BUFDG Conference 2003 The Pricing Agenda Professor David Westbury Chair, Joint Costing and Pricing...

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

PricingStrategy

PromotionDistribution

Methods

Pricing and Corporate Objectives

Pricing Policy

Financial Objectives

MarketingObjectives

CorporateObjectives

Key Pricing FactorsCorporate 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 FactorsCustomers

• 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 FactorsCompetition

• Understanding the market

• Analysing competitors

• Assessing market position

International Fees, Lab based (£)

0

10

20

30

40

50

60

Fee (£)

Inst

itu

tio

ns

Series1

An Example of a Competitive Market for Fees

N=161, mean=8306, 2002/3

The contract enables a product to be developed and sold

Year Income (£k) Costs (£k) Profit (£k)

1 850 750 1002 1200 790 4103 1300 850 4504 1500 900 6005 1900 950 9506 2100 1000 11007 2300 1100 12008 2500 1200 13009 1900 950 950

10 1000 730 270

Total 16550 9220 7330

Rate of return (%) 11

Net Present Value of profit £137,689.56

Value price of £138k would remove all of benefitValue price of £46k would leave 2/3 of the benefit with the company

Example of Value Pricing of a Contract

Pricing Strategyp

rice

valuelow

high

high

A B

D E

C

Cost based Pricing

Price is based on cost recovery, or if possible, cost plus contribution

Public Sector Culture

Total Costs=

Direct Costs

+

Indirect (support) Costs

+

Costs of Capital & Assets

Costing

Direct and Indirect Costs

Cost of project, eg. Short course

Direct costs:

Teaching staff Consumables

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 Changing from cost based to market or value based

NPFT 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