Pricing Your Educational
Product/Service for Long Term
Profitability
Education Industry Days
February 20, 2014
1
Session Overview
• Introduction
– Summary of session
– Learning objectives
– Existing knowledge and skills?
• Pricing methodology
– Cost categories
– Unit costing
• Forecasting/projection methodology
– Forecasting assumptions
– 5-year projections
• Case studies
– Flex Academies – direct and allocable costs
– Globaloria – customer acquisition costs
• Utilizing the pricing spreadsheet
2
INTRODUCTION
3
Session Summary
• This session will help participants understand a basic methodology for
pricing their company’s products/ services and the impact of product
pricing on a company’s long-term strategy and profitability.
• The session will be oriented toward new/emerging entrepreneurs in the
early stages of their company’s development and will introduce a set of
basic pricing principles that are fundamental to a company’s business
strategy.
• Participants will receive a spreadsheet template that they can use in
their own company to analyze alternative pricing structures and their
impact on the longer term profitability of their company.
4
Learning Objectives
• By the end of this session, learners will be able to:
– Understand a set of basic principles that affect the pricing of an
educational product/service including: unit costing, direct costs and
allocable costs, gross margin percentage, customer acquisition costs,
etc.
– Discuss and reflect on the how these basic principles operate within
their specific company in real, practical terms.
– Identify how the pricing strategies of various companies can differ
based on the nature of their business strategies, the economics of
their products and their expectations of future revenue growth.
– Utilize a provided spreadsheet to analyze the impact of various
pricing strategies on their company’s long term strategy and
profitability.
5
Existing Knowledge/Skills???
Do you know/understand…
Definition of Key Terms
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Unit costing
Unit pricing
Direct costs
Direct allocable costs
Cost of goods sold (COGS)
Customer acquisition costs
Gross margin
Contribution to overhead
Corporate/overhead costs
Analytic Skills
•
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Spreadsheet development
Cost estimating
Revenue forecasting
Financial projections
Scenario planning
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PRICING METHODOLOGY
7
Unit Pricing Methodology
• It is critical for your company to
have a clear methodology for
determining the price of the
products/services it offers to the
marketplace.
• While there are multiple
approaches to pricing, the
methodology is ultimately based on
the unit costs incurred in delivering
the product/service on a per
customer basis.
UNIT PRICING METHODOLOGY
Product
#1
DIRECT COSTS
Direct Program Costs
50
Direct Allocable Costs
25
Total Direct Costs/Customer
75
CUSTOMER ACQUISITION COSTS
Direct Sales Costs
15
Allocable Sales Costs
Total Customer Acquisition
Costs/Customer
10
TOTAL COSTS PER CUSTOMER
100
MARGIN %
20%
PRICE
$125
25
8
Direct Costs
COGS
• Direct costs are expenses that are generated and incurred by
delivering a product/service to an additional customer.
– The incremental costs of providing a product/service to an incremental
customer.
– Costs of goods sold (COGS).
• There are two broad categories of direct costs to consider:
– Direct program costs – Expenses generated by the direct provision of a
product/service to a customer.
– Direct allocable costs – Expenses that are shared by multiple
customers and/or sites, but are costs that increase in direct response
to an increase in the number of customers.
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Per-Pupil Unit Cost Analysis
EXAMPLES: Whole School Program and Individual Courses
PER PUPIL COSTS
DIRECT PROGRAM COSTS
Teacher
Curriculum licenses
Materials
(computer, shipping costs,
consumables)
Total Direct Program Costs
Whole
School
Individual
Course
1,500
500
100
0
700
2,700
50
150
DIRECT ALLOCABLE COSTS
Administration
Central program support
Teacher professional development
400
300
100
0
0
50
Total Direct Allocable Costs
800
50
3,500
200
TOTAL DIRECT COSTS PER PUPIL
10
Group Exercise
• Identify the following items for your business and
describe your thinking to your neighbors:
– What are the primary direct program costs of your
business?
– What are the primary direct allocable costs of your
business?
– What costs are you unsure how to categorize?
