Pricing

Purpose of Pricing Recover costs –Break even –Subsidized programs & services To create new resources

Purpose of Pricing To establish value To Influence behavior –$50 for 10 games –Late fees & replacement costs –Damage deposits –Early bird registration

Purpose of Pricing To promote efficiency –Shift demand from peak Egs?? –Bulk purchases Season tickets – reduces staff time

Purpose of Pricing To promote equity –Fairness & Redistribute revenue WIC program free, others charged $5/adult, $2/child pool admission

Approaches to Establishing Price Arbitrary pricing Competitive pricing –Much higher or lower price? What happens? Market pricing –UI vs ISU ticket 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 Contingency costs Fixed costs Variable costs Direct and indirect 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 Contingency costs The unexpected –New programs – higher contingency Surcharges Replacement charges % or flat rate –% Based on expenditures

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, t-shirts

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 Staff$9/hr x 2250 hrs$20,250 TOTAL VARIABLE COSTS$45,000 TOTAL COSTS$101,425 5% contingency overall= $101,425 x.05 = $5, $106,496.25

Step 1: Determine pricing variables Direct and indirect costs –Direct costs –Indirect costs - expenses not directly chargeable to a project Accounting & Secretarial staff Marketing Maintenance –How do you track indirect costs??

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 = expenditures (O & M) 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???

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

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 hours of lessons –Program Cost x # of Hrs / Min # of participants –($47.33 x 5)/10 Total program cost = $ $ /10 people = $23.66 per skater

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

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

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 Figure Skating35%$30.77 $47.33 * (1-.35) Public Skating0%$47.33 $47.33 * (1-.00) Open skating100%Free--- Junior Hockey10%$42.60 $47.33 * (1-.10) Men’s Hockey-25%$59.16 $47.33 * (1.25)

Set Up ##/$$Total Transportation-4200$800 Staff27225$3,600 Event #1-4235$1,470 Event # $5,250

Pricing Youth Baseball Sponsors Participants pay for cost of coaches Chicago Trip ___ # of participants ___ # of leaders ___ # of hours leaders work ___ # of bus days ___ # to be fed