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by D. Scott Looney
The Business My Summer 2014 Review article “The Future for Education: Why Hawken Has to Lead� underscored the urgent need for schools to shift from an industrialized model of education to a more progressive form of education. In the following article, I take a look at the business side of the equation.
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of Education by D. Scott Looney The rise of innovation and disruptors in our burgeoning information-based culture have dramatically changed the way we live and work; technology and globalization, the driving forces behind this shift, have rendered the industrial-based educational model completely outdated and ineffective. And yet, amidst this sea of cultural change, schools have remained relatively fixed in their approaches, stuck in old behaviors and outmoded approaches. The result is that students are – and will increasingly become – unprepared for a world that demands new approaches, mindsets and skills. The abundance of research on brain science in recent decades has provided further validation for a more progressive kind of education – the kind espoused by John Dewey and Maria Montessori over a century ago.
Independent schools like Hawken, I concluded, are uniquely positioned to take the lead in fixing what is wrong with education today. Yet, ironically, it is our very culture of innovation, technology and the rising rate of marketplace competition that is threatening the very existence of independent schools. Why? Because the way we educate our children is not the only thing that is broken in our system. Our business model is also broken. In this follow-up article, I address that threat, and assert that if we remain smart, courageous and principled, we will emerge even stronger as a result.
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The problem facing tuition-charging schools Education done well is not designed to be efficient, and inefficient systems tend to be expensive, requiring more space, programming, teachers, time and resources. As a result, even as schools go about the business of fixing what is wrong with the way we educate our children, they are running the risk of getting priced out of the market. A quick glance at the cost of a private education shows clearly that the rate of tuition at schools and colleges has far outpaced the rate of inflation. How did this hyperinflation happen? The answer begins with a look at the client base, particularly at elite private schools, where a sizeable proportion of customers fall in the top 1% of income earners. The baseline expectation of that top 1% – most of whom don’t consider cost an issue of primary concern – puts no small amount of pressure on schools and colleges to provide a luxury product. Meanwhile, the largest available customer base – the other 99% – may seek some luxury, but they also want value. They know they can’t afford the best, but they want something that comes close. They also want to pay a fair price for it. This creates a problem for schools. Whose lead do they follow – the “luxury customers” or the “value customers”? Because schools rely on both types to sustain their business model, it is important that the needs and expectations of both groups are met. And so to avoid extraordinary risk, tuition-charging institutions continue to incrementally increase their price year after year, offering discounts (financial aid, merit aid and tuition remission for faculty and staff ) to those who cannot afford the high sticker price. While tuition discounting is effective for providing socioeconomic diversity and maintaining the overall enrollment, it does nothing to address the hyper inflating list price.
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While many families understand that widespread availability of need-based aid for college and universities, they are less aware of possible tuition discounts available at private schools, so they see the very high list price on the private school website and walk away. Inquiries (those people who contact admission offices) have dropped notably for nearly all private schools over the last ten years. The list price is just too scary. Without enough inquiries (shoppers), private schools will be in dire straits.
Competing models of education Competition in education is nothing new. It is, in fact, what has kept independent schools thriving since their inception. Public schools have historically been the go-to option for families, but dissatisfaction with the public option has led many to seek out alternatives – primarily independent and parochial schools. These options served our communities well for more than a century, but, over time, new options have emerged in the market to meet the changing needs of families and society. All but the most upscale suburban public schools have fallen short of expectations; parochial schools increasingly have limited appeal as society becomes more secular; and independent schools have grown increasingly and prohibitively expensive. These challenges have prompted the rise of additional alternatives: public magnet schools in the 70s; the rise of home schooling in the 80s; and the growth of online and public charter schools in the 90s and 2000s.1 To underscore the extent to which things have changed, consider the multitude of options available today in the educational marketplace, many of which have launched since the start of the new millennium and are on a fast
growth curve. In addition to public, independent and parochial