Ask an Accountant: Pt 4
How Do I Set Prices That Reflect the Value of My Childcare Services?
As we wrap up the current blog series about frequently asked financial questions we receive from Early Childhood Education clients, we turn our attention to the ever-important topic of childcare prices. In the following article, we answer the question, “How do I set prices that reflect the value of my childcare services?” by exploring several factors you need to consider in order to set prices that will help you turn a profit. Read on to learn more.
Childcare Prices and Profitability
The prices you set for your childcare services have a direct impact on your business’s profitability. As such, it is imperative for you to look at each one of the following factors as you evaluate your price structure. If you fail to do so, then you may find yourself in the no-win situation of offering the best prices in town without being able to generate a profit. Some of our clients have been there. In order to price your childcare services at their true value, consider these factors:
Costs of Running Your Business
Your business costs generally fall into three categories: overhead, labor, and supplies.
Overhead costs – These are costs that involve ongoing business operations which aren’t directly related to labor or supplies. Overhead costs include such things as mortgage or rent payments, utilities, insurance, business fees and licenses, advertising and marketing, and administrative fees.
It’s a good idea to consider charging a one-time enrollment fee to offset some of the administrative costs associated with each new child’s enrollment.
Remember – the more you can keep your overhead costs down, the more you can maximize profitability.
Labor costs – These are expenses related to your team of employees. Labor costs include salaries and wages, as well as the cost of employee benefits and payroll taxes.
Keep in mind that quality daycare teachers offer a stable workforce that parents count on when they entrust their child into your care.
Supply costs – These are expenses encompassing the materials required to operate your childcare business day-to-day. Supplies include furniture and equipment, educational materials, arts and crafts supplies, classroom decorations, food and beverage services, and so on. You will need to calculate the cost of these supplies on a per-child basis, so you can factor them into your rates.
Together, overhead, labor, and supplies will help you determine the total costs of running your business.
Competitor childcare businesses in your area can provide a wealth of information about other options families in your community have for childcare. However, some clients have made the mistake of placing too much emphasis on what their competitors are charging without considering the costs of running their own business, discussed above. For example, if you look at the daycare down the road and decide you are going to set your rates lower than theirs without factoring in your unique costs and the value your program brings to the community, you won’t make money. Think of it as doing a disservice to families because if you don’t charge the true value of your services, you won’t be in business for long. What a loss for the families you serve and the childcare staff you employ!
You can, however, asses your competitors as a general benchmark for setting your own prices by investigating the following:
- How do your competitors charge for their services? By the hour? By the week? By the month?
- How is the price structure different for a child enrolled full-time versus a child enrolled part-time?
- Do your competitors offer a reduced rate for families who have more than one child enrolled?
- Do your competitors have an enrollment fee? A late payment fee? A late pick-up fee?
- How many children do your competitors accommodate in their program? What is the adult-to-child ratio? How many children are in each class?
- How do your competitors structure their prices differently for infants, toddlers, preschoolers, and school-aged children?
Considering the costs of running your business and investigating your competitors are essential components of setting prices that reflect the value of your childcare business. One more area you will need to consider is the inflation rate.
Cost of Living
Finally, as you set prices for your childcare business, you absolutely must factor in the rate of inflation, or the rate of increase in prices over a given period of time. We tell our clients they must always implement an annual price increase that is greater than the annual inflation rate. If you neglect to consider the annual inflation rate, you may begin to fall into a deficit between your income and expenses. Accounting for the current cost of living as you set your tuition rates will ensure your business stays profitable.
By considering your costs, competitors, and the cost of living, you can set prices for your childcare business with confidence, knowing your prices reflect the true value of your childcare services.
The professionals at Honest Buck are here to help you lay a foundation for a profitable childcare business. Our team of experts can help you evaluate the price structure for your Early Childhood Education business so you can increase your profit margin and grow your business. Contact us today.