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Pricing

Pricing. Purpose of Pricing. Recover costs To create new resources To establish value To Influence behavior To promote efficiency To promote equity. Approaches to Establishing Price. Arbitrary pricing Competitive pricing Market pricing Cost recovery pricing.

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Pricing

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  1. Pricing

  2. Purpose of Pricing • Recover costs • To create new resources • To establish value • To Influence behavior • To promote efficiency • To promote equity

  3. Approaches to Establishing Price • Arbitrary pricing • Competitive pricing • Market pricing • Cost recovery pricing

  4. Determine pricing variables Determine the cost of one unit of production Determine the subsidy rate Establishing a price

  5. Step 1: Determine pricing variables • Demand • Fixed costs • Variable costs • Direct and indirect costs • Contingency costs

  6. Step 1: Determine pricing variables • Demand • # of participants • Set a program min & max • What can determine a maximum? • Basically…an educated guess • Usually base revenues on minimum • When wouldn’t you base revenues on minimums?

  7. Step 1: Determine pricing variables • Fixed costs • Financial costs that the org. incurs regardless of the status of the program • Unavoidable costs • Does not change with changes in volume • Field maintenance, marketing, manager’s salary • Changing fixed costs • Additional staff to maintain the ratio; additional field for games • F.C. Example….

  8. Cost Summary - Ice Rink Fixed Costs Capital Costs $4,300/month x 7 months $30,100 Administration (overhead) $375/month x 7 months $2,625 Ice installation/removal $2,000 Basic maintenance $2,000/month x 7 months $14,000 Basic services $1,100 x 7 months $7,700 TOTAL FIXED COSTS $56,425

  9. Step 1: Determine pricing variables • Variable costs • Resulting from actual operation of the program/service • Change directly & proportionately to changes in volume • More the service is offered, the higher the variable cost • Supplies, equipment

  10. Fixed Costs TOTAL FIXED COSTS $56,425 HOURLY FIXED COSTS (2250 hrs) $25.08 Variable Costs Supplies$10/person x 2475 people $24,750 Equipment$20,250 TOTAL VARIABLE COSTS $45,000 TOTAL COSTS$101,425 Cost Summary - Ice Rink

  11. Step 1: Determine pricing variables • Direct and indirect costs • Direct costs • Indirect costs - expenses not directly chargeable to a project • Accounting & Secretarial staff • Marketing • Management • Maintenance • Utilities Direct & indirect costs of a Youth Soccer clinic

  12. Step 1: Determine pricing variables • 3 approaches to indirect costs • Equal share allocation • Percent of budget • Percent of time

  13. Step 1: Determine pricing variables • Equal share allocation • Indirects equally split among all departments • Best used when areas are near equal size & revenue producing • Example…

  14. $27,000 in overhead/indirects

  15. Step 1: Determine pricing variables • Percent of budget • % of indirects equal to the % of budget • Budget managed = revenues + expenditures • 50% of budget = 50% of indirects • Best with departments that are unequal in revenue & size

  16. $27,000 in overhead/indirects

  17. Step 1: Determine pricing variables • Percent of time • Looks at time spent on programs and assigns that percent to the program • Time consuming • Good way to allocate indirect staffing, maybe not for other things

  18. 27,000 in overhead Best option????....

  19. $27,000 in overhead/indirects Best option????.... How does each dept determine how to absorb the indirect costs???

  20. Cost Allocation Comparisons on a $100,000 salary

  21. Step 1: Determine pricing variables • Contingency costs • The unexpected • New programs – higher contingency • % or flat rate • Based on expenditures

  22. Another example + = + =

  23. Step 2: Determine 1 Unit of Production • Per person, per hour, per class, per day • P=(F+V)/N • P= Cost of the unit • F = Fixed costs (expenditures, direct/indirect) • V= Variable costs (expenditures, d/i) • N= Demand, # of units to be sold, hrs, teams

