Tuition Rates Versus Salary Expense in Child Care

On your journey as a childcare business owner, you’ve been successful at hitting target occupancy and salary expense goals while navigating the complicated financial modeling of running an early education business. Thin margins, even when operating at a financially healthy level, include daily monitoring of enrollment openings and teacher hours—sometimes down to each 15- minute intervals on the clock. In “normal” times, it’s one of the most difficult parts of your management process.

Enter Covid. Grants kept you financially stable while costs increased and occupancy dropped. As the economy rebounded, enrollment returned but teacher shortages and difficulties in hiring qualified staff became the most difficult part of your work (not an entirely new concept to the childcare sector, but one that is now being exacerbated). You are paying higher wages than ever before for less qualified staff and hesitating to fully enroll because either you don’t want to further stress teachers or you just don’t have them. You’ve consider raising tuition rates at a higher rate than usual, but how far can parents stretch? And while grants may be stabilizing your staff costs, you know they are not going to be available forever. So, what should you do?

What’s Important to Staff?

The ability to pay dedicated childcare staff and talented teams what they deserve is not a new problem for early education owners. The industry itself often attracts managers and teachers seeking a rewarding work environment where they are valued and appreciated—not those looking for the highest pay. Culture-building, teaming, and career path strategies are vital to attracting and retaining great staff. It is important to expand these concepts into creative actions and to implement new strategies designed to support this challenge.

Raising Tuition Rates

The delicate balance between setting tuition rates at a level that parents can afford, while covering the increasing costs of quality care and education, has long been the industry’s greatest challenge. It is not unusual for a provider—even pre-Covid—to charge less than it takes to cover costs and make enough profit to re-invest in the business, but this isn’t sustainable if you want to continue providing quality care to your families and support to your staff.

Annual Increases at Minimum
The historical industry norm is one annual tuition rate increase at somewhere between 3-5 percent. Business owners that balance tuition rates well will calculatee the actual cost of providing quality care and account for a reasonable profit with sufficient cashflow sufficient to re-invest in the business. After all, new safe vehicles, updating classroom and playground equipment, and adding additional staff benefits are minimum requirements for adequately caring for and educating young children. Rising costs and lower occupancies have forced childcare owners to have more than one increase a year or increase rates at closer to 8-12 percent, or both—and with very little pushback from parents who now better understand better the critical nature of their childcare resource.

Eliminating Discounts
Very often a hidden danger, discounting tuition is broadly becoming a thing of the past.  As many businesses don’t often record the full tuition and the discount and instead just record the discounted amount, they often don’t know the financial impact of each discount in each age group to the school—two pieces of information that are vital in creating financial health.

Many years pre-Covid, the industry moved away from discounting for “free” or “vacation” days and haves re-considered discounting for multiple children in a family or for employees of specific businesses. Staff discounts remain strong with the industry norm being free childcare for managers and half price for teachers. Some are now limiting staff discounts to two per staff with no discounts for the expensive infant programs.

Tips for Catching Up
If you were not charging healthy rates before Covid and are now having trouble catching up, it is time for some creativity. One strategy is to combine a healthy increase with the elimination of one or more discount. Another is to raise tuition for current families slightly, designating them as “legacy” families, and start new families at a rate that supports the school’s financial well-being.

What if My Competitors are Lower?
Before considering the tuition rates of competitors in making your decisions, be sure that they are true competitors. Just because a school operates in your market does not make them a true competitor. Can you articulate the reasons your school is superior? It’s possible that your level of quality does not have true competition in your market, and, if so, the rates of others should be ignored.

Bottom Line: No One Benefits If You go Out of Business

At the end of the day, tough business requires tough decision-making. We recognize childcare owners entered the industry to provide a valuable service to children and families, and not to make a profit, but it’s critical to learn breakeven analysis and appropriate pricing strategies to ensure the health and longevity of your business. Think about it: You wholeheartedly invest in the care and education of your students, so why wouldn’t you do the same with your school’s financial health?

If you want to learn more about healthy spending ranges or how best to manage your childcare costs, we invite you to join us at our upcoming THRIVE Workshop. You can learn more at www.hingeadvisors.com/thrive-workshops.