Costing and Pricing Explained!

Whenever there is a group activity, and there are costs, pricing comes into play. The problem is NOT everybody understands costing. I would daresay that most people do not understand costing at all.

Let me give you an example from a Running club.

These are the costs incurred for conducting a run:

Transport (Rs. 1200), Volunteers (400 each, 2 volunteers for one run), Energy drinks (850), Fruits (1000).

All this adds up to say 3850. Now if there are say 40 runners, you could collect Rs. 100 per runner and hope to break even.

However what happens then is the figure of Rs. 100 gets etched in people’s mind.

Let us say in the next run there are only 25 runners….now what happens?

Tempo, Volunteers – remains the same at Rs. 2000. Energy drinks comes to 500 and fruits come to 700.

The total cost now is Rs. 3200. Spread over 25 runners the amount is Rs. 140!

Now each runner can argue that the service has remained the same, so the payment should remain the same!

Well come to the fact that costs are basically two types – FIXED and VARIABLE.

The fixed costs remain the same – immaterial of how many runners come. So if the costs are to be borne equally, it looks TOUGH.

So every orgnisation should split the costs into 2 parts – fixed and variable…and the CONTRIBUTION also in the F and V component. So the contribution of say 50 per run is COMPULSORY…apart from that people have to pay money for defraying expenses on fruits, energy drink, etc.

Just took an example from a non profit making body.

However, even a non profit making body has to EARN a surplus..! If you are wondering why, well here are the reasons:

– what happens if an event is organised, VARIABLE expenses incurred (say perishables like bananas are bought, AND THEN, the event gets cancelled?

– what if one of the volunteers has an injury and has to be treated in a hospital?

– what if assets like icebox, water spray, medicines, etc. have to be bought (these are NOT costed (!) per run, but per fixed period.

Well, well, not all businessmen understand all this…..nor do all runners!!

 

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3 Responses to “Costing and Pricing Explained!”

  1. Luv you Subra for this 🙂

    Definitely sharing……

  2. Good one Subra…very true! not many understand costing..

  3. Good one, simply helped in understanding the otherwise complex topic.

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