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Customer Acquisition Costs
Sales/Marketing
• Customer acquisition costs are expenses that are generated
and incurred by selling a product/service to an additional
customer .
– The incremental sales/marketing costs of a product/service to an
incremental customer.
• There are two broad categories of direct costs to consider:
– Direct sales costs – Expenses generated by the direct sale of a
product/service to a customer.
• Examples: Sales commissions and direct response advertising.
– Allocable sales costs – Expenses that are shared across multiple
customers and/or sites, but are marketing costs that a portion of the
company’s overall marketing program.
• Examples: Conference attendance and advertising.
12
Group Exercise
• Identify the following items for your business and
describe your thinking to your neighbors:
– What are the primary direct sales costs of your business?
– What are the primary allocable sales costs of your
business?
– What costs are you unsure how to categorize?
13
Margin Percentage
• Once you have determined the “per
unit costs” of providing a
product/service to a customer, it is
critical for your company to
determine a margin percentage it
will apply to the sale price of the
product service.
• The margin percentage can vary
substantially based on:
–
–
–
–
Company strategy.
Corporate overhead costs.
Expected sales volume.
Investor return expectations.
BASIC PRICING
METHODOLOGY
DIRECT COSTS
Direct Program Costs
Direct Allocable Costs
Total Direct Costs/Customer
CUSTOMER ACQUISITION COSTS
Direct Sales Costs
Allocable Sales Costs
Total Customer Acquisition
Costs/Customer
Product
50
25
75
15
10
25
TOTAL COSTS PER CUSTOMER
100
MARGIN %
UNIT COST %
20%
80%
PRICE
$100/80% =
$125
14
Group Exercise
• Identify the following items for your business and
describe your thinking to your neighbors:
– What is the primary rationale for a high margin business?
A low margin business?
– What is an appropriate margin percentage for your
company’s primary product/service?
– How do you determine an appropriate margin percentage
for your company?
– How can market research and competitor analysis affect
this process?
15
FORECASTING METHODOLOGY
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Financial Model Assumptions
Five Years – FY15-19
PROJECTION
FY 16
FY 17
FY 18
FY 15
FY 19
REVENUE – Whole School
Program enrollments
Price/revenue per enrollment
200
$7,000
1,000
$7,000
2,000
$7,000
5,000
$7,000
10,000
$7,000
REVENUE – Individual Courses
Course enrollments
Price/revenue per year course
1,200
$700
1,500
$700
2,000
$700
2,500
$700
3,000
$700
COSTS – Whole School
Total direct cost as % of revenue
Student acquisition costs %
Margin %
50
25
25
40
20
40
40
15
45
40
10
50
40
10
50
COSTS – Individual Courses
Total direct cost as % of revenue
Student acquisition costs %
Margin %
25
25
50
25
25
50
25
25
50
25
25
50
25
25
1750
Pro Forma Financial Model
Five Years – FY15-19 (in thousands)
FY 15
REVENUE
Whole school
Individual courses
Total Revenue
FY 16
PROJECTION
FY 17
FY 18
FY 19
1,400
840
2,240
7,000
1,050
8,050
14,000
1,400
15,400
35,000
1,750
36,750
70,000
2,100
72,100
COSTS
Whole School
Direct costs
Student Acquisition
Individual Courses
Direct costs
Student Acquisition
Total Costs
700
350
2,800
1,400
5,600
2,100
14,000
3,500
28,000
7,000
210
210
1,470
262
262
4,724
350
350
8,400
437
437
18,374
525
525
36,050
CONTRIBUTION TO OVERHEAD
$770
$3,326
$7,000
$18,376
$36,050
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CASE STUDIES
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Case Studies
• Flex Academies
– A DC-based start-up focused on managing afterschool programs.
– Key need to determine unit costs and direct/allocable costs to
establish initial pricing strategy and profitability.
• Globaloria
– A NYC-based company with a K12 learning platform and courseware
in STEM, computing, game design and coding.
– Key need to determine customer acquisition costs to expand sales
capabilities.
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UTILIZING THE PRICING SPREADSHEET
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