  24. Step 2: Determine 1 Unit of Production • Using the ice rink data…(without contingency) • P=(F+V)/N • P=($56,425 + $45,000)/2250 hours • P=$45.09/hour

  25. Step 2: Determine 1 Unit of Production • Using the ice rink data…(with 5% contingency) • P=((F+V) + C(F+V))/N • P=($56,425 + $45,000) + .05($56,425 + $45,000) /2250 hours • P=($101,425 + $5,071.25) /2250 • P=$47.33/hour, or…. • $45.09 x 5% = $2.25…. • $45.09+$2.25 = $47.34

  26. Step 2: Determine 1 Unit of Production • Incorporate Demand (if needed) • Base demand on minimum # of people to run the program • Exception to the rule! Program Cost * # of Hrs Minimum # of participants • Example….

  27. Step 2: Determine 1 Unit of Production • Skating Lessons - $47.33 per hour (unit cost) • Minimum of 10 people • 5 hour lesson • Program Cost x # of Hrs / Min # of participants • ($47.33 x 5)/10 • Total program cost = $236.65 • $236.65 /10 people = $23.66 per skater

  28. See first aid example Answer question #6 Cost per person = $119.90

  29. Step 3: Determine Subsidy Rate • Subsidy – how much of the cost of the unit is absorbed by someone other than the consumer • Cross subsidization – from another program • Sponsors • Tax funds • Target market determines subsidy rate • Public, Merit, Private

  30. Profit Break even Free

  31. Example • 5.Elite swimming or diving team • 4. Swim team • 3. Swim lessons • 2. Pool • 1. Spray ground, non-monitored lake • Commercial agencies??? Profit Break even Free

  32. Arlington, VA Competitive adult activities, merchandise, Rentals for profit groups 100%+ direct cost recovery Competitive Youth activities, concessions, vending, trips 50-100% direct cost recovery 20-50% direct cost recovery 0-20% direct cost recovery 0% direct cost recovery

  33. Step 3: Determine Subsidy Rate User Group Subsidy rate Price/hr Figure Skating 35% $Merit Rink rental 0% $Merit/Private Open skating 100% $Public Junior Hockey 10% $Merit Men’s Hockey -25% $Private (break even) (free) (profit)

  34. Step 3: Determine Subsidy Rate • Figure skating • $47.33/hour X 35% subsidy = • $16.56 per hour subsidy • $47.33-$16.56 = $30.77 charge per hour Agency absorbs Individual absorbs

  35. Step 3: Determine Subsidy Rate • Men’s Hockey • $47.33/hour X 25% profit (-25% subsidy) = • $11.83 per hour profit • $47.33+$11.83 = $59.16 charge per hour • Another way…..

  36. Step 3: Determine Subsidy Rate • $47.33/hour X 35% subsidy = • $47.33 * (1-0.35) = $30.76 charge per hour • Works because you pay only 65% of the hourly fee • $47.33/hour X -25% subsidy (profit) • $47.33 * (1.25) = $59.16 charge per hour • You are paying 125% of the fee

  37. Step 3: Determine Subsidy Rate User Group Subsidy Price/hr Formula Synch Skating 45% Public Skating 0% Open skating 100% Junior Hockey 10% Women’s Hockey -45% Per hour = $47.33

  38. Step 3: Determine Subsidy Rate User Group Subsidy Price/hr Formula Synch Skating 45% $26.03 $47.33 * (1-.45) Public Skating 0% $47.33 $47.33 * (1-.00) Open skating 100% Free --- Junior Hockey 10% $42.60 $47.33 * (1-.10) Women’s Hockey -45% $68.63$47.33 * (1.45)

  39. Tips • Identify what you know • Identify what you need to know • Move from the known to the unknown • Double check your assumptions and work • Not all the information you have is always essential or even necessary • Set it up…

  40. Set Up Item Units Units Cost Total Overhead 1 1 $25 $25 Head Instructor 1 10hrs $15 $150 Assistant Instr 1 8 hrs $10 $80 Building rent 1 10 $24 $240 Total $495

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