4251
0011 0010 1010 1101 0001 0100 1011
Purpose of Pricing
• Recover costs
– Break even
– Subsidized programs & services
• To create new resources
4251
0011 0010 1010 1101 0001 0100 1011
Purpose of Pricing• To establish value
• To Influence behavior
– $50 for 10 games
– Late fees & replacement costs
– Damage deposits
– Early bird registration
4251
0011 0010 1010 1101 0001 0100 1011
Purpose of Pricing
• To promote efficiency
– Shift demand from peak
• Egs??
– Bulk purchases
• Season tickets – reduces staff time
4251
0011 0010 1010 1101 0001 0100 1011
Purpose of Pricing
• To promote equity
– Fairness & Redistribute revenue
• WIC program free, others charged
• $5/adult, $2/child pool admission
4251
0011 0010 1010 1101 0001 0100 1011
Approaches to Establishing Price
• Arbitrary pricing
• Competitive pricing– Much higher or lower price? What happens?
• Market pricing– UI vs ISU ticket
• Cost recovery pricing
4251
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
4251
0011 0010 1010 1101 0001 0100 1011
Step 1: Determine pricing variables
• Demand• Contingency costs• Fixed costs• Variable costs• Direct and indirect costs
4251
0011 0010 1010 1101 0001 0100 1011
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?
4251
0011 0010 1010 1101 0001 0100 1011
Step 1: Determine pricing variables
• Contingency costs• The unexpected
– New programs – higher contingency• Surcharges• Replacement charges• % or flat rate
– % Based on expenditures
4251
0011 0010 1010 1101 0001 0100 1011
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….
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
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??
4251
0011 0010 1010 1101 0001 0100 1011
Step 1: Determine pricing variables
• 3 approaches to indirect costs
– Equal share allocation– Percent of budget– Percent of time
4251
0011 0010 1010 1101 0001 0100 1011
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…
4251
0011 0010 1010 1101 0001 0100 1011
$27,000 in overhead/indirectsAllocation
MethodFood & Beverage Sales & Marketing Conferences &
Meetings
Equal Share $9,000 $9,000 $9,000
% of budget
Time budget
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
$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
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
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????....
4251
0011 0010 1010 1101 0001 0100 1011
$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???
4251
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
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
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….
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
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
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
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)
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
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…..
4251
0011 0010 1010 1101 0001 0100 1011
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
4251
0011 0010 1010 1101 0001 0100 1011
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 $47.33 * (1.25)
4251
0011 0010 1010 1101 0001 0100 1011
Set Up
# #/$ $ Total
Transportation - 4 200 $800
Staff 2 72 25 $3,600
Event #1 - 42 35 $1,470
Event #2 - 42 125 $5,250