Case Study – Commercial Pricing Model for a Training/Education Company

The Challenge

Strategize was approached to create a financial model to support the development of commercial strategy and planning for a training company’s education courses. The pricing tool needed to support all ad-hoc analyses on commercial issues relating to the company’s proposed courses, in order to improve the financial returns. Strong financial and analytical skills were required to deliver a sophisticated pricing tool to model and efficiently communicate computed returns, through the use of accompanying tables, graphs, and executive dashboards.

To realise this Mandate

Strategize built a complete pricing and activity-based costing (ABC) model to capture all costs in order to better price a course, by student and type. By specifying performance hurdles or metrics of sales returns, executive management will be able to better price courses and safeguard positive returns.

The pricing model allocates not just direct costs associated with a course, but also a proportion of forecast indirect costs to the pricing of the course, as per the auspices of classic activity-based costing (ABC). This permits a more accurate calculation of return on sales, because many companies’ overheads are material and must be considered in the pricing of goods or services. Often companies make the mistake of pricing using historical, rather than forecast financial data, which can result in the under-pricing of its costs of goods sold.

Another Challenge faced

It was the requirement by the client to craft two forms of the model – into the one financial model. The “full” and “light” versions of the model allows improved corporate governance controls with the pricing of the model, whereby the employees and middle management are responsible only for the input of course specific data. The “light” pricing model will present a reduced and more basic version of the model, which aims to prevent spreadsheet confusion with less sophisticated users. It also provides a quick business casing solution to managers and less financially astute executives, as well stakeholders less conditioned with using sophisticated financial models.

The more arbitrary financial decisions, such as incrementally indirect costs often requires more commercial judgement, which an experienced executive is more equipped to do. These features, along with the cash flow, dashboard and sensitivity worksheets would be restricted to the “full” version of the model.

The features of sensitivity analysis can allow the executives to tinker with the variables. This was the essence of the commercial pricing model’s value-add; it gives the client’s executives the ability to understand how the drivers of unit price, unit volume , i.e. how much will the return on sales or NPAT (net profit after tax) increase from a 15% increase in the course price, but with the 7% drop in student enrolments.

In conclusion – Final words from the Client

The education provider is already seeing the value of its investment, in terms of mandating Strategize Financial Modelling to build a pricing tool. The client CEO stated “we can see how much strategic value it is going to add to simplifying our course approval process”, and further “the model is already proving its worth and confirming what our class size strategy should be for maximising return”.