Pricing 0011 0010 1010 1101 0001 0100 1011 1 2 4 Purpose of Pricing 0011 0010 1010 1101 0001 0100 1011 • Recover costs • To create new resources • To establish value • To Influence behavior • To promote efficiency • To promote equity 1 2 4 Approaches to Establishing Price 0011 0010 1010 1101 0001 0100 1011 • Arbitrary pricing • Competitive pricing • Market pricing • Cost recovery pricing 1 2 4 ESTABLISHING A PRICE 0011 0010 1010 1101 0001 0100 1011 1. Determine pricing variables 2. Determine the cost of one unit of production 3. Determine the subsidy rate 1 2 4 Step 1: Determine pricing variables 0011 0010 1010 1101 0001 0100 1011 • • • • • Demand Fixed costs Variable costs Direct and indirect costs Contingency costs 1 2 4 Step 1: Determine pricing variables 0011 0010 1010 1101 0001 0100 1011 • Demand • # of participants • Set a program min & max – What can determine a maximum? • Basically…an educated guess 1 2 4 – Usually base revenues on minimum • When wouldn’t you base revenues on minimums? Step 1: Determine pricing variables 0011 0010 1010 1101 0001 0100 1011 • Fixed costs • Financial costs that the org. incurs regardless of the status of the program • Unavoidable costs • Does not change with changes in volume 1 • Changing fixed costs – Additional staff to maintain the ratio; additional field for games • F.C. Example…. 2 4 – 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 0011 0010 1010 1101 0001 0100 1011 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 1 2 $7,700 4 $56,425 Step 1: Determine pricing variables 0011 0010 1010 1101 0001 0100 1011 • Variable costs • Resulting from actual operation of the program/service 1 2 • Change directly & proportionately to changes in volume – More the service is offered, the higher the variable cost – Supplies, equipment 4 Cost Summary - Ice Rink Fixed Costs TOTAL FIXED COSTS $56,425 0011 0010 1010 1101 0001 0100 HOURLY FIXED COSTS (22501011 hrs) $25.08 Variable Costs Supplies $10/person x 2475 people Equipment TOTAL VARIABLE COSTS TOTAL COSTS $24,750 1 2 $20,250 $45,000 4 $101,425 Step 1: Determine pricing variables 0011 0010 1010 1101 0001 0100 1011 • 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 1 2 4 Step 1: Determine pricing variables 0011 0010 1010 1101 0001 0100 1011 • 3 approaches to indirect costs – Equal share allocation – Percent of budget – Percent of time 1 2 4 Step 1: Determine pricing variables 0011 0010 1010 1101 0001 0100 1011 • Equal share allocation – Indirects equally split among all departments 1 2 4 – Best used when areas are near equal size & revenue producing •Example… $27,000 in overhead/indirects Allocation Food & Beverage Sales & Marketing 0011 Method 0010 1010 1101 0001 0100 1011 Equal Share % of budget Time budget $9,000 $9,000 Conferences & Meetings $9,000 1 2 4 Step 1: Determine pricing variables 0011 0010 1010 1101 0001 0100 1011 • Percent of budget – % of indirects equal to the % of budget 1 • Budget managed = revenues + expenditures • 50% of budget = 50% of indirects 2 4 – Best with departments that are unequal in revenue & size $27,000 in overhead/indirects Allocation Food & Beverage 0011 0010 1010 1101 0001 0100 1011 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 2 4 Step 1: Determine pricing variables 0011 0010 1010 1101 0001 0100 1011 • 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 1 2 4 27,000 in overhead Allocation Food & Beverage 0011 0010 1010 1101 0001 0100 1011 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 0011 0010 1010 1101 0001 0100 1011 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????.... 