42510011 0010 1010 1101 0001 0100 1011Pricing

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Purpose of Pricing

• Recover costs

– Break even

– Subsidized programs & services

• To create new resources

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Purpose of Pricing• To establish value

• To Influence behavior

– $50 for 10 games

– Late fees & replacement costs

– Damage deposits

– Early bird registration

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Purpose of Pricing

• To promote efficiency

– Shift demand from peak

• Egs??

– Bulk purchases

• Season tickets – reduces staff time

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Purpose of Pricing

• To promote equity

– Fairness & Redistribute revenue

• WIC program free, others charged

• $5/adult, $2/child pool admission

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Approaches to Establishing Price

• Arbitrary pricing

• Competitive pricing– Much higher or lower price? What happens?

• Market pricing– UI vs ISU ticket

• Cost recovery pricing

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0011 0010 1010 1101 0001 0100 1011ESTABLISHING A PRICE

1. Determine pricing variables2. Determine the cost of one unit of production3. Determine the subsidy rate

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Step 1: Determine pricing variables

• Demand• Contingency costs• Fixed costs• Variable costs• Direct and indirect costs

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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?

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Step 1: Determine pricing variables

• Contingency costs• The unexpected

– New programs – higher contingency• Surcharges• Replacement charges• % or flat rate

– % Based on expenditures

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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….

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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

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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

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Cost Summary - Ice RinkFixed 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 = $5,071.25 $106,496.25

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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??

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Step 1: Determine pricing variables

• 3 approaches to indirect costs

– Equal share allocation– Percent of budget– Percent of time

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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…

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$27,000 in overhead/indirectsAllocation

MethodFood & Beverage Sales & Marketing Conferences &

Meetings

Equal Share $9,000 $9,000 $9,000

% of budget

Time budget

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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

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$27,000 in overhead/indirectsAllocation

MethodFood & Beverage Sales & Marketing Conferences &

Meetings

Equal Share $9,000 $9,000 $9,000

% of budget 60% 15% 25%

$16,200 $4,050 $6,750

Time budget

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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

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27,000 in overheadAllocation

MethodFood & Beverage Sales & Marketing Conferences &

Meetings

Equal Share $9,000 $9,000 $9,000

% of budget 60% 15% 25%

$16,200 $4,050 $6,750

Time budget 20% 50% 30%

$5,400 $13,500 $8,100

Best option????....

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$27,000 in overhead/indirectsAllocation

MethodFood & Beverage Sales & Marketing Conferences &

Meetings

Equal Share $9,000 $9,000 $9,000

% of budget 60% 15% 25%

$16,200 $4,050 $6,750

Time budget 20% 50% 30%

$5,400 $13,500 $8,100

Best option????....

How does each dept determine how to absorb the indirect costs???

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0011 0010 1010 1101 0001 0100 1011ESTABLISHING A PRICE

1. Determine pricing variables2. Determine the cost of one unit of production3. Determine the subsidy rate

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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

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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

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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

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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 HrsMinimum # of participants

– Example….

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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 = $236.65• $236.65 /10 people = $23.66 per skater

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0011 0010 1010 1101 0001 0100 1011ESTABLISHING A PRICE

1. Determine pricing variables2. Determine the cost of one unit of production3. Determine the subsidy rate

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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

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Step 3: Determine Subsidy RateUser Group Subsidy rate Price/hr

Figure Skating 35% $Merit

Rink rental 0%

$Merit/Private

Open skating 100% $Public

Junior Hockey 10% $Merit

Men’s Hockey -25% $Private

(break even)

(free)

(profit)

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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

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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…..

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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

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Step 3: Determine Subsidy RateUser Group Subsidy Price/hr Formula

Figure Skating 35% $30.77 $47.33 * (1-.35)

Public Skating 0% $47.33 $47.33 * (1-.00)

Open skating 100% Free ---

Junior Hockey 10% $42.60 $47.33 * (1-.10)

Men’s Hockey -25% $59.16 $47.33 * (1.25)

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Set Up

# #/$ $ Total

Transportation - 4 200 $800

Staff 2 72 25 $3,600

Event #1 - 42 35 $1,470

Event #2 - 42 125 $5,250

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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