Private Schools, the Pandemic, and Resetting Tuition: Wise Decision or a Fool’s Errand?

Volume 46 No. 7 ● September 1, 2021 ● Silver Member Sneak Peek

 

Early in the COVID pandemic onset, ISM published an I&P article discussing the merits of a school making a marketplace shift—decreasing tuition to be more accessible to a broader socioeconomic population. That article discussed our concerns and recommendations for carrying out a primary market stance shift from high tuition to low tuition.

Price, Product, and Process

ISM categorizes private schools into a three-tier taxonomy: price, product, and process. The landscape is such that schools compete in one of three ways.

Low Price: Tuition at rates $15K or less, featuring large classes of 25+ students, limited cocurricular programs, and moderate salaries. Price schools are often faith-based or Montessori-based programs.

Academic Product: School programs are aimed at students who can perform at the highest possible academic levels, highly selective admission, moderate class sizes, and highest next-level placement. Tuitions start at $25K or more.

Academic Process: A great variety of academic and curricular programs are offered. The school provides small classes and programs focused on the best fit for students’ abilities and interests. Tuitions range between $25K or more.

A school must select a primary competitive niche and work diligently to become the most desirable school within that niche.

ISM has encouraged schools to understand, while they may have components of all three school types, they must select a primary competitive niche and work diligently to become the most desirable school within that niche. To be desirable, a school must be seen in the market as worth every penny it charges, and that the school is full and with waiting lists at every level. High-perceived value drives strong enrollment.

While there are several differences between the three school types, a fundamental distinction is that a price school’s socioeconomic makeup substantially differs from a product/process school’s. Parent incomes are lower—much lower—in price schools than parent incomes for those who choose a product or process school. This difference affects most important decisions a school makes because a price school is concerned with safeguarding a low-price to a modest income earning population. The product or process school’s value proposition is about everything other than price to a group comprising remarkably high incomes. Thus, when a school’s leadership changes its primary marketplace stance, it must ensure parents understand everything entailed in the decision. Failure to reset expectations creates a significant risk of decreasing value perception and reducing enrollment, the opposite of the intended outcome for the marketplace switch decision.

Tuition-Elasticity Studies

ISM has also published two tuition-elasticity studies. We completed the first soon after the 2010 recession and the second in 2016. Our elasticity studies examined the enrollment and tuition relationship between the years 2006 and 2016. Working with Measuring Success and National Business Officers Association to complete the elasticity studies, our research showed that, despite fears of the practice of tuition outpacing average market inflation, enrollment and tuition increases share no discernable mathematical relationship. Further, tuition increases have not impacted enrollment at entry points. A school can raise tuition, lower tuition, or do nothing to tuition—it has a 50/50 chance of an enrollment change. The notion that lowering tuition will drive any enrollment increase or any increased donor activity has no empirical support. Lowering tuition does, however, make all pricing decisions—past, present, and future—appear arbitrary to those called on to pay for their children’s education. These parents had assumed tuition was at the level needed to deliver the school’s mission to all enrolled students. To discover your pricing decisions are analogous to the pricing approach for used cars can be dismaying.

Some school leaders in various locales have determined tuition resets are necessary and decided their high tuitions (whatever “high” means to them) are not sustainable long-term. In our article concerning marketplace shift, we wrote schools can safely lower tuition, but they must also understand the characteristics of a lower-priced private school and be ready to make the required structural and programmatic changes to support the new lower tuition. We recommended schools clarify to current families and employees that, in a shift to lower tuition, class sizes would increase and there would be fewer academic and cocurricular options and fewer administrators.

Don’t assume ever-increasing enrollment is possible or desirable. Neither is true.

When a school reduces tuition, it can no longer offer the programs it could at a higher rate. It must therefore explain its revised features and benefits or risk impinging on perceived value. Reduced quality results in unhappy parents and causes enrollment declines. Enrollment demand is a function of perceived quality, not tuition level itself. Lowering tuition—with lofty goals of increased fundraising, increased enrollment, and reducing costs, with no history of increasing enrollment or fundraising—is a far greater threat to sustainability than high tuition.

Further, price schools must acknowledge their fundamental distinctions from product/process schools and be sure their families understand these differences. While private schools offer high-quality experiences to their students, price and product/process schools do not compete directly. Their communities are different socioeconomically—they provide the same array of academic and cocurricular programs. As different mission-centered enterprises, deep understanding is necessary to make an effective change.

Sustainability and Marketplace Shift

ISM’s Stability Markers™ should be used as research-derived, long-term sustainability guard rails. They can guide a school in making a marketplace shift. The first six Stability Markers are the primary ones and include:

• cash reserves;
• a strategic plan and strategic financial plan;
• high-performing executive leadership;
• a hard-income-driven structure (tuition- and endowment-driven);
• a high-functioning faculty culture and rich student experience; and
• enrollment demand in excess of supply.

The ISM X™ discusses outcomes when a Board focuses on the Stability Markers through their strategic planning process, and when the Executive Leadership Team builds a robust faculty culture and student experience rooted in predictability and support, satisfaction, and enthusiasm. The Board’s strategic plan will increase reserves and decrease debt. Increasing endowment and robust cultures allows a school to enjoy stable enrollment. In some markets, enrollments can increase. Don’t assume ever-increasing enrollment is possible or desirable. Neither is true.

