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Setting childcare tuition properly can seem like a daunting task. Underpricing the tuition can lead to a loss of potential profit, while setting the tuition too high or increasing the tuition frequently can risk driving families away from your program. If you were to increase the tuition, there would also be an operational cost of having to update the bill plan and invoicing system.
Understanding different tuition pricing strategies can help you reach your goals. How you set your tuition will affect the number of families you appeal to and the number of children enroll in your childcare program. It will also determine your profit margin, and therefore, the funds you have available to grow your business.
In this article we explore different tuition pricing strategies and their respective pros and cons. Consider each strategy and pick the approach that best fits you. This way, you can make sure you are really serving your goals: To offer great programs for your community, and also to prosper and have income to support your staff.
Table of contents
- Why are tuition pricing strategies important?
- Types of pricing strategy
- Price tuition fees for your success
Why are tuition pricing strategies important?
Tuition pricing strategies can greatly affect whether your childcare will bring in a profit, how much of a profit it will generate, and how sustainable it will be in the long term. Understanding the role and importance of tuition pricing strategies is a prerequisite to picking the right approach for your childcare.
Pricing refers to the amount of money you charge for your services. But, it is much more than simply setting an amount of money. It determines your profit margin; it signals to potential families how much you value your services; and it positions you in the market compared to other childcare facilities in your area.
Tuition pricing strategies refer to the different processes and methodologies you can use to determine and set your prices. Do you determine it based on the cost of your services with a small profit on top of it? Do you determine it based on what your competitors are charging? Do you try to beat your competition by pricing your services lower than theirs? The answers to these questions can determine your position in your market, your ability to meet your business goals, and how families perceive the value of your childcare services.
In the next section, we will go over different approaches to consider, before deciding which one is suitable for your childcare. There are some basic factors you need to consider, before deciding on a particular tuition pricing strategy:
- Know your income and expenses: Before you select a tuition pricing strategy for your childcare, you need to have a clear overview of your expenses, including rent or mortgage, staffing costs, utilities, supplies, etc. Without this information, it will be impossible to determine what the minimum you need to bring in as income is, to break even and turn a profit. Once you have calculated your expenses, you should also determine the different revenue streams for your childcare program, including tuition fees but also additional service fees for services such as extended hours, special events, or field trips. Learn more about How to Successfully Create and Balance Your Budget.
- Be open to different perspectives: To pick the right tuition pricing strategy for your childcare, you will need to think critically of the possible benefits and advantages of each one, and to challenge certain assumptions. For example, pricing as a cheaper service can be both an advantage and a disadvantage: cheap can mean affordable and accessible for families; but sometimes it can also backfire and raise concerns about quality of service. Or, a long-term strategy may bring more profit eventually, but it may not allow you to make the upgrades you may need to make in the short-term.
- Be ready to adjust: No tuition is set for good. You will need your strategy to be one that allows you to adjust as times change, and that helps you price new services, such as extended care or excursions, when you add them to your service provisions. Even a minor shift in tuition can make a big difference in the long term, especially when you are faced with increasing costs for supplies, or if you want to expand your childcare. Read here for different ways in which your childcare can expand in the long term, with our Cost Modeling and Forecasting Roadmap Guide.
Types of pricing strategy
Let’s look at some main types of pricing strategy that you may consider in setting your childcare’s tuition. Keep in mind that each strategy comes with different advantages and drawbacks. There is no one-size-fits-all approach when it comes to childcare pricing strategies. It is important to consider your unique circumstances, and select the pricing strategy that will work best for you.
Cost-plus pricing
The cost-plus pricing model is one of the easiest to understand and implement, which also makes it very popular as a pricing strategy. With cost-plus pricing, you calculate the costs you incur in order to provide a service, and add a markup to the unit cost to determine the final tuition cost. Effectively you look at two things: 1. The cost of offering the service, as divided per child; and 2. Your desired profit margin, per child. For example: if the cost of offering the service per child is $1,000/month, and you want your profit margin per child to be 20%, you will need the price to be $1,200/month (1,000/(1-20%)) per child.
This is a direct and clear way to set your tuition fees. Beyond determining your costs, and deciding on what profit margin would serve your business objectives, the pure cost-plus pricing does not require any further market research. Provided you calculate your costs correctly, and estimate the number of children to determine the per-person cost, this is a simple and safe approach to ensure you will have a profit.
The downside to this approach of pricing childcare tuition is that the cost-plus pricing strategy does not take into account your customer base and their willingness to pay. This means that, if you set your childcare tuition fees higher than the families are willing or able to pay, you may struggle to maximize enrollment, and your profits can suffer as a result. Or, if you set the tuition fees lower than what you could have, you may be missing out on income that could help your childcare business grow.
