Where now for school fees?

An understanding of your school’s market, by comparing what has happened in the past with what is likely to happen in the future, is critical to discharging your fiduciary duty. Jean-Marc Hodgkin reports on a new approach

As a school leader, you should be able to answer the following questions:
• what is the market size for my product?
• what is the aspirational demand for my product?
• what is the demand for my product and what prevents it from reaching its potential?
• have I priced my product correctly? and
• how do I know the answers to the above?

Aspirations are high
Aspirational demand for independent schooling is on the increase. In 2005, the Sunday Times commissioned a survey that concluded that 52 per cent of households would purchase independent education if they could afford it; by 2007, that figure had increased to 57 per cent. This suggests that there is strong attraction to the market.

If almost 60 per cent of households would like to buy independent education, why do we only educate 6.3 per cent of the market? One answer might be that the supply-side of the equation is full: that is, there are no more places available. However, we know that this is not the case.

On the demand side, is there evidence that pricing has pushed independent schools out of the reach of many households? The traditional approach in pricing methodology is to research the price elasticity of demand, which is:

per cent change in demand
per cent change in price

In 2008, the ISC undertook research that broadly concluded that, over the past decade, there was little evidence that a change in price reduced demand. There were, however, early indicators of cross elasticity of demand: increases in boarding costs were starting to push parents towards the cheaper day option, thereby changing the overall product mix.

Is past performance a guide to future performance?
There are two aspects to this: firstly, we need to understand the question of affordability and how households fund independent schooling and, secondly, we need to take a view on what the next decade will bring economically and politically. Considering the second question first, it’s easy to see how the next decade is likely to pan out. The UK in deep recession:
• quantitative easing policy not yet having the desired effect;
• housing market crash and lending at a standstill;
• £700 billion of borrowing planned by the Government over the next five years;
• estimates of 30 to 40 years to get borrowing back down to below 40 per cent of GDP (as in 2007);
• tax increases already evident (50 per cent band, loss of personal allowances, pension reforms);
• unemployment rates heading towards 8 per cent; and
• the worst may be yet to come: post- election, the new Government will need to start repaying the deficit.

The cost
Over the past decade, taking the compound effect of these increases, while wages have gone up by 50 per cent, independent school fees have doubled. Yet the ISC’s research into price elasticity of demand suggests that, up until now, independent school fees are broadly inelastic. If this is true, we need to understand how households are funding this cost.

The main methods of funding independent education have been: income, savings, house equity and gifts/grandparents/inheritance. With the recession having reduced the value of investments, pensions and property, the reliance on funding independent education from earned income is crucial. A review of past performance yields clues to how the market has remained buoyant and what the impact may be in the next decade.

Profession and earnings
If we hypothesise that to purchase independent education out of earned income, you will be an above-average wage earner, earning at least the average wage with which to run your household, plus marginal additional income on top of the average wage with which to fund on average 1.7 places per household.

From the Government’s annual survey of hours and earnings (ASHE), those who earned £37,500 or greater was compared to those in 2009, that earned £65,000 or greater. In addition to the traditional top-earners, most mid-ranking white-collar managers could afford independent education from a single salary by making appropriate financial adjustments to their households.

By 2009, the position is different, with only the top few financial, City and medical professionals being able to afford independent education from a single salary. In addition, the startling fact is that the market for single earners has shrunk by more than 60 per cent from 1.1 million to around 400,000 jobs. Until now, price elasticity of demand has remained constant over the past decade. This can be explained predominantly by the shift from single to dual earners to top up the household income from the £50k 2009 salary for a middle manager to the £65k+ required to fund independent education.

What about the next decade?
If independent schools continue to increase their fees by twice the rate of wage inflation over the next decade, it is likely that household incomes in excess of £125k per annum will be required to fund independent education. In addition, those households with middle managers who can only afford this product through the support of a second household wage will increasingly require both earners to earn significantly above the average wage. This may lead to a fall in demand.

The most important issue facing independent schools over the next five to ten years is affordability. On current trends, with the prevailing economic outlook, it is almost certain that it will decline: many inside and outside the sector perceive that fee rises are already too high and that there are early warning signs that an affordability threshold has already been passed. In the last five years, independent school numbers have not kept pace with the growth in the number of children with parents in managerial and professional roles and, furthermore, pupil numbers in the south-east have declined. Cost-cutting will be the primary tool for schools in a time of declining affordability. Federating with other schools or groups of schools will be an important medium-term option.

Adopting a niche positioning strategy will also help with declining affordability. However, it is clear that for many schools any increase in fees above that of wage inflation over the next decade is likely to result in a shrinking school roll, leading to closures in the longer term.

Jean-Marc Hodgkin is bursar at Dame Alice Harpur School.

Return to Fees Management