This article appeared as "Dynamics Duo" in the Fall 2022 issue of Independent School.
The market is like Goldilocks. It decides if your price is too hot, too cold, or just right,” says Peter Porcelli Jr. in his book The Politically Incorrect Real Estate Agent Handbook: A Serious How-to Manual with a Sense of Humor.
And while the market doesn’t determine independent school tuition, it is always reacting to tuition and making judgments about it and its place in families’ discretionary income spending. Schools aren’t often fully aware of the market’s reaction to price outside of its relationship to enrollment, thinking, “If we’re full, our price (and financial aid approach) must be working.” If enrollment begins to flatten or decrease, anxiety about the market’s reaction to tuition increases.
NAIS research as well as research from Independent School Management, Measuring Success, and NBOA (“Effects of Tuition Increases on Enrollment Demand,” February 2017) have shown that there is no clear correlation between year-over-year increases in tuition and enrollment. Sometimes, in some places, there’s a connection—and sometimes in some places there isn’t. Price, in and of itself, and how it changes are not typically marketwide decision drivers, but value, quality, and differentiation perceptions are. While enrollment trends and outcomes aren’t always neatly tied to price, the degree to which price may be affecting a given market at a given time is important to assess.
School leaders might undertake such an assessment—even if the school is meeting its targeted number of enrolled students—by asking and unpacking such questions as “Is our price impacting our ability to enroll the students we want? Meet our mission? Shape the kind of community we believe is most conducive to student success? Live into our vision for the future of society?”
There are two critical dynamics school leaders must understand when assessing the impact of tuition on their market and its families’ inclination to choose an independent school: the nature of families’ ability to afford tuition and the nature of their willingness to pay the tuition that they’d be asked to pay (in full or in part).
Understanding where the market generally stands related to its perceptions of ability and willingness to pay goes hand-in-hand with evaluating and identifying a pricing and discounting strategy that will provide the revenue needed to deliver high-quality, mission-aligned programs and experiences to families.
Ability to Pay
Even if families in the market who are perfectly suited for your school and its mission strongly believe that it is of the highest quality and meets its promise of excellent outcomes, they will be unable to attend if their income and other resources are insufficient to bear what you will ask them to pay. Often, the ability-to-pay conversation in schools takes the form of “Have we priced ourselves out of the market?” without a clear way to discern the answer. How might you go about identifying the ability of your market to pay school tuition?
Compare tuition growth to the income growth of the families in your market. If a school’s tuition grows at a much greater rate than family incomes grow, the pressure to keep up with the school’s cost increases the market’s inability to pay the tuition. Over time, you can see how tuition increases at your school compare to income changes in the market. This dynamic can contribute to the trends in demand for financial aid or shifts in who is seeking or receiving financial aid.
Nationally, income and tuition data from the Census Bureau and DASL suggest that since 1990, the ability to pay at all family income levels, even the very wealthiest, has decreased. While this trend was accentuated throughout the 2000–2010 decade, it has reversed slightly by 2020. Between 1990 and 2020, inflation-adjusted independent school tuition had grown 102% while inflation-adjusted median family income had grown just 23%.
Calculate how the typical family income in your market compares to your school tuition and fees. And gauge how that ratio is changing over time; if the percentage increases, it means that ability to pay is decreasing, and price may become an increasingly important element of a decision to enroll. National income and tuition statistics show that while median day school tuition in 1990 represented 20% of median family income, that ratio shifted to 33% in 2020. In 2020, boarding school tuition was about 75% of median family income, up from about 42% in 1990.
Looking at ability to pay at the different income levels puts into stark relief how those with highest need feel the burden of price growth most severely. For example, among families in the lowest quintile of family income, median day school tuition in 2020 was about 130% of their average income, up from 71% in 1990. Among families in the highest quintile of incomes, the burden moved from about 7% in 1990 to just under 10% by 2020. For the most affluent top 5% of U.S. families, tuition in 1990 was less than 5% of their average family income and remained almost unchanged by 2020, at 5.5%. Not only does the ability to keep up with tuition growth increase as family income increases, so does schools’ ability to provide financial aid for families across the income spectrum.
Identify how much income a family needs to earn to be able to pay your tuition without financial assistance. Compare that to the percentage of families in the school’s primary drawing area who earn that much or more. Monitoring this over time, you can see if more (increasing ability to pay) or fewer (declining ability to pay) families earn enough to enroll at least one child in your school.
According to NAIS DASL, the median average tuition for all grades in day schools was $28,117 in 2021–2022. Based on a formula like the one the School and Student Services (SSS) financial aid system uses, a family of four with no net worth would have to earn about $190,350 to be considered able to pay that tuition. The $64,555 median average 7-day boarding tuition requires a family to earn nearly $310,000. According to Census Bureau data, just under 10% of households in the overall U.S. population earn $200,000 or more, leaving a small market of families able to pay the typical day or boarding tuitions. Of course, this ability-to-pay reality changes market by market, city by city. Knowing this proportion of able-to-pay families—and whether it’s growing or shrinking—will help inform decisions around price and discounting strategy.
It can be tricky to adjust price down to please or match the market; for schools, that can mean planning for smaller enrollments with more full-pay families. For some, this can limit other mission-related goals such as expanding access and opportunity for the less affluent and creating economically diverse student communities from across the spectrum of backgrounds and experiences.
