Recently, my family relocated to Navi Mumbai, and we were searching for a private school for our son. I stumbled upon a very insightful pricing scenario...
After lots of R&D, we narrowed down our search for our son's school to two, lets call these schools as ABC and XYZ. Both of these schools follow same ICSE board curriculum, are located close to each other, and are very well known for their academic results, student placements in top undergraduate programs, comparable facilities available to students (both in terms of infrastructure -- e.g. swimming pool, football and basketball courts, auditorium, AC in every classroom, etc.; and also other extra curricular programs -- e.g. dance, karate, elocution, singing, etc.), as well as quality of faculty (and I learned from an acquaintance, who is a teacher at another private school, that both these schools pay comparable salaries to its teachers.)
The difference between these schools was in their annual FEE. School ABC was charging Rs. 24,000 for an academic year, while School XYZ was charging Rs. 70,000 for an academic year. When I investigated these schools further, I learnt that School ABC was having 54 students in every classroom, while School XYZ was having 30 students in every classroom. When I triangulated the numbers, I realized that at school ABC, student to teacher ratio was 36:1, while at school XYZ it was 15:1. In every other aspect, both these schools were at par.
How much, if at all, would be a fair premium for a better student to teacher ratio?
By having a better student teacher ratio, the cost of the academic program per student at school XYZ is certainly higher. One approach to pricing can be a cost plus approach. Costs are higher, therefore higher fee. The other way would be a value driven approach. Better student to teacher ratio can be viewed from a value aspect also, and can be translated into higher average time available per student with each teacher. The perceived value of the program, due to better student to teacher ratio is higher, therefore it is ok to charge a higher fee.
It might be a bit difficulty to quantify the differences in the delivered value at the two programs, but there seems to be a much stronger perceived value differentiation. As a result of which, different profile of customers will be attracted to the two programs, which is what I found at these schools as well. I also noticed that School XYZ was further highlighting the better student to teacher ratio in other aspects of school operations as well -- more space in canteen for students, spacious classroom with wider desks, larger closets for students to keep their belongings, etc.
If we do a little arithmetic, we will notice that School XYZ was actually making higher contribution margins vs. School ABC, as can be seen below (assuming all infrastructure and facilities charges are sunk costs):
School ABC
Number of students per class = 54
Number of division per class: 3
Number of classes (Junior Kindergarten to Class X): 12
Total number of students (N) = 54*3*12 = 1944
Number of teachers (T) = 54
Student to teacher ratio = 36 : 1
Average tuition fee (F) = Rs. 24,000
Annual gross revenue (A = F*N) = Rs. 46,656,000
Average teacher salary (B) = Rs. 4,00,000
Contribution margin (C = A - B*T) = 25,056,000
School XYZ
Number of students per class = 30
Number of division per class: 2
Number of classes (Junior Kindergarten to Class X): 12
Total number of students (N) = 30*2*12 = 720
Number of teachers (T) = 48
Student to teacher ratio = 15 : 1
Average tuition fee (F) = Rs. 70,000
Annual gross revenue (A = F*N) = Rs. 50,400,000
Average teacher salary (B) = Rs. 5,00,000
Contribution margin (C = A - B*T) = 26,400,000
Does it mean that School ABC is undercharging and it will be better off if it started charging Rs. 70,000 per student per year. I think the answer is NO. In this scenario, School XYZ positioned itself for high willingness to pay parents, and it turns out to be the case that there were just the right number of parents in the neighborhood that were capable of paying the higher fee and appreciate better student to teacher ratio. If the supply of seats at higher price programs increases, it will lead to a mismatch with demand. Such situations are not sustainable. There are sufficient number of parents who can only afford lower prices for school programs and there are enough of those to fill up all the seats available at ABC. A Robust pricing strategy integrates Prospecting, Positioning, Pricing. There are no magic optimal price numbers!
After lots of R&D, we narrowed down our search for our son's school to two, lets call these schools as ABC and XYZ. Both of these schools follow same ICSE board curriculum, are located close to each other, and are very well known for their academic results, student placements in top undergraduate programs, comparable facilities available to students (both in terms of infrastructure -- e.g. swimming pool, football and basketball courts, auditorium, AC in every classroom, etc.; and also other extra curricular programs -- e.g. dance, karate, elocution, singing, etc.), as well as quality of faculty (and I learned from an acquaintance, who is a teacher at another private school, that both these schools pay comparable salaries to its teachers.)
The difference between these schools was in their annual FEE. School ABC was charging Rs. 24,000 for an academic year, while School XYZ was charging Rs. 70,000 for an academic year. When I investigated these schools further, I learnt that School ABC was having 54 students in every classroom, while School XYZ was having 30 students in every classroom. When I triangulated the numbers, I realized that at school ABC, student to teacher ratio was 36:1, while at school XYZ it was 15:1. In every other aspect, both these schools were at par.
How much, if at all, would be a fair premium for a better student to teacher ratio?
By having a better student teacher ratio, the cost of the academic program per student at school XYZ is certainly higher. One approach to pricing can be a cost plus approach. Costs are higher, therefore higher fee. The other way would be a value driven approach. Better student to teacher ratio can be viewed from a value aspect also, and can be translated into higher average time available per student with each teacher. The perceived value of the program, due to better student to teacher ratio is higher, therefore it is ok to charge a higher fee.
It might be a bit difficulty to quantify the differences in the delivered value at the two programs, but there seems to be a much stronger perceived value differentiation. As a result of which, different profile of customers will be attracted to the two programs, which is what I found at these schools as well. I also noticed that School XYZ was further highlighting the better student to teacher ratio in other aspects of school operations as well -- more space in canteen for students, spacious classroom with wider desks, larger closets for students to keep their belongings, etc.
If we do a little arithmetic, we will notice that School XYZ was actually making higher contribution margins vs. School ABC, as can be seen below (assuming all infrastructure and facilities charges are sunk costs):
School ABC
Number of students per class = 54
Number of division per class: 3
Number of classes (Junior Kindergarten to Class X): 12
Total number of students (N) = 54*3*12 = 1944
Number of teachers (T) = 54
Student to teacher ratio = 36 : 1
Average tuition fee (F) = Rs. 24,000
Annual gross revenue (A = F*N) = Rs. 46,656,000
Average teacher salary (B) = Rs. 4,00,000
Contribution margin (C = A - B*T) = 25,056,000
School XYZ
Number of students per class = 30
Number of division per class: 2
Number of classes (Junior Kindergarten to Class X): 12
Total number of students (N) = 30*2*12 = 720
Number of teachers (T) = 48
Student to teacher ratio = 15 : 1
Average tuition fee (F) = Rs. 70,000
Annual gross revenue (A = F*N) = Rs. 50,400,000
Average teacher salary (B) = Rs. 5,00,000
Contribution margin (C = A - B*T) = 26,400,000
Does it mean that School ABC is undercharging and it will be better off if it started charging Rs. 70,000 per student per year. I think the answer is NO. In this scenario, School XYZ positioned itself for high willingness to pay parents, and it turns out to be the case that there were just the right number of parents in the neighborhood that were capable of paying the higher fee and appreciate better student to teacher ratio. If the supply of seats at higher price programs increases, it will lead to a mismatch with demand. Such situations are not sustainable. There are sufficient number of parents who can only afford lower prices for school programs and there are enough of those to fill up all the seats available at ABC. A Robust pricing strategy integrates Prospecting, Positioning, Pricing. There are no magic optimal price numbers!
