Why Zone Pricing can be a Bad Idea! 📦 Podcast Ep. 65
In this episode of Pricing College, we ask why charging customers more or less based on their location – i.e. postcode or zip code (zone pricing) may seem like a good idea – but may create many more issues than benefits.
In pricing – it is vital to not annoy or alienate customers or potential customers – and of course – no one wants to feel discriminated against.
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TIME-STAMPED SHOW NOTES
[00:00] Introduction
[01:28] People believed that they should be treated fairly regardless of where they live, etc
[02:20] In a firms perspective, why zone pricing is a way of getting the right measures in place?
[03:07] Postcode is a blunt instrument. Do people accept zone pricing?
[04:29] Joanna explains that having value-based pricing will help a company avoid the issues of zone pricing.
[06:02] Does zone pricing discriminate against people and exploit certain aspects?
What is zone pricing?
In today’s episode, we want to talk about a pricing approach or concept that on initial inspection can seem a really good idea. But sometimes there may be more negatives than outweighed the positives. That is zone pricing.
If you type into two approaches it could be on a store by store basis if it’s a large chain. Or could even be on the internet that when you type in your address the price changes. It sounds great. You could charge different areas, different prices.
But, are there downsides?
If you think about it, even as a customer you probably will think there is a downside. Customers may not like being charged more just simply because of where they live their postcode.
Because ultimately this is where the information and this it’s investigating where you leave. The affluence of your suburb and ultimately, how much you’ll be able to spend?
It’s a great way to measure spending but, Is it fair?
Fundamentally, I think people have a real belief that they should be treated fairly.
They should be treated equally to everyone else. Their dollars or pounds or euros going into the store should be equal to the next person’s.
Sometimes it could breed resentment that it’s whether it’s a postcode lottery. You might want to use that term. Or, it could be even like a tax or penalty on someone from a certain area.
- What would their reasoning for that be?
- Would it be a higher social socio-economic area with higher incomes?
- And their feeling could charge more, or whatever the reason?
It could be in a cost-plus environment.
There could be good reasons why a company may want to do this. If you’ve got regional, remote stores and shipping stuff to that location. That might make sense.
But I think in many regards, people want dependency same price and believe that is their right.
If you think about it I suppose on the other side from a firm’s perspective. They just really are keen to get the right metrics and measures in place. So they can understand the market.
So to them logically speaking it makes complete sense to do so using postcodes data and all of that to understand spending. As Aidan was saying spending and willingness to pay seem to be well correlated.
So, why don’t we investigate one, if the other one willing to spend is too abstract and difficult to measure?
We can use spending instead. But it just can be difficult when you start using that as a strict measure for everything else. Especially in terms of price setting.
I think postcode is a very blunt instrument.
Depending on the country, or the city you’re in. Postcodes can be small or massive. You could have huge numbers of varied suburban areas in those areas. A very diverse population.
So there’s got to be more drivers than just simply your location.
We always say in this podcast it’s probably hundreds of drivers driving something. If you’re trying to sell any product, do you think the postcode location is the biggest, most logical way to segment your market?
I would suggest no.
If it’s getting down to a cost-plus mechanism where it’s posting stuff out to people. There’s a very simple way to fix that is you charge them a separate postage price. And when you get to the cart and checkout.
People accept that if you live on an Island remote off the coast. It’s a bit different than being two miles from the depot.
So I think people accept that if in those instances. But I think if you jump online and you type a different postcode and it gives you different pricing. Or of course, just read your IP etc as well and give you different pricing. I think that would start to annoy people.
I also think you’d have a high chance of getting bad media coverage.
If the newspapers got onto that. Because it’s a very easy spinnable story. If you want to spend that story. And make it look like big corporates or taking advantage of people in certain areas. I think you’re walking into a trap if you try that one.
Maybe as if you’re trying to calculate the cost to serve a customer it might be a useful input.
But I suppose this is why in terms of price setting, businesses are moving away from purely that cost focus to a more value-based focus. And thinking more broadly about drivers of purchase.
Drivers of demand to calculate the price asking questions such as…
- How has this customer group come to us?
- What are they looking to buy from us?
- Why are they buying these particular products and services from us?
- How are they consuming our products?
Now, these are the more important sort of drivers of demand that you should be using in a value-based price-setting process.
It’ll get you away from those difficult sorts of conversations and the issues with postcode and zone pricing that can get a bit messy.
Also, it’s quite limited. I suppose in terms of generating those additional price premiums that you are looking to find. But yet fairly and in line with what customers are willing to pay.
So going down the value base route asking those questions about, why people are buying? It will help you generate more profit dollars for your services and products.
Bottomline: Does zone pricing discriminate against people?
We all say common sense is required. I think common sense is not very common. But in this instance, it’s a bit harder to explain.
Obviously, in many businesses in smaller towns or certain areas, it’s perfectly understandable that prices will be lower than the nation’s capital or the richest parts of the country.
This can go from restaurants to haircuts to anything like that. Whereby the price will be influenced by to large extent the labour and part of the people in the area. Then the employment process etc.
So, of course, if you’re in a smaller area or a more remote region you might be able to buy a drink in a bar for less than you would in a fancy bar in the city. It can also apply to haircuts. I think that’s perfectly understandable.
The difficulty gets into it when your segmentation or your matching local pricing or those aspects that are perfectly legitimate.
You have to be just very careful that everything you’re doing could not be perceived as in any way discrimination against people or exploitation of certain aspects.
I think if you’re trying to sell a consumer product that’s the same item at a different price at different geographies. That you could get into some sort of marquee ground or could be perceived or spot different mechanisms.
I think that’s something that anybody sensibly would want to avoid and not get into. Just the potential benefit of a few extra dollars here just wouldn’t be worthwhile.
The potential downside in my belief. Of course, though, if you’re trying to compete in a town your need to think about the value offer you provide. If the price level for takeaway sandwiches in this town is much lower than elsewhere. You probably have to match to market in that area.
But again, that’s a match to market it’s not a postcode lottery. It’s not discrimination against on a postcode basis.
I suppose this is what a good pricing team would do they would look at a particular price point in relation to where they sit in the price structure. That is in between your floor prices and also the price ceiling.
The price parameters for everything that you sell, then they’ll look at…
- What is the overall business strategy?
- Is our pricing aligned to that strategy?
- And where is our price?
- What’s our price positioning in the market?
- Just because we can price higher in one zone, does that go against our price positioning? our business strategy?
- Are we within our price parameters?
There’ll be asking all those questions making sure they check the boxes for everything. Because if you don’t you can find yourself dealing with some very difficult issues.
Using this as one measure just using, what customers are willing to spend? what they can spend?
Zone pricing isn’t bad, but it has to be considered in relation to a lot of other inputs.
A good pricing team will do that they won’t just lead with that input. Because it can lead to very difficult discussions and legal issues further down the line.
So just bear in mind when you’re dealing with pricing, having that internal expertise can be important. It just gives you confidence that everything that you’re pricing is in order and aligned to your business strategy and everything else in the business.
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