Pricing
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Purpose of Pricing
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• Recover costs
• To create new resources
• To establish value
• To Influence behavior
• To promote efficiency
• To promote equity
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Approaches to Establishing Price
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• Arbitrary pricing
• Competitive pricing
• Market pricing
• Cost recovery pricing
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ESTABLISHING A PRICE
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1. Determine pricing variables
2. Determine the cost of one unit of production
3. Determine the subsidy rate
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Step 1: Determine pricing variables
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•
•
•
•
•
Demand
Fixed costs
Variable costs
Direct and indirect costs
Contingency costs
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Step 1: Determine pricing variables
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• Demand
• # of participants
• Set a program min & max
– What can determine a maximum?
• Basically…an educated guess
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– Usually base revenues on minimum
• When wouldn’t you base revenues on minimums?
Step 1: Determine pricing variables
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• Fixed costs
• Financial costs that the org. incurs regardless of the status of
the program
• Unavoidable costs
• Does not change with changes in volume
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• Changing fixed costs
– Additional staff to maintain the ratio; additional field for games
• F.C. Example….
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– Field maintenance, marketing, manager’s salary
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
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Ice installation/removal
$2,000
Basic maintenance
$2,000/month x 7 months
Basic services
$1,100 x 7 months
TOTAL FIXED COSTS
$14,000
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$7,700
4
$56,425
Step 1: Determine pricing variables
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• Variable costs
• Resulting from actual operation of the
program/service
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• Change directly & proportionately to changes in
volume
– More the service is offered, the higher the
variable cost
– Supplies, equipment
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Cost Summary - Ice Rink
Fixed Costs
TOTAL FIXED COSTS
$56,425
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HOURLY
FIXED
COSTS
(22501011
hrs)
$25.08
Variable Costs
Supplies
$10/person x 2475 people
Equipment
TOTAL VARIABLE COSTS
TOTAL COSTS
$24,750
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2
$20,250
$45,000
4
$101,425
Step 1: Determine pricing variables
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• Direct and indirect costs
– Direct costs
– Indirect costs - expenses not directly
chargeable to a project
• Accounting & Secretarial staff
• Marketing
• Management
Direct &
indirect costs
• Maintenance
of a Youth
• Utilities
Soccer clinic
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Step 1: Determine pricing variables
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• 3 approaches to indirect costs
– Equal share allocation
– Percent of budget
– Percent of time
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Step 1: Determine pricing variables
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• Equal share allocation
– Indirects equally split among all
departments
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– Best used when areas are near equal
size & revenue producing
•Example…
$27,000 in overhead/indirects
Allocation
Food & Beverage
Sales & Marketing
0011 Method
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Equal Share
% of budget
Time budget
$9,000
$9,000
Conferences &
Meetings
$9,000
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4
Step 1: Determine pricing variables
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• Percent of budget
– % of indirects equal to the % of budget
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• Budget managed = revenues + expenditures
• 50% of budget = 50% of indirects
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– Best with departments that are unequal
in revenue & size
$27,000 in overhead/indirects
Allocation
Food & Beverage
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Method
Sales & Marketing
Equal Share
$9,000
$9,000
$9,000
% of budget
60%
15%
25%
$16,200
$4,050
Time budget
Conferences &
Meetings
1
$6,750
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4
Step 1: Determine pricing variables
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• 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
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27,000 in overhead
Allocation
Food & Beverage
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Method
Sales & Marketing
Equal Share
$9,000
$9,000
$9,000
% of budget
60%
15%
25%
$16,200
$4,050
20%
50%
$5,400
$13,500
Time budget
Best option????....
Conferences &
Meetings
1
$6,750
2
4
30%
$8,100
$27,000 in overhead/indirects
Allocation
Food & Beverage
Sales & Marketing
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Method
Conferences &
Meetings
Equal Share
$9,000
$9,000
$9,000
% of budget
60%
15%
25%
$16,200
$4,050
$6,750
20%
50%
$5,400
$13,500
Time budget
Best option????....
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30%
$8,100
How does each dept determine how to absorb the indirect costs???
Cost Allocation Comparisons on a $100,000 salary
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Allocation
Tennis
Equal share
Percent of budget
Time Budget Study
Golf
Fitness
Bowling
?
?
?
?
40%
25%
30%
?
?
?