Willingness to Pay
Even in markets where the ability to pay is strong, there is no guarantee that the willingness to do so is equally strong. In fact, the opposite can be true: If families in a market are affluent enough to afford a high tuition, it’s likely that they may also have access to high-quality public education options, which raises the stakes for proving the value of the independent school premium. Charging a high price just because you know there are enough families who can pay it is missing half the picture.
So how might you assess the market’s willingness to pay your tuition and gauge the dynamics of willingness?
Examine the trends of your admission demand. Pay particular attention to the long-term trends in admission applications and yield rates (the percentage of applicants that you accept for admission who also accept your offer). If these are decreasing over time, they suggest that the market’s willingness to choose your school is waning. It’s possible that price point or financial aid availability may be an element of this decision, but it’s not always the case. Even if enrollment is holding steady or growing, application demand and yield trends can signal a changing market willingness (is it harder to stay full than it used to be?).
Examine trends in attrition. This is another measure of willingness but focuses on whether your current families continue to pay your price. Those who choose to go elsewhere when they could have stayed in your school are declaring that it’s no longer worth the tuition. Unpacking what drives that decision and leveraging those findings to create specific retention strategies is key. What themes emerge and how do they shift over time? Is your attrition growing or shrinking?
Understand families’ perceptions of your value and what they think it’s worth. Whether through surveys, interviews, or a combination of the two, unpacking the stories and motivators of willingness allows you to see where your value proposition succeeds or fails. Ask families what they think and feel about your price—to what degree do they believe sacrificing to pay your tuition is worth it? What specifically stops them from deciding to pay your tuition?
Ask parents who recently enrolled (in the past year) what specifically made them willing to enroll, as well as what sacrifices they decided were worth making to pay your tuition. Ask parents who recently declined an admission offer what made them unwilling to enroll. Try to dig deeper if they give the “we couldn’t afford it” response. Ask them what they did instead, how much that costs them, and what was it that made them willing to do that instead. Even if they continue to focus on price, seek out the one or two non-price-related drivers of that choice.
Ask parents who sought financial aid but were ineligible and still enrolled. Ask them what made them willing to do it even if they questioned the affordability. Ask them how important it was to them to rearrange their priorities on household finances, what sacrifices they’re making, and why it’s important to them to do so.
It can be especially helpful to reach out to prospects who decided not to apply or not to accept an enrollment offer to understand what impacted their unwillingness to move forward. Find out where they go if they decided to go. What makes them willing to choose the alternative—and unwilling to select (or stay) with you?
Engaging in conversations with several families in each of these categories can yield themes and patterns that should illustrate a sense of how strongly people are willing to make it work to attend your school. Probing those themes and patterns by surveying broader groups of families can improve your depth of understanding.
Adding Context
When schools explore families’ attitudes and perceptions, they often tend to focus on price points—how much is too high? Too low? About right? (Remember Goldilocks?) Traditional market research that examines willingness to pay a particular price often uses tools and approaches such as the van Westendorp pricing assessment, which asks consumers a few mindset-probing questions about what price is so high that they’d no longer consider buying the product/service, and what price is so low that they begin to question the product/service’s quality. This model also probes for the point at which consumers believe the price starts to feel expensive but still worth consideration, as well as the price at which the product/service would be considered a bargain.
But when it comes to major spending decisions like school or college tuition, having only a hypothetical sense of how much families say they are willing to pay can be insufficient. What someone might say they are willing to pay on a survey is often very different from what they do pay when actually choosing a school. Infusing qualitative insights about why families are seeking an independent school for their child, such as the NAIS Jobs-To-Be-Done research on parents, will indicate how far they are willing to go on price. This sensitivity must also be overlaid with other factors such as the quantity, quality, and pricing of competitive alternatives in a given market.
For example, you might find that your middle school is priced at a point (and grows at a rate) that is bearable for enough people over time, but the willingness to pay for it is constrained by a prevailing sense that other schools have a better track record for preparing students to get into the most rigorous high schools. Even though enough families can pay your price, too few are willing to do so. Adjusting the price perception in the market in this case is more about improving perceived value than being in closer financial reach. You can do this by improving the outcomes (i.e., high school preparedness) through program innovation, sharpening marketing messages about your outcomes (i.e., our student readiness for top high schools is better than you think), or both. In this scenario, just dropping or further discounting the price alone may not be the answer to enrolling more students. A lower price or a new scholarship may not do enough to change the willingness factor if the underlying “preparedness problem” isn’t addressed in some way.
Alternatively, you might find that many families believe that your middle school does a fantastic job at preparing students for success at the best high schools, but your tuition price is simply out of reach for too many of them. In this case, you can focus your attention and effort on innovations and opportunities that will allow more students access. Decisions become more about bringing the price point down for more people in order to more fully live into the mission through greater investments in need-based aid, or perhaps actually resetting the tuition to a lower price.
With greater clarity on the willingness-vs-ability dynamics, you can determine if your market response needs to focus on addressing one element or the other. Do you need to focus on improving the market’s ability to pay your tuition or do you need to attend more to its willingness to do so?
For example, if you need to make your market more able to pay a price, then you might:
- Reduce the tuition price so that more families can become full-pay.
- Slow the rate of price growth so that more families can keep up with it.
- Extend more need-based financial aid support to bring the price closer for those who can’t pay full price—without reducing full tuition for those who are able can pay.
- Increase the value equation by offering an improved (lowered) price while keeping outcomes fairly stable (or making them better).
- Increase value by delivering improved (strengthened) outcomes while keeping price fairly stable (or lower).
- Improve awareness that what you provide is aligned to families’ core motivators (Jobs To Be Done), without changing either price or outcomes much.