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Basing-point pricing system
In this guide
- 1. Basing-point pricing system
- 2. 3 key takeaways
- 3. What is the basing-point pricing system?
- 4. How does the basing-point pricing system work?
- 5. Examples of basing-point pricing system usage
- 6. Importance of the basing-point pricing system
- 7. Criticisms of the basing-point pricing system
- 8. Real-world application
3 key takeaways
Copy link to section- Basing-point pricing includes shipping costs from a designated basing point, standardizing prices across regions.
- It simplifies pricing for companies but can lead to higher prices for customers far from the basing point.
- This system is commonly used in industries where transportation costs are significant, such as steel and cement.
What is the basing-point pricing system?
Copy link to sectionThe basing-point pricing system is a method used by companies to set product prices by including the cost of shipping from a predetermined location, called the basing point, regardless of the actual shipping origin. The basing point is typically a central or strategically chosen location, and the shipping cost from this point is added to the base price of the product.
This pricing system aims to create uniform pricing for customers in different geographic locations by using a standard shipping cost from the basing point. However, it can lead to discrepancies where customers closer to the actual shipping origin may end up paying more than necessary, while those farther away might benefit from lower shipping costs included in the price.
How does the basing-point pricing system work?
Copy link to section- Establishing the basing point: A company designates a specific location as the basing point. This location is used as the reference point for calculating shipping costs.
- Calculating the base price: The base price of the product is determined without considering shipping costs.
- Adding shipping costs: The shipping cost from the basing point to the customer’s location is calculated and added to the base price of the product.
- Setting the final price: The final price charged to the customer includes the base price plus the shipping cost from the basing point.
Examples of basing-point pricing system usage
Copy link to section1. Steel industry
Copy link to section- Basing point: A steel manufacturer designates Pittsburgh as the basing point.
- Pricing: The base price of steel is set, and the shipping cost from Pittsburgh to the customer’s location is added to this price, regardless of where the steel is actually shipped from.
2. Cement industry
Copy link to section- Basing point: A cement company chooses Chicago as the basing point.
- Pricing: The base price of cement includes the shipping cost from Chicago to the customer’s location, even if the cement is shipped from a different plant closer to the customer.
Importance of the basing-point pricing system
Copy link to section- Price standardization: Creates uniform pricing across different regions, making it easier for companies to manage and communicate prices.
- Simplicity: Simplifies the pricing process for companies with multiple production and shipping locations.
- Competitive strategy: Can be used to stabilize prices in highly competitive industries where transportation costs are a significant factor.
Criticisms of the basing-point pricing system
Copy link to section- Inefficiency: Customers closer to the actual shipping origin may end up paying higher prices due to the standardized shipping cost from the basing point.
- Anti-competitive concerns: The system can be perceived as anti-competitive, as it might discourage price competition and maintain artificially high prices in certain regions.
- Regulatory scrutiny: In some cases, basing-point pricing has faced regulatory scrutiny and legal challenges due to concerns about fairness and market manipulation.
Real-world application
Copy link to sectionExample: A cement manufacturer with multiple plants across the country uses the basing-point pricing system to simplify its pricing strategy.
Establishing the basing point: The company designates Chicago as the basing point for all pricing calculations.
Calculating the base price: The base price of cement is set at $50 per ton.
Adding shipping costs: The shipping cost from Chicago to various customer locations is calculated. For a customer in New York, the shipping cost from Chicago is $20 per ton.
Setting the final price: The final price for the customer in New York is $70 per ton ($50 base price + $20 shipping cost from Chicago), even if the cement is actually shipped from a plant closer to New York.
More definitions
Sources & references
Arti
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