition, which means firms do not need to strive for competitive advantage as fierce as in other industries.