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

ESTABLISHING A PRICE 1.Determine pricing variables 2.Determine the cost of one unit of production 3.Determine the subsidy rate

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

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?

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….

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

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

Cost Summary - Ice Rink 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

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

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

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…

$27,000 in overhead/indirects Allocation Method Food & BeverageSales & MarketingConferences & Meetings Equal Share$9,000 % of budget Time budget

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

$27,000 in overhead/indirects Allocation Method Food & BeverageSales & MarketingConferences & Meetings Equal Share$9,000 % of budget60%15%25% $16,200$4,050$6,750 Time budget

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

27,000 in overhead Allocation Method Food & BeverageSales & MarketingConferences & Meetings Equal Share$9,000 % of budget60%15%25% $16,200$4,050$6,750 Time budget20%50%30% $5,400$13,500$8,100 Best option????....

$27,000 in overhead/indirects Allocation Method Food & BeverageSales & MarketingConferences & Meetings Equal Share$9,000 % of budget60%15%25% $16,200$4,050$6,750 Time budget20%50%30% $5,400$13,500$8,100 Best option????.... How does each dept determine how to absorb the indirect costs???

Allocation methodTennisGolfFitnessBowling Equal share ???? Percent of budget 40%25%30%5% ???? Time Budget Study 10%25%45%20% ???? Cost Allocation Comparisons on a $100,000 salary

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

Another example Fixed costsVariable costsTotal F & V Contingency rate Contingency total Total costs $ 10, $ 5, % $ 8, $ 22, $1, = =

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

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

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

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….

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 = $ $ /10 people = $23.66 per skater

See first aid example Answer question #6 #/hr $Total Marketing $320 Instructor-11615$240 Cost per person = $119.90

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

Free Break even Profit

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

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

Step 3: Determine Subsidy Rate User GroupSubsidy ratePrice/hr Figure Skating 35%$Merit Rink rental 0%$Merit/Private Open skating100%$Public Junior Hockey 10%$Merit Men’s Hockey -25%$Private (break even) (free) (profit)

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

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…..

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

Step 3: Determine Subsidy Rate User GroupSubsidyPrice/hrFormula Synch Skating45% Public Skating0% Open skating100% Junior Hockey10% Women’s Hockey-45% Per hour = $47.33

Step 3: Determine Subsidy Rate User GroupSubsidyPrice/hrFormula Synch Skating45%$26.03 $47.33 * (1-.45) Public Skating0%$47.33 $47.33 * (1-.00) Open skating100%Free--- Junior Hockey10%$42.60 $47.33 * (1-.10) Women’s Hockey-45%$68.63 $47.33 * (1.45)

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…

Set Up ItemUnitsUnitsCostTotal Overhead11$25$25 Head Instructor110hrs$15$150 Assistant Instr18 hrs$10$80 Building rent110$24$240 Total$495