Using the Benefits Continuum, Enterprise Funds, and Cost Finding to Implement Best Pricing Practices

Abstract

The paper reports how best practices in pricing recreation and aquatic facilities and services suggested by the research literature were implemented in a city of 100,000. The process had three core elements.

First, in order to price each service at a level that was fair and equitable to both participants and nonparticipants, a benefits continuum was developed. This categorized each service into one of five categories. Services perceived to provide communitywide benefits were fully subsidized from taxes, so no price was charged for them. At the other extreme, when all benefits were perceived to accrue to users a price was set that covered all of its costs. The magnitude of spillover benefits that a community receives varies among services, so three position points were shown on the continuum reflecting services where benefits accrued primarily to the community (25% cost recovery), equally to users and the community (50%), and primarily to the users (75%).

The second element was the implementation of enterprise-like funds for all services that generated revenues. However, the technical definition of enterprise funds as being self-financing was qualified by the council, because it approved transfer of money from the general fund which was intended to subsidize economically disadvantaged users of the enterprise services. 

Prices designed to produce revenues that achieve rationally derived cost-recovery targets and create viable enterprise funds are dependent upon there being reasonably accurate estimates of service costs, since revenue goals without accurately estimating costs are meaningless. Accordingly, a cost finding exercise was undertaken which involved taking available financial data and recasting and adjusting it to derive cost estimates. Full absorption costing was used that embraced four types of costs: citywide administration indirect costs, department indirect costs, division indirect costs, and direct variable costs. The resultant cost based prices were then adjusted to reflect the going rate for each service charged by other suppliers in the area.

The perceived advantages and challenges encountered in this process are discussed along with the managerial implications. Agencies tend to make price changes reactively in response to an emergent financial or political imperative. However, strategic pricing requires proactively developing a policy. This case study describes a proactive approach that provides strong conceptual scaffolding upon which to construct an effective pricing policy.