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Pricing
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Purpose of Pricing
• 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
• Arbitrary pricing
• Competitive pricing
• Market pricing
• 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• Fixed costs• Variable costs• Direct and indirect costs• Contingency 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• 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, equipment
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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
Equipment $20,250
TOTAL VARIABLE COSTS $45,000
TOTAL COSTS $101,425
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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• Management• Maintenance• Utilities
Direct & indirect costs
of a Youth Soccer clinic
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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 = revenues + expenditures• 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 1011Allocation method Tennis Golf Fitness Bowling
Equal share ? ? ? ?
Percent of budget 40% 25% 30% 5%
? ? ? ?
Time Budget Study 10% 25% 45% 20%
? ? ? ?
Cost Allocation Comparisons on a $100,000 salary
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Step 1: Determine pricing variables
• Contingency costs• The unexpected• New programs – higher contingency• % or flat rate• Based on expenditures
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Another example
Fixed costs Variable costs Total F & V Contingency rate
Contingency total Total costs
$ 10,000.00 $ 5,000.00 10%
$ 8,000.00 $ 22,000.00 $1,000
+
+
=
=
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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 hour lesson
– 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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See first aid exampleAnswer question #6
#/hr #/hr #/hr $ Total
Marketing - - 16 20 $320
Instructor - 1 16 15 $240
Cost per person = $119.90
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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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Free
Brea
k ev
en
Prof
it
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Example
• 5.Elite swimming or diving team
• 4. Swim team• 3. Swim lessons• 2. Pool• 1. Spray ground, non-
monitored lake
• Commercial agencies???
Prof
it
Brea
k ev
en
Free
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HIGHLY INDIVIDUAL
MOSTLY INDIVIDUAL
INDIVIDUAL/COMMUNITYAdvanced youth & adult
activities, rentals nonprofit & gvt groups
COMMUNITY/INDIVIDUALYouth camps, afterschool programs,
Beginner/intermediate youth & adult programs
COMMUNITYNon-monitored parks & facilities, drop in programs, special events, social services
Arlington, VACompetitive adult activities, merchandise, Rentals for profit groups
100%+ direct cost recovery
50-100% direct cost recovery
20-50% direct cost recovery
Competitive Youth activities, concessions, vending, trips
0-20% direct cost recovery
0% direct cost recovery
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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
Synch Skating 45%
Public Skating 0%
Open skating 100%
Junior Hockey 10%
Women’s Hockey -45%
Per hour = $47.33
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Step 3: Determine Subsidy RateUser 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 $47.33 * (1-.10)
Women’s Hockey -45% $68.63 $47.33 * (1.45)
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Tips
• 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
Item Units Units CostTotal
Overhead 1 1 $25 $25Head Instructor 1 10hrs $15 $150Assistant Instr 1 8 hrs $10
$80Building rent 1 10 $24
$240
Total$495
