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Pricing Your Educational Product/Service for Long Term

Profitability

EDVenturesJuly 18, 2014

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Session Overview• Introduction

– Summary of session– Learning objectives– Existing knowledge and skills?

• Pricing methodology– Cost categories– Unit costing

• Forecasting/projection methodology– Forecasting assumptions– 5-year projections

• Using the methodology in your day-to-day business decisions• Case study - Utilizing the pricing spreadsheet

– Meaghan Donahue – Total Education Solutions

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INTRODUCTION

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Session Summary• This session will help participants understand a basic methodology for

pricing their company’s products/ services and the impact of product pricing on a company’s long-term strategy and profitability.

• The session will be oriented toward new/emerging entrepreneurs in the early stages of their company’s development and will introduce a set of basic pricing principles that are fundamental to a company’s business strategy.

• Participants will receive a spreadsheet template that they can use in their own company to analyze alternative pricing structures and their impact on the longer term profitability of their company.

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Learning Objectives• By the end of this session, learners will be able to:

– Understand a set of basic principles that affect the pricing of an educational product/service including: unit costing, direct costs and allocable costs, gross margin percentage, customer acquisition costs, etc.

– Discuss and reflect on the how these basic principles operate within their specific company in real, practical terms.

– Identify how the pricing strategies of various companies can differ based on the nature of their business strategies, the economics of their products and their expectations of future revenue growth.

– Utilize a provided spreadsheet to analyze the impact of various pricing strategies on their company’s long term strategy and profitability.

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Existing Knowledge/Skills???Do you know/understand…

Definition of Key Terms

• Unit costing• Unit pricing• Direct costs• Direct allocable costs• Cost of goods sold (COGS)• Customer acquisition costs• Gross margin• Contribution to overhead• Corporate/overhead costs

Analytic Skills

• Spreadsheet development• Cost estimating• Revenue forecasting• Financial projections• Scenario planning

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PRICING METHODOLOGY

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Unit Pricing Methodology

• It is critical for your company to have a clear methodology for determining the price of the products/services it offers to the marketplace.

• While there are multiple approaches to pricing, the methodology is ultimately based on the unit costs incurred in delivering the product/service on a per customer basis.

UNIT PRICING METHODOLOGY Product #1

DIRECT COSTS

Direct Program Costs 50

Direct Allocable Costs 25

Total Direct Costs/Customer 75

CUSTOMER ACQUISITION COSTS

Direct Sales Costs 15

Allocable Sales Costs 10Total Customer Acquisition Costs/Customer 25

TOTAL COSTS PER CUSTOMER 100

MARGIN % 20%

PRICE $125

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Direct CostsCOGS

• Direct costs are expenses that are generated and incurred by delivering a product/service to an additional customer.– The incremental costs of providing a product/service to an incremental

customer.– Costs of goods sold (COGS).

• There are two broad categories of direct costs to consider:– Direct program costs – Expenses generated by the direct provision of

a product/service to a customer.– Direct allocable costs – Expenses that are shared by multiple

customers and/or sites, but are costs that increase in direct response to an increase in the number of customers.

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Per-Pupil Unit Cost AnalysisEXAMPLES: Whole School Program and Individual Courses

PER PUPIL COSTS Whole School

Individual Course

DIRECT PROGRAM COSTSTeacher 1,500 100Curriculum licenses 500 0Materials (computer, shipping costs, consumables) 700 50Total Direct Program Costs 2,700 150

DIRECT ALLOCABLE COSTSAdministration 400 0Central program support 300 0Teacher professional development 100 50

Total Direct Allocable Costs 800 50

TOTAL DIRECT COSTS PER PUPIL 3,500 200

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Group Exercise

• Identify the following items for your business and describe your thinking to your neighbors: – What are the primary direct program costs of your

business?– What are the primary direct allocable costs of your

business?– What costs are you unsure how to categorize?

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Customer Acquisition CostsSales/Marketing

• Customer acquisition costs are expenses that are generated and incurred by selling a product/service to an additional customer .– The incremental sales/marketing costs of a product/service to an

incremental customer.

• There are two broad categories of direct costs to consider:– Direct sales costs – Expenses generated by the direct sale of a

product/service to a customer.• Examples: Sales commissions and direct response advertising.

– Allocable sales costs – Expenses that are shared across multiple customers and/or sites, but are marketing costs that a portion of the company’s overall marketing program.• Examples: Conference attendance and advertising.

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Group Exercise

• Identify the following items for your business and describe your thinking to your neighbors: – What are the primary direct sales costs of your business?– What are the primary allocable sales costs of your

business?– What costs are you unsure how to categorize?

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Margin Percentage

• Once you have determined the “per unit costs” of providing a product/service to a customer, it is critical for your company to determine a margin percentage it will apply to the sale price of the product service.

• The margin percentage can vary substantially based on:– Company strategy.– Corporate overhead costs.– Expected sales volume.– Investor return expectations.

BASIC PRICING METHODOLOGY Product

DIRECT COSTS Direct Program Costs 50 Direct Allocable Costs 25Total Direct Costs/Customer 75

CUSTOMER ACQUISITION COSTS Direct Sales Costs 15 Allocable Sales Costs 10Total Customer Acquisition Costs/Customer 25

TOTAL COSTS PER CUSTOMER 100

MARGIN % 20%UNIT COST % 80%

PRICE $100/80% = $125

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Group Exercise• Identify the following items for your business and

describe your thinking to your neighbors: – What is the primary rationale for a high margin business?

A low margin business?– What is an appropriate margin percentage for your

company’s primary product/service?– How do you determine an appropriate margin percentage

for your company?– How can market research and competitor analysis affect

this process?

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FORECASTING/PROJECTION METHODOLOGY

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Financial Model AssumptionsFive Years – FY15-19

PROJECTIONFY 15 FY 16 FY 17 FY 18 FY 19

REVENUE – Whole SchoolProgram enrollments 200 1,000 2,000 5,000 10,000Price/revenue per enrollment $7,000 $7,000 $7,000 $7,000 $7,000

REVENUE – Individual CoursesCourse enrollments 1,200 1,500 2,000 2,500 3,000Price/revenue per year course $700 $700 $700 $700 $700

COSTS – Whole SchoolTotal direct cost as % of revenue 50 40 40 40 40Student acquisition costs % 25 20 15 10 10Margin % 25 40 45 50 50

COSTS – Individual CoursesTotal direct cost as % of revenue 25 25 25 25 25Student acquisition costs % 25 25 25 25 25Margin % 50 50 50 50 50

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Pro Forma Financial ModelFive Years – FY15-19 (in thousands)

PROJECTION FY 15 FY 16 FY 17 FY 18 FY 19

REVENUE Whole school 1,400 7,000 14,000 35,000 70,000Individual courses 840 1,050 1,400 1,750 2,100Total Revenue 2,240 8,050 15,400 36,750 72,100

COSTS Whole School Direct costs 700 2,800 5,600 14,000 28,000 Student Acquisition 350 1,400 2,100 3,500 7,000Individual Courses Direct costs 210 262 350 437 525 Student Acquisition 210 262 350 437 525Total Costs 1,470 4,724 8,400 18,374 36,050

CONTRIBUTION TO OVERHEAD $770 $3,326 $7,000 $18,376 $36,050

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UTILIZING THE PRICING SPREADSHEET

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CASE STUDY

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Case Study

• Total Education Solutions– Need bullets from Meaghan