Balancing Profitability and Affordable Service
Deciding how to structure the prices for your daycare business may be one of the most important—and difficult—decisions you make as a business owner. You will need to consider various factors when determining what to charge for your daycare service, including what your competitors charge, how much parents in your area can afford to pay, your desired profit, and the costs of running your business. With a little research and careful testing in your local market, you can set prices that are fair and competitive and that assure the profitability of your childcare center.
An Important Fact to Consider as You Decide on a Price Structure
In the following guide, you will explore the essential components of setting fair and profitable prices for your daycare business, but first it is important to point out the necessity of knowing the value you bring to your community. As you consider the following factors that will influence your price structure, keep in mind the things that set your business apart from the rest. You are not offering a babysitting service; chances are, your teachers are using a thoughtfully developed curriculum that will enrich each child’s daycare experience as well as provide the educational and structured play that is so important for children’s development. Your prices should reflect the value you place on your services, and you must find a pricing structure that neither undervalues your service, nor prices you out of the local market. Remember that there will always be customers that will be unhappy with your prices (just like any business!) You will always have that parent who complains about your late payment fee or your practice of raising your rates yearly. But if you’ve done your research and tested your market to find a price that works for your business, then stand firm in your decision. Anything else will sell yourself short of your true value.
Get to Know Your Competitors
If you want to get familiar with your competitors to learn more about the going rate for childcare service in your area, then ask! Call around to other daycare facilities and see what they charge. Here is some important information you may want to gather as you make inquiries of your local competitors:
- 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?
- What are some of the additional fees your competitors charge? Do they have an enrollment fee? A late payment fee? A late pick-up fee?
- How many children can 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, and slightly older children?
Speaking with other daycare center directors will provide tons of insight that can help you determine local childcare prices as you consider what you want to charge.
Your local resource and referral center should be able to tell you the general rates in your area as well.
As you discover your competitors’ rates, determine how they will influence your own rates. Before you decide to drop your prices below your competitors’, for example, decide if the service you offer is actually worth more than what your competitors offer. You may provide a hot breakfast and a hot lunch, while your competitors may only offer lunch, for instance. In addition, your competitors may offer a slightly lower rate, but if their enrollment is full, parents may be forced to look elsewhere for childcare options anyway. Consider the big picture when deciding what to charge.
Join us as Rachelle Calina, CPA, review’s the application and related instructions including how it changes the rules related to owner compensation, FTE counts, the 8-week or 24-week covered period, non-payroll costs and more! We will also show you how to obtain the necessary documentation from QuickBooks Payroll, ADP and Paychex. This will be a one-hour presentation followed by 30 minutes of Q&A.
Assess What Parents Can Afford
While it is not your responsibility to offset the growing costs of childcare that plague working parents, you should be aware of the challenges parents face in being able to pay for childcare expenses, as well as how much money the average family in your area can afford to spend on childcare services. You are clearly running a business and not a charity, but if you do not consider what parents are able to afford, you may not be in business for long.
According to the Economic Policy Institute, the average cost of childcare for an infant in Washington state is $14,554—or $1,213 per month. It’s no surprise that childcare is often the second largest expense a family faces, after a mortgage or rent payment. In fact, with childcare costs eating away at about 20 percent of a median-income family’s budget in Washington, it’s no wonder parents are desperate to find quality care they can actually afford.
What does this mean for you, as a daycare business owner? After all, you have staff members to pay and a facility to run. However, when you decide your prices, consider the average income of a typical family in your city, as well as what the average family in your area spends on childcare. This will help you set prices that are realistic for families who are looking to enroll.
Decide on Your Desired Profit
If you don’t know where you’re going, how are you going to get there? It’s important to do some digging to determine how much revenue you’re expecting your childcare business to make. It may be stating the obvious, but at the end of the day, you want to set prices that will turn a profit after all your expenses have been paid. If your rates are barely going to cover your overhead, labor, and the cost of supplies, you are putting your business in a position of trying to survive. You want to thrive.
Research can help you in this area too. Look at the average costs of running a daycare operation where you live. How much money does the average daycare director make? How much can you expect to pay your staff members? Be sure that your expectations align with the reality of your local economy.
Determine the Costs of Running Your Business
When determining the costs of running your daycare business, you’re going to want to look at three categories: overhead, labor, and supplies.
These are the expenses of running your business that are not directly related to labor or supplies. Your overhead will include things like the rent and utilities for your building, advertising and marketing, business fees and licenses, and administrative fees associated with required paperwork.
Many daycare facilities charge a one-time enrollment fee to help offset the cost of the administrative paperwork involved in enrolling a new child into their program. The more ways you can find to minimize your overhead expenses, the more you will maximize your profit.
How much will you have to pay your staff members? Simply put, these are your labor expenses. Labor rates are commonly calculated by the hour, and they take into consideration the adult-to-child ratio mandated by state regulations and your own facility’s enrollment capacity. When calculating the labor rate, you will also need to consider the cost of employee benefits and payroll taxes.
What are the costs of the materials you need to run your childcare business day-to-day? These supplies would include any furniture and equipment, educational toys and games, arts and crafts supplies, classroom décor, and food and beverages, just to name a few examples. You will need to calculate the cost of these supplies on a per-child basis, so you can include them in the rates you charge.
Together, overhead, labor, and supplies, as well as your adult-to-child ratio, will help you determine the total costs of running your business.
Once you have researched your competition, decided on your desired profit, calculated your expected expenses, and determined whether you would like to implement any additional fees, like late-payment fees and enrollment fees, you can set your tuition rates with confidence!
If you would like the reassurance of a team of financial experts guiding you through the process of setting prices that maximize your profit, contact Honest Buck Accounting today! We’ll help you implement a pricing plan that works for you.