The issue of fee elasticity is more relevant now than ever. Independent schools up and down the country face a difficult time economically in the months and years ahead. Soaring energy costs, teachers’ pensions, the contracting of the market and the very real prospect of the loss of charity status. These all threaten to cause serious damage to the bottom line.
Rightly so, many independent schools attempted to keep fee rises to a minimum during the pandemic. The ISC census found that their schools had an annual average increase of just 3 per cent in 2020. This was the second lowest in two decades, followed by a similarly low fee increase in 2021. On top of this, fee discounts were provided to parents to compensate them for the time that lockdowns prevented their children attending school. The amount of means-tested fee assistance provided by ISC schools to their parents also rose to a total of £480million.
Not surprisingly, many schools are now looking to an increase in fees as a method of generating more revenue and to deal with their on-going soaring costs. But there is of course a fine line to tread between generating more revenue through a fee increase and exceeding current and prospective parents’ ability to invest in an independent education. As we have heard so much of over recent weeks, the cost-of-living crisis will hit families hard. Average energy bills set to exceed £5,000 from April, inflation is already at 10.1% and the prospect of VAT raises the cost of an independent education before any fee increase. So just how much is too much when it comes to school fees?
MTM Consulting and Fee Elasticity
With this in mind, MTM Consulting have been commissioned by a number of schools to look at the issue of fee elasticity within their market. Put quite simply, fee elasticity of demand is a measurement of the change in the consumption and uptake of your product (the education offered) in relation to a change in its price (the fees set). Knowing the elasticity of course allows you to make informed, evidence-based decisions. It is an essential metric to which Heads, Bursars and Governors should be referring when it comes to setting their school’s fee strategy.
Research carried out by MTM Consulting for one UK based boarding school demonstrated a clear correlation between the fees increasing faster than the average disposable income and the number of UK boarders decreasing. This was unsurprising considering boarding fees have increased from 25% of average disposable income in 1984 to 57% of disposable income in 2018. However, our analysts were also able to identify the specific range through which the school in question could expect fee increases to result in a drop in the number of boarders. More importantly, they identified the point at which their product became inelastic and resulted in numbers holding steady despite fee increases.
As part of this research, we also found evidence of British schools as a Veblen good for international families i.e., the more the price increases the more attractive it becomes. However, the challenges of recruiting international families, particularly post-covid, and the cost of agents also has significant impact here.
There are of course several factors, other than the political landscape in which we are operating, that will have an impact on your fee elasticity. We’ve touched on some of these below, but many will be particular to your local area and market, which is why an analysis and report specifically carried out for your school can reveal some interesting observations.
Availability of alternative schools
The more alternative education institutions there are in your catchment area, the bigger an impact a fee increase may have on numbers within the school. For example, factors such as new, highly anticipated academies opening in a key catchment area or other independent schools keeping their fees at a lower level all increase the fee elasticity. As the fees in one school go up, the availability of suitable alternatives will see their demand fall.
Duration of Fee Change
The length of time that the fee increase continues also matters. We know that parents don’t buy into independent education for the short-term. While we do of course see parents saving for key stages of their children’s education, for example the final two years of an independent Sixth Form education, these are in the minority of independent families. Parents will want to know that they can afford the school fees long term. At present that involves calculating that fees will continue to rise faster than wages and continue the upward trajectory of placing increasing demands on their disposable income.
Income
The income level within your local area will also influence the demand elasticity. The decline in annual incomes for much of the population may well cause independent education to become more elastic as parents decide to save their money rather than commit to a long term non-essential investment.
Next steps:
- If you are considering raising your school fees but have not yet considered the issue of fee elasticity, stop and take a pause!
- If you aren’t fully aware of how your families will react, you are putting your school at greater risk. On the other hand, by understanding your families and their reactions, you are better able to predict revenue outcomes and future proof your school.
- To gain a full understanding of the potential impact of significant fee rises on your market, get in touch with Dan on 01502 722787 who will talk you through how MTM Consulting can help, take a look at our product page or book on to our 2023 Fee Elasticity webinar.