1. Pricing Your Educational Product/Service for Long Term Profitability EDVentures July 18, 2014 1

2. Session Overview Introduction – Summary of session – Learning objectives – Existing knowledge and skills? Pricing methodology – Cost categories – Unit costing Forecasting/projection methodology – Forecasting assumptions – 5-year projections Using the methodology in your day-to-day business decisions Case study - Utilizing the pricing spreadsheet – Meaghan Donahue – Total Education Solutions 2

3. INTRODUCTION 3

4. Session Summary This session will help participants understand a basic methodology for pricing their company’s products/ services and the impact of product pricing on a company’s long-term strategy and profitability. The session will be oriented toward new/emerging entrepreneurs in the early stages of their company’s development and will introduce a set of basic pricing principles that are fundamental to a company’s business strategy. Participants will receive a spreadsheet template that they can use in their own company to analyze alternative pricing structures and their impact on the longer term profitability of their company. 4

5. Learning Objectives By the end of this session, learners will be able to: – Understand a set of basic principles that affect the pricing of an educational product/service including: unit costing, direct costs and allocable costs, gross margin percentage, customer acquisition costs, etc. – Discuss and reflect on the how these basic principles operate within their specific company in real, practical terms. – Identify how the pricing strategies of various companies can differ based on the nature of their business strategies, the economics of their products and their expectations of future revenue growth. – Utilize a provided spreadsheet to analyze the impact of various pricing strategies on their company’s long term strategy and profitability. 5

6. Existing Knowledge/Skills??? Do you know/understand… Definition of Key Terms Unit costing Unit pricing Direct costs Direct allocable costs Cost of goods sold (COGS) Customer acquisition costs Gross margin Contribution to overhead Corporate/overhead costs Analytic Skills Spreadsheet development Cost estimating Revenue forecasting Financial projections Scenario planning 6

7. PRICING METHODOLOGY 7

8. Unit Pricing Methodology It is critical for your company to have a clear methodology for determining the price of the products/services it offers to the marketplace. While there are multiple approaches to pricing, the methodology is ultimately based on the unit costs incurred in delivering the product/service on a per customer basis. 8 UNIT PRICING METHODOLOGY Product #1 DIRECT COSTS Direct Program Costs 50 Direct Allocable Costs 25 Total Direct Costs/Customer 75 CUSTOMER ACQUISITION COSTS Direct Sales Costs 15 Allocable Sales Costs 10 Total Customer Acquisition Costs/Customer 25 TOTAL COSTS PER CUSTOMER 100 MARGIN % 20% PRICE $125

9. Direct Costs COGS Direct costs are expenses that are generated and incurred by delivering a product/service to an additional customer. – The incremental costs of providing a product/service to an incremental customer. – Costs of goods sold (COGS). There are two broad categories of direct costs to consider: – Direct program costs – Expenses generated by the direct provision of a product/service to a customer. – Direct allocable costs – Expenses that are shared by multiple customers and/or sites, but are costs that increase in direct response to an increase in the number of customers. 9

10. Per-Pupil Unit Cost Analysis EXAMPLES: Whole School Program and Individual Courses 10 PER PUPIL COSTS Whole School Individual Course DIRECT PROGRAM COSTS Teacher 1,500100 Curriculum licenses 5000 Materials (computer, shipping costs, consumables) 70050 Total Direct Program Costs 2,700150 DIRECT ALLOCABLE COSTS Administration 4000 Central program support 3000 Teacher professional development 10050 Total Direct Allocable Costs 80050 TOTAL DIRECT COSTS PER PUPIL 3,500200

11. Group Exercise Identify the following items for your business and describe your thinking to your neighbors: – What are the primary direct program costs of your business? – What are the primary direct allocable costs of your business? – What costs are you unsure how to categorize? 11

12. Customer Acquisition Costs Sales/Marketing 12 Customer acquisition costs are expenses that are generated and incurred by selling a product/service to an additional customer. – The incremental sales/marketing costs of a product/service to an incremental customer. There are two broad categories of direct costs to consider: – Direct sales costs – Expenses generated by the direct sale of a product/service to a customer. Examples: Sales commissions and direct response advertising. – Allocable sales costs – Expenses that are shared across multiple customers and/or sites, but are marketing costs that a portion of the company’s overall marketing program. Examples: Conference attendance and advertising.

13. Group Exercise Identify the following items for your business and describe your thinking to your neighbors: – What are the primary direct sales costs of your business? – What are the primary allocable sales costs of your business? – What costs are you unsure how to categorize? 13

14. Margin Percentage Once you have determined the “per unit costs” of providing a product/service to a customer, it is critical for your company to determine a margin percentage it will apply to the sale price of the product service. The margin percentage can vary substantially based on: – Company strategy. – Corporate overhead costs. – Expected sales volume. – Investor return expectations. 14 BASIC PRICING METHODOLOGY Product DIRECT COSTS Direct Program Costs 50 Direct Allocable Costs 25 Total Direct Costs/Customer 75 CUSTOMER ACQUISITION COSTS Direct Sales Costs 15 Allocable Sales Costs 10 Total Customer Acquisition Costs/Customer 25 TOTAL COSTS PER CUSTOMER 100 MARGIN % 20% UNIT COST % 80% PRICE $100/80% = $125

15. Group Exercise Identify the following items for your business and describe your thinking to your neighbors: – What is the primary rationale for a high margin business? A low margin business? – What is an appropriate margin percentage for your company’s primary product/service? – How do you determine an appropriate margin percentage for your company? – How can market research and competitor analysis affect this process? 15

16. FORECASTING/PROJECTION METHODOLOGY 16

17. Financial Model Assumptions Five Years – FY15-19 17 PROJECTION FY 15 FY 16FY 17FY 18FY 19 REVENUE – Whole School Program enrollments200 1,0002,0005,00010,000 Price/revenue per enrollment$7,000 REVENUE – Individual Courses Course enrollments1,200 1,5002,0002,5003,000 Price/revenue per year course$700 COSTS – Whole School Total direct cost as % of revenue50 40 Student acquisition costs %25 201510 Margin %25 404550 COSTS – Individual Courses Total direct cost as % of revenue25 Student acquisition costs %25 Margin %50

18. Pro Forma Financial Model Five Years – FY15-19 (in thousands) 18 PROJECTION FY 15FY 16FY 17FY 18FY 19 REVENUE Whole school1,4007,00014,00035,00070,000 Individual courses8401,0501,4001,7502,100 Total Revenue2,2408,05015,40036,75072,100 COSTS Whole School Direct costs7002,8005,60014,00028,000 Student Acquisition3501,4002,1003,5007,000 Individual Courses Direct costs210262350437525 Student Acquisition210262350437525 Total Costs1,4704,7248,40018,37436,050 CONTRIBUTION TO OVERHEAD$770$3,326$7,000$18,376$36,050

19. UTILIZING THE PRICING SPREADSHEET 19

20. CASE STUDY 20

21. Case Study Total Education Solutions – Need bullets from Meaghan 21