Competitive pricing
Unlike the cost-plus pricing strategy, competitive pricing focuses on other childcare services in your area. Competitive pricing refers to setting your prices in relation to the prices of your competitors. By doing market research, you can identify the tuition fees charged by other childcare programs that cater to the same or a comparable community. You then decide where in that range you would place your childcare’s services, and you set the tuition fees based on that.
While this pricing strategy requires some market research, this does not need to be a very lengthy process. You need to start by determining who your competitors are and their pricing models. Try to gather data from at least 5 competitors in your broader area, and make sure to select childcare programs that offer similar services to yours, such as all-day family child care home, forest schools, Montessori, , etc. This will give you a good understanding of the market, and your prices will likely be within the range of what families in your area are able and willing to pay for childcare, guaranteeing that your tuition fees will not put off prospective families.
This strategy does rely on trusting that other childcare facilities have set their tuition fees correctly. When using the competitive pricing strategy, you need to be mindful that you do not miss out on potential to increase your profit. It could be the case that your competitors are pricing their services below what the families would be willing to pay for your services, so focusing on competing with them on pricing, rather than increasing the value of your services to compete on that basis, may result in a loss of profit and your business stagnating.
Value-based pricing
Value-based pricing is an inward looking strategy, because it looks at the costs and requires you to evaluate the services you offer. It is simultaneously an outward looking pricing strategy, because you need to look at the market. Unlike competitive pricing that looks at competitors, this time you focus on your customers: the families you work with and the ones you wish to attract to your childcare facility.
According to value-based pricing, you set the price of your services in accordance to how much your potential customer base believes the service is worth. You set tuition fees to reflect how much families are willing to pay for your services. Remember: cheap is not always good! Sometimes, setting a higher price to a service signals that the service is of higher quality. For example, higher tuition fees that reflect a lower child-to-caretaker ratio or the use of state-of-the-art facilities, will be an attractive proposition for many families. This way, you can ensure you are maximizing the profit based on the quality of services you offer.
While the potential of this strategy to maximize profit may sound appealing, it does require an active, ongoing process of setting and adjusting your tuition fees. To make sure you are not charging excessive fees, and driving families away from your childcare, you need to maintain frequent contact with the families and your potential customers, and to get feedback on your services and your fees. Customer research is effectively a continuous process with value-based pricing, so this is an option to consider if your team has the capacity to support this research.
Penetration pricing
What about cases where you are just launching your childcare facilities? In such instances, you may need to prioritize attracting families and making sure enrollment is high, and do so quickly. Penetration pricing is a great pricing strategy if you are focusing on a short term boost in enrollment.
Penetration pricing is similar to competitive pricing, because you need to look at the tuition fees offered by childcare programs that offer services to the same community as you. Unlike competitive pricing where you would set your tuition fees somewhere in the middle of the range of what your competitors are charging, with the penetration pricing strategy, you set the tuition fees lower than your competitors. You compete with them on price, so you can “penetrate” the market.
This can be a great way to attract attention from families in your area, and do so quickly. Especially at times when the cost of living is on the rise, families may find an affordable alternative more attractive, enabling you to increase enrollment while you establish your childcare program and prove the quality of services you offer.
But be careful: this pricing strategy may make it harder to raise prices in the future. If you attract the families that are looking for a lower-cost option, you may find it harder to sustain those relationships with them in the long term when you need to increase your prices. Communication with families is key in raising tuition fees in the future without risking your enrollment numbers plummeting. Make sure to communicate any tuition fee increases to the families with plenty of notice, and clearly explain why this increase is happening. Many families will be more open to the tuition increase if they also see tangible improvements, such as offering new services, expanding facilities, or hiring more educators.
Versioning pricing
Your tuition fees do not need to be inflexible. The versioning pricing strategy recognizes differentiations between the services and the families you work with, and is particularly well-suited to childcare services. For example, you can create different pricing tiers by age group. This recognizes that the cost of care for infants, toddlers, and preschoolers are different, with younger age groups needing a different child-to-educator ratio than older children to provide the level of care needed. Or, you can apply versioning pricing to additional services on offer, providing lower tuition fees for the basic services and having a higher markup for optional services that families may use more infrequently.
While versioning pricing can be more complicated, it can serve to strike a balance between maximizing enrollment and maximizing income. You can learn more about different tiers of pricing in our post, Maximize Profit in Childcare: Cost-Cutting and Profit-Boosting Strategies.
Price tuition fees for success
It may seem like a daunting task to determine the right tuition fees that will help your business grow. Considering your childcare facilities unique circumstances, and which strategy fits your current capacity and objectives, will help make this process a lot simpler. And importantly, it will ensure you are setting up your childcare with a sustainable model for long term success. As with any strategy, you need to periodically review it to ensure it still serves your goals. As times change, you can revisit the issue of childcare tuition pricing strategies, and adapt your strategy to your current needs and expectations.
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