Every board of every independent school struggles annually with the question of setting tuition fees for the coming year. If the board does not struggle with setting the “right” tuition fees, then it should.
On one hand, tuition fees determine the affordability of a school to its parents and prospective parents, and thus the enrolment size and the financial elitism of the school.
On the other hand, tuition fees deliver the primary source of income that are needed to pay the staff and provide the resources required to provide a solid learning program in most non-government schools.
Clearly, wisdom is required to ensure a fair balance is achieved between these competing needs. It is far too easy for board members to assert “if the school is full, then the price we are charging must be appropriate”. Similarly, it is far too easy for board members to quote individual anecdotal cases as a basis to claim that if fees rise too much then large numbers of loyal families will be forced to withdraw their children.
To address this tension, it is important to separate the issues of “ability to pay” from “willingness to pay”.
ABILITY TO PAY
Even if a family’s profile is perfectly aligned with a school, even if they passionately believe in the school’s mission and even if they are excited by the outcomes the school is achieving, they won’t be able to attend the school if they can’t afford the fees. This raises an important question for board members – how can we identify the ability of our clients to pay the tuition fees?
In an excellent recent article by Mark Mitchell (Vice President of NAIS) published a graph showing the changes in tuition fees for students in independent day-schools in the United States since 1990 as a percentage of family income. He showed the statistics against median family incomes, and also against each quintile of family incomes. For every income group, school fees were shown to have increased over the past three decades as a percentage of family incomes.
He also presented equivalent statistics for boarding tuition fees over the same period, showing that the increases were even greater.
Clearly, if a school’s fees are rising faster than the incomes of the families it serves, then the school becomes – by definition – less financially accessible to those families. This can result in decreasing student numbers, greater economic elitism in the school’s population, an increase in bad debts, greater pressure for targeted financial aid, and more grumbling in the school community.
WILLINGNESS TO PAY
Even if families are able to pay the tuition fees, there may be reasons why they are unwilling to do so. Perhaps perversely, some families may view schools that freeze their fees or hardly increase them as desperate to stop falling enrolments or, even more worryingly, liable to lower standards through under-resourcing. On that basis, such families may decide to move their children to a school with higher fees. Such schools defy the normal rules of supply-and-demand insofar as demand rises as the price rises (this is known by economists as a Giffin good).
Willingness to pay is more difficult to assess than ability to pay. Willingness to pay can be estimated by analysing the trends in demand for admission over time, by looking at the statistics of withdrawals (together with the reasons provided in regularly conducted exit interviews), and by listening to families’ comments and feedback, whether provided informally or through regular school community surveys of the school’s performance and culture.
There are also more formal methods to assess willingness to pay, and one notable instrument is Van Westendorp's Price Sensitivity Meter. This simple approach analyses the results of asking a group of participants four price-related questions:
Another complication arises due to the impact of competitors. For example, a school may be both affordable and performing strongly, but word-of-mouth conversations among parents may push the idea that a competitor school is doing something that is even better – maybe it has a more charismatic leader, or offers a better educational program such as the IB, or is regarded as more caring for students with special needs, and so on.
At the risk of over-simplifying the complexities of setting fees at the “right” level, if a school needs to help its families to become more able to pay a price, then it might:
If a school needs to make the market more willing to pay a price, then it might:
The American business magnate and philanthropist Warren Buffet is reported to have said “The single most important decision in evaluating a business is pricing power... If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.” He also claimed that “You can determine the strength of a business over time by the amount of agony they go through in raising prices.”
One can join the never-ending debate over whether schools are (or should be) businesses or not. However, irrespective of which side of that argument you take, it must be conceded that schools must be run in a business-like manner if they are to survive – hence the important annual agony over the decision about tuition fees.
-Dr Stephen Codrington
The Board’s fiduciary and non-fiduciary duties are explored in detail in terms of ‘Best Practice’ during the workshop OSG-S7 The Board’s Duties.
You may also be interested in previous articles which are archived at https://optimalschool.com/articles.html. You can subscribe to receive future articles by e-mail using the red button below.