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BUFDG Conference 2003 The Pricing Agenda Professor David Westbury Chair, Joint Costing and Pricing Steering Group. Joint Costing & Pricing Steering Group • • • • HEFCE SHEFC ELWa DE&L • • • • • U Uk SCOP U Scotland HHEW the HEIs Role of JCPSG • To advise universities and colleges on the development of good practice in Costing and Pricing. • To encourage the integration of financial and academic decision making. JCPSG Web-site • http://www.jcpsg.ac.uk Funding the Future: The Same or Different? It must be different! Action is needed now Transparency Review Outcomes Research Teaching Intensive Intensive Publicly funded T -4% -2% Non publicly funded T +35% +30% Publicly funded R -35% -90% Non publicly funded R -30% -80% Other activities +25% +10% Informal data, 1999-2000 What is a price...? What the customer pays for goods or services. A price does not exist in isolation. Part of the relationship between the purchaser and the provider. Pricing Issues • Pricing is a different discipline from Costing • Pricing is strongly linked to Marketing Pricing Strategy The parts must fit together:Institutions can do a lot individually, but some aspects may require joint action Pricing Strategy and Marketing The Marketing Mix • Pricing is only one of four factors in the marketing mix: Products and Markets Distribution Methods Promotion Pricing Strategy Pricing and Corporate Objectives Financial Objectives Corporate Objectives Pricing Policy Marketing Objectives Key Pricing Factors Corporate Strategy • Corporate strategy must underpin pricing strategy • Tensions between competing strategic objectives may exist • Action is needed to resolve tensions General Approaches to Pricing 1) Market based 2) Cost based Derive from two different cultures: Private sector and public sector Question… Can the two pricing cultures exist together in one institution? Yes… but there has to be a university strategy and framework Market based Pricing Price is based on the value to the customer “in the market place” Private Sector Culture Key Pricing Factors Customers • The customer is king - but • Who is the customer and what do they want? • Customers will balance benefits of a purchase against costs • Need to understand customer’s perception of benefit and value in deciding prices Market Based Pricing Two main types: Competitive market pricing: price set by assessment of market and competitors Value pricing: price set from a calculation of the value of the product to the customer Key Pricing Factors Competition • Understanding the market • Analysing competitors • Assessing market position An Example of a Competitive Market for Fees International Fees, Lab based (£) 60 40 30 Series1 20 10 14 00 0 12 00 0 10 00 0 80 00 60 00 0 40 00 Institutions 50 Fee (£) N=161, mean=8306, 2002/3 Example of Value Pricing of a Contract The contract enables a product to be developed and sold Year Income (£k) Costs (£k) Profit (£k) 1 2 3 4 5 6 7 8 9 10 Total 850 1200 1300 1500 1900 2100 2300 2500 1900 1000 750 790 850 900 950 1000 1100 1200 950 730 100 410 450 600 950 1100 1200 1300 950 270 16550 9220 7330 Rate of return (%) Net Present Value of profit 11 £137,689.56 Value price of £138k would remove all of benefit Value price of £46k would leave 2/3 of the benefit with the company Pricing Strategy high price A B C D E low value high Cost based Pricing Price is based on cost recovery, or if possible, cost plus contribution Public Sector Culture Costing Total Costs = Direct Costs + Indirect (support) Costs + Costs of Capital & Assets Direct and Indirect Costs Direct costs: Teaching staff Consumables Cost of project, eg. Short course Indirect costs: Accommodation Administration Library & IS Etc. Indirect and other costs can be related to direct costs through a “rate card” Pricing and Market Position High demand, low competition: Value price Low demand, high competition: Market price High demand, high competition: Market price Low demand, low competition: Cost plus price Then What? If price exceeds full economic cost, proceed If cost exceeds price, then either not proceed, or reduce costs, or subsidise if strategically important Pricing and Transparency Review Categories Category Pricing PFT NPFT Changing from cost based to market or value based Market based PFR Cost based NPFR Market or value based Other Market or value based What Have We Done So Far? • Advocacy with Government • Advocacy within the sector • Publications OST, Research Councils, and Funding Councils • Group considering options for funding regime • Move from “overhead rate” to full economic cost? • Project proceeding to determine FEC: JCPSG and 9 pilot institutions based on TRAC methods • Volume versus price? • What about charities? Market Pricing: What Next? • • • • • How many have pricing policies? Markets and competition? Not yet a mature market? Role of marketing disciplines? How do we change an inappropriate price-value equation? JCPSG Publications “Pricing toolkit for the higher education sector” October 2000 available electronically on web-site JCPSG Publications “Developing a pricing strategy in higher education institutions” July 2002 Available electronically on web-site JCPSG Publications “The use of indirect cost rates in costing government contracts – technical guidance” September 2001 Available electronically on web-site The Pricing Agenda Discussion Time for Change • There is scope for improvement in pricing decision making • Government is starting to respond • Institutions must respond too where they can • SPREAD THE WORD