If the calculus described in the preceding paragraph has not been the outcome for your school, there is indeed a sustainability issue. Such schools are not sustainable. One must understand sustainability had nothing to do with the school’s tuition level. ISM, NBOA, and Measuring Successes’ analyses suggest enrollment and tuition share no mathematical relationship. Perceived quality is the more accurate driver. Schools must determine how to drive value to their population. This is the critical sustainability conversation nugget. Reduced tuition may cause temporary market interest in your school. However, the reality of giving faculty and staff annual raises means your tuition is going to rise again. And if your school has reduced tuition rates without increasing class sizes, reducing administrative staff, and reducing programs, you will drive your hard income coverage to a dangerously low coverage rate. Fundraising may cover the gap, but only for a short time.

Donors are uninspired long term to donate to keep lights on and the teachers paid. They give to enhance programs and facilities, and to make private school communities of excellence. Schools that lower tuition without making the necessary institutional changes—and cannot reset parents’ perception of the program’s quality—will learn they are on a fool's errand.

There is nothing wrong with a Board making a strategic decision to lower tuition. If your school cannot find success based on the first six ISM Stability Markers, a shift to a price-focused school could indeed be a wise move. Lower-priced schools, especially when enrollments grow to 1,000 or more, have distinct advantages.

• Such schools often have prevalent socioeconomic diversity.
• While class sizes must be large (25+), large price schools can have diverse cocurricular programs that are highly attractive to students and drive enrollment.
• More students can increase and enhance social opportunities, sustaining enrollment and perceived value.

The Demographics for Selecting Private Schools

ISM has also reported the demographic choosing private schools—parents with high incomes—has been flat for the past 20 years, while the number of private schools has almost doubled. We hypothesize the real problem facing private education is too much supply for flat demand. Could this change? Yes. Has it changed in 20 years? No!

To compound the problem, schools have been trying to increase market demand with financial aid and other discount programs. And while the research suggests financial aid has increased demand, it has also hurt school sustainability. Discounting to lower-income demographics may yield higher enrollment, but it also decreases net revenue per student. When a school must discount to more than 30% of its enrollment, it risks devaluing its tuition rate to full-pay families. When price schools discount more than 10% of the gross tuition revenue, and when product/process schools discount more than 20% of gross tuition revenue without an endowment to offset the discounts, they experience significant operating deficits.

The Long-Lasting Effects of the Pandemic

The pandemic will probably reduce the number of private schools—perhaps sharply. We have observed:

• no apparent, sustained, or increased demand for private education;
• we have too many schools; and
• the pandemic has exposed the financial vulnerability of many schools.

Consider the conundrum airlines recently resolved—too many flights, too many airlines, and prices were too low. Many people bought airline tickets at prices that did not reflect operational costs. Airlines were giving away too much. Our schools have a similar problem.

For private schools to thrive, it is time to reduce the number of schools to match demand and charge the correct tuition to build a sustainable business model and reduce competition. This means the price/product/process taxonomy is more critical than ever. Schools must design themselves to match their competitive niche characteristics (in both their program breadth and depth and their demographics) to drive perceived value and remain fiscally healthy. Larger schools (with enrollments of 600 plus in the product/process marketplace and 1,000+ for low price schools) will become increasingly necessary to maximize organizational efficiency and to overcome noncompetitive teacher salaries.

It is time to overhaul the entire structure of private education.

What about schools that do not fit into the price/product/process paradigm, schools with tuition between $15K and $25K? Many schools find themselves within this “no-man’s-land” pricing. First, one must know the $15 to $25K range is an observed market range in America’s average city. Of course, there will be schools in the middle of this range. When a school’s tuition is lower than $25K, its structure, while not as reduced as a $15K price schools, is still smaller and its program less robust than more expensive schools. These schools will take on price school characteristics. Their class sizes must be larger and program less robust to reflect the desired tuition point. The trickier thing is effectively marketing a school. Schools priced between the taxonomy find they are not expensive enough to be perceived as high-quality to the typical product/process family, but too expensive for the demographic choosing price schools.

For schools with tuitions less than $15K, ISM recommends investigating the spend-per-student in your local public schools. At that tuition level, you will never build a balance sheet sound enough to sustain the school or to recruit competitive teachers. Increase your tuition to parallel the spend-per-student at the public schools in your area.

The Issues of Faculty Compensation

Last, we have a growing concern teachers’ starting salaries and career-long income growth are not equivalent to others similarly educated. CPAs, many medically trained graduates, MBAs, etc., pay equally for their bachelor’s and master’s degrees, as do teachers. Yet, these similarly prepared individuals have much higher starting salaries (as much as 50% higher) and much higher long-term salary potential (often a multiple of five or six times greater). The number of graduates preparing for a career in education is declining. If our industry does not improve teacher compensation to comparatively prepared graduates, and if a pandemic outcome is an increasing desire for remote work, education could face a talent catastrophe. Why would a college graduate choose to go into teaching when they cannot work remotely, when they earn low pay—much lower than other professionals—and work in a high-stress environment with demanding parents?

Conclusion

Schools face many important long-term sustainability decisions. ISM believes the pandemic is altering the face of private schools, but lowering tuition is not the answer. It is time to overhaul the entire structure of private education to:

• reduce competition and right-size to fit the market;
• build larger schools with full enrollments that maximize organization efficiency; and
• offer competitive wages to faculty and staff.

We must repair our broken system to continue to offer inspiring programs that develop the brightest and the best. But what if our best schools cannot discern what drives long-term sustainability? These schools will fail and will face the tough decision to close or merge to reduce competition.