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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**Approaches to Establishing Price**• Arbitrary pricing • Competitive pricing • Market pricing • Cost recovery pricing**Determine pricing variables**Determine the cost of one unit of production Determine the subsidy rate Establishing a price**Step 1: Determine pricing variables**• Demand • Fixed costs • Variable costs • Direct and indirect costs • Contingency costs**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?**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….**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**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**Fixed 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 Cost Summary - Ice Rink**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**Step 1: Determine pricing variables**• 3 approaches to indirect costs • Equal share allocation • Percent of budget • Percent of time**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…**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**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**27,000 in overhead**Best option????....**$27,000 in overhead/indirects**Best option????.... How does each dept determine how to absorb the indirect costs???**Step 1: Determine pricing variables**• Contingency costs • The unexpected • New programs – higher contingency • % or flat rate • Based on expenditures**Another example**+ = + =**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**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**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**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 Hrs Minimum # of participants • Example….**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**See first aid example**Answer question #6 Cost per person = $119.90**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**Profit**Break even Free**Example**• 5.Elite swimming or diving team • 4. Swim team • 3. Swim lessons • 2. Pool • 1. Spray ground, non-monitored lake • Commercial agencies??? Profit Break even Free**Arlington, VA**Competitive adult activities, merchandise, Rentals for profit groups 100%+ direct cost recovery Competitive Youth activities, concessions, vending, trips 50-100% direct cost recovery 20-50% direct cost recovery 0-20% direct cost recovery 0% direct cost recovery**Step 3: Determine Subsidy Rate**User 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)**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**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…..**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**Step 3: Determine Subsidy Rate**User 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**Step 3: Determine Subsidy Rate**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 $47.33 * (1-.10) Women’s Hockey -45% $68.63$47.33 * (1.45)**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…**Set Up**Item Units Units Cost Total Overhead 1 1 $25 $25 Head Instructor 1 10hrs $15 $150 Assistant Instr 1 8 hrs $10 $80 Building rent 1 10 $24 $240 Total $495