Chapter 5
YOU ARE THE OWNER OF A PUBLIC GOLF COURSE. (For profit organization)
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Do some brainstorming with your shareholders and answer the following questions:
Please answer in paragraph format, complete sentences and use the terms given when possible so that I know you understand the terms.
1) Explain why your organization is a for profit organization..
2) What are some preconceptions that consumers may have about price and quality?
3) What will be your strategy in reference to setting the price to establish value?
4) What can you do to make sure your golf pro gets paid by the consumer?
5) What can you do to make sure the golf pro does not consistently have clients that cancel practice?
6) What can you do to encourage purchasing a membership?
7) What can you do to get golfers to play in the off season?
8) What can you do to attract new golfers?
9) Should adults, children, and senior citizens all pay the same price? Why?
10) Should members have extra benefits? If so, what benefits will you offer?
11) Is it appropriate to charge for public service and why?
12) Is it appropriate to charge for merit service and why?
13) Is it appropriate to charge for private service and why?
14) Monetary Price- What are the costs to the golfer to participate in the sport?
15) Opportunity Price What are some of the opportunity cost to the golfer?
16) Psychological Price What psychological prices may the golfer incur?
17) Effort Price – What effort cost may a golfer incur?
19) Competitive Approach – What are some advantages and disadvantages to this approach?
20) Market Pricing
What are some advantages and disadvantages to this approach?
Uses a cost driver to determine the cost per unit. A cost driver is an activity that fluctuates with demand. It could be hours worked, machine hours used, miles driven etc. It is an activity that when changed, changes the cost.
Requirements: (F) Fixed costs must be known (costs that do not change
With the cost driver)
Ex Rental of a building must be paid no matter how
Much you use the building. Its cost is fixed.
(V) Variable costs must be known (cost that does change
With the cost driver)
Ex the more units are produced, the more hourly
Workers (cost driver) are needed.
(N) The activity driver the Number of units used or sold.
(Can be hours worked, machine hours used, miles driven etc)
(P) The price of the unit is what will be determined.
(C) Contingency rate adding a % to the cost for unexpected
Costs that arrive.
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Example Assume the following information for a golf pro.
P to be determined
F $56,425
V $45,000
N 2,250 hours worked
C5%
Formula P ((F + V) + C (F + V)) / N
((56,425 + 45,000) + .05(56,425 + 45,000)) / 2,250 hours
P $47.33 per hour the golf pro needs to charge
Work through: Assuming the following information
P to be determined
F $60,000
V $50,000
N 3,000 hours worked
C5%
21) What price per hour does the golf pro need to charge?
SUBSIDIZATION AND UNIT PRICING
Rate of subsidization refers to how much of the unit cost is going to be recovered from sources other than the consumer. This means that the dollar per unit for the consumer can be reduced by the % of the cost that will be subsidized. Cross Subsidization use of profits of one program are used to reduce the price of another program.
The formula is the same as above but with the subsidization rate included.
Ex the hourly rate from the 1 st example was $47.33 per hour.
If 35% of the cost will be covered from another source other than
The consumer, then the price to charge the consumer will be
(1 .35) * 47.33 $30.77 an hour
If there is no subsidization and a profit needs to be added to the cost
Then the formula would be (1 + profit %) * Predetermined price
Ex if a 25% profit needs to be included with the $47.33 price then
(1 + .25) * 47.33 $59.16 per hour would need to be charged.
Predetermined
Complete the following chart:
Predetermined Price Amount Subsidized Price to Charge Formula
Driving range $12 10 % $ (1 – .10) * $12
Putting range $6 5 % $
9 Hole green fee $18 0 % $
18 Hole green fee $25 8 % $
Cart $10 20 % profit
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(F) SENSITIVITY TO CHANGES IN PRICE
Based on the premise that the consumer will respond to changes in price in several different ways.
Elasticity of Demand the measure of demand fluctuations
Price Elasticity of Demand the measure of price induced demand fluctuations the percentage change in quantity consumed that is caused by the change in price.
Formula Price Elasticity change in attendance/ (sum of attendance/2)
Divided by change in price / (sum of price/2)
Relatively inelastic market segments with an elasticity less than 1.00 is LESS sensitive to the price change
Unitary Elastic market segments with an elasticity around 1.00 is NEUTRAL to price change
Relatively elastic market segments with an elasticity greater than 1.00 MORE sensitive to price changes Exercise: determine the elasticity for the following chart
Market Season Price Attendance Elasticity
Segment enter amount here
Child 2001 $3.00 150,000
Child 2003 $3.50 120,000
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ADJUSTING PRICES (3) CONSIDERATIONS
1 Reference Price the price that the consumer feels that the product
Or service should cost.
2 Objective Price the actual price charged for the service
3 Subjective Price the difference between the reference price and
The objective price.
IF Objective price is lower than reference price then
Subjective price is considered cheap
IF Objective price is close to reference price then
Subjective price is considered reasonable
IF Objective price is higher than the reference price then
Subjective price is considered expensive
Youth 2001 $4.00 105,000
Youth 2003 $5.00 99,500
Adult 2001 $7.00 60,000
Adult 2003 $8.00 52,500
Senior 2001 $6.00 35,000
Senior 2003 $6.50 28,000
# 22 with the information above completes the chart below:
Check the appropriate column for elasticity for each age group given
Relatively
Inelastic Unitary
Elastic Relatively
Elastic
Child
Youth
Adult
Senior
# 23 if the objective price is higher than the reference price, how would you go about convincing the consumer that the price is appropriate for the service?