10%
25%
45%
?
?
?
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5%
?
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20%
?
Step 1: Determine pricing variables
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• Contingency costs
• The unexpected
• New programs – higher contingency
• % or flat rate
• Based on expenditures
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Another example
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Fixed costs
Variable costs
Total F & V
Contingency
rate
$ 10,000.00 + $ 5,000.00 =
10%
$ 8,000.00 + $ 22,000.00 =
$1,000
Contingency
total
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Total costs
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Step 2: Determine 1 Unit of
Production
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• Per person, per hour, per class, per day
• P=(F+V)/N
–
–
–
–
P=
F=
V=
N=
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Cost of the unit
Fixed costs (expenditures, direct/indirect)
Variable costs (expenditures, d/i)
Demand, # of units to be sold, hrs, teams
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Step 2: Determine 1 Unit of
Production
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• Using the ice rink data…(without
contingency)
• P=(F+V)/N
• P=($56,425 + $45,000)/2250 hours
• P=$45.09/hour
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Step 2: Determine 1 Unit of
Production
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• 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
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Step 2: Determine 1 Unit of
Production
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• 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….
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Step 2: Determine 1 Unit of
Production
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• Skating Lessons - $47.33 per hour (unit cost)
– Minimum of 10 people
– 5 hour lesson
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– 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
See first aid example
Answer question #6
#/hr
#/hr
#/hr
$
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Marketing
Instructor
-
16
-
-
1
16
Cost per person = $119.90
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Total
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$320
15
$240
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Step 3: Determine Subsidy Rate
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• Subsidy – how much of the cost of the unit is
absorbed by someone other than the
consumer
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– Cross subsidization – from another program
– Sponsors
– Tax funds
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• Target market determines subsidy rate
– Public, Merit, Private
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Example
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• 5.Elite swimming or
diving team
• 4. Swim team
• 3. Swim lessons
• 2. Pool
• 1. Spray ground, nonmonitored lake
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• Commercial
agencies???
Arlington, VA
100%+ direct cost
recovery
HIGHLY
INDIVIDUAL
Competitive adult activities,
merchandise, Rentals for
profit groups
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50-100% direct cost
recovery
20-50% direct cost
recovery
MOSTLY
INDIVIDUAL
Competitive Youth activities,
concessions, vending, trips
INDIVIDUAL/COMMUNITY
Advanced youth & adult
activities, rentals nonprofit
& gvt groups
COMMUNITY/INDIVIDUAL
0-20% direct cost
recovery
0% direct
cost
recovery
Youth camps, afterschool programs,
Beginner/intermediate youth &
adult programs
COMMUNITY
Non-monitored parks & facilities, drop in
programs, special events, social services
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Step 3: Determine Subsidy Rate
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User Group
Subsidy rate Price/hr
Figure Skating
35%
Rink rental
0%
$Merit
$Merit/Private
Open skating
100%
$Public
Junior Hockey
10%
$Merit
Men’s Hockey
-25%
$Private
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Step 3: Determine Subsidy Rate
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• Figure skating
• $47.33/hour X 35% subsidy =
– $16.56 per hour subsidy
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– $47.33-$16.56 = $30.77 charge per hour
Step 3: Determine Subsidy Rate
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• Men’s Hockey
• $47.33/hour X 25% profit (-25% subsidy) =
– $11.83 per hour profit
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– Another way…..
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– $47.33+$11.83 = $59.16 charge per hour
Step 3: Determine Subsidy Rate
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• $47.33/hour X 35% subsidy =
– $47.33 * (1-0.35) = $30.76 charge per hour
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• Works because you pay only 65% of the hourly fee
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• $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
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User Group
Subsidy
Synch Skating
45%
Public Skating
0%
Open skating
100%
Junior Hockey
10%
Women’s Hockey
-45%
Per hour = $47.33
Price/hr
Formula
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Step 3: Determine Subsidy Rate
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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
Women’s Hockey
-45%
$68.63
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$47.33 * (1-.10)
$47.33 * (1.45)
Tips
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•
•
•
•
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…
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Set Up
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Item
Units
Units
Cost
Total
Overhead
Head Instructor
Assistant Instr
Building rent
1
1
1
1
1
10hrs
8 hrs
10
$25
$15
$10
$24
$25
$150
$80
$240
Total
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$495