1 2 4 30% $8,100 How does each dept determine how to absorb the indirect costs??? Cost Allocation Comparisons on a $100,000 salary 0011 0010 1010 1101method 0001 0100 1011 Allocation Tennis Equal share Percent of budget Time Budget Study Golf Fitness Bowling ? ? ? ? 40% 25% 30% ? ? ? 10% 25% 45% ? ? ? 1 5% ? 2 4 20% ? Step 1: Determine pricing variables 0011 0010 1010 1101 0001 0100 1011 • Contingency costs • The unexpected • New programs – higher contingency • % or flat rate • Based on expenditures 1 2 4 Another example 0011 0010 1010 1101 0001 0100 1011 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 1 Total costs 2 4 Step 2: Determine 1 Unit of Production 0011 0010 1010 1101 0001 0100 1011 • Per person, per hour, per class, per day • P=(F+V)/N – – – – P= F= V= N= 1 2 Cost of the unit Fixed costs (expenditures, direct/indirect) Variable costs (expenditures, d/i) Demand, # of units to be sold, hrs, teams 4 Step 2: Determine 1 Unit of Production 0011 0010 1010 1101 0001 0100 1011 • Using the ice rink data…(without contingency) • P=(F+V)/N • P=($56,425 + $45,000)/2250 hours • P=$45.09/hour 1 2 4 Step 2: Determine 1 Unit of Production 0011 0010 1010 1101 0001 0100 1011 • 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 1 2 4 Step 2: Determine 1 Unit of Production 0011 0010 1010 1101 0001 0100 1011 • 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…. 1 2 4 Step 2: Determine 1 Unit of Production 0011 0010 1010 1101 0001 0100 1011 • Skating Lessons - $47.33 per hour (unit cost) – Minimum of 10 people – 5 hour lesson 1 2 4 – 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 $ 0011 0010 1010 1101 0001 0100 1011 Marketing Instructor - 16 - - 1 16 Cost per person = $119.90 1 2 Total 20 $320 15 $240 4 Step 3: Determine Subsidy Rate 0011 0010 1010 1101 0001 0100 1011 • Subsidy – how much of the cost of the unit is absorbed by someone other than the consumer 1 – Cross subsidization – from another program – Sponsors – Tax funds 4 • Target market determines subsidy rate – Public, Merit, Private 2 0011 0010 1010 1101 0001 0100 1011 1 2 4 Example 0011 0010 1010 1101 0001 0100 1011 • 5.Elite swimming or diving team • 4. Swim team • 3. Swim lessons • 2. Pool • 1. Spray ground, nonmonitored lake 1 2 4 • Commercial agencies??? Arlington, VA 100%+ direct cost recovery HIGHLY INDIVIDUAL Competitive adult activities, merchandise, Rentals for profit groups 0011 0010 1010 1101 0001 0100 1011 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 1 2 4 Step 3: Determine Subsidy Rate 0011 0010 1010 1101 0001 0100 1011 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 1 2 4 Step 3: Determine Subsidy Rate 0011 0010 1010 1101 0001 0100 1011 • Figure skating • $47.33/hour X 35% subsidy = – $16.56 per hour subsidy 1 2 4 – $47.33-$16.56 = $30.77 charge per hour Step 3: Determine Subsidy Rate 0011 0010 1010 1101 0001 0100 1011 • Men’s Hockey • $47.33/hour X 25% profit (-25% subsidy) = – $11.83 per hour profit 1 – Another way….. 2 4 – $47.33+$11.83 = $59.16 charge per hour Step 3: Determine Subsidy Rate 0011 0010 1010 1101 0001 0100 1011 • $47.33/hour X 35% subsidy = – $47.33 * (1-0.35) = $30.76 charge per hour 1 2 • Works because you pay only 65% of the hourly fee 4 • $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 0011 0010 1010 1101 0001 0100 1011 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 1 2 4 Step 3: Determine Subsidy Rate 0011 0010 1010 1101 0001 0100 1011 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 1 2 4 $47.33 * (1-.10) $47.33 * (1.45) Tips 0011 0010 1010 1101 0001 0100 1011 • • • • • 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… 1 2 4 Set Up 0011 0010 1010 1101 0001 0100 1011 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 1 2 4 $495