Pricing

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What is Pricing?

In both the private and the public sector, pricing refers to the act of deciding the amount required as payment, usually for a product or service provided.

Prices can be set for a company’s operating units, such as when a shared services centre is funded by charging its services to the operating units that benefit from them. 

Prices can also be applied to external clients, such as when a government corporation decides to charge citizens for certain services.

On what does prices’ establishment depend?

Establishing prices depends on the organization’s objectives. Shared services centres will want to recover their operating costs but will not necessarily want to make a profit. However, a company selling products or services to external clients will, by and large, aim to set its prices so as to generate a net profit.  Depending on its social policies, a government corporation could choose to have citizens pay only half the cost of a given service, or even offer that service at no charge.

Information needs depends on objectives.

For instance, when the objective is to improve operating profits, managers need to know their customer / product / service profitability so they can generate greater profits through performance management techniques. When the objective is to be self-financing through operating units (for the Treasury Board) or through the general population (for ministries and government corporations), accountability assumes critical importance. In fact, operating units that finance a shared services centre want to be sure that they pay their fair share of the costs but no more. The Treasury Board wants to make sure that financing requests are based on well-founded and logical principles, so it is important that the model’s logic can be explained to third parties.

With the Decimal Suite, users can model cost behaviour based on cause-effect relationships. This makes it easy to explain costing logic and to understand cost mix.  Costs are not an incomprehensible black box; in fact, both accountability and assessing costs by program turn out to be relatively easy tasks.

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Pricing issues – public sector Pricing issues – private sector
Determining the percentage of costs to be re-invoiced (full costs, variable costs, specific costs, non-recurring costs, etc.) Determining pricing to optimize profitability
Separating the different costs of the various programs and / or operating units Price elasticity
Ensuring all service users are treated fairly Being able to influence clients and representatives
Being able to explain cost to users / partner organizations or to the Treasury Board Understanding fixed and variable costs
Being able to perform comparative analyses of comparable entities Pricing products or services in overcapacity mode
Distinguishing between fixed and variable costs  
Understanding the cost mix (how much each operating unit contributes to product / service costs) Understanding the cost mix (how much each operating unit contributes to product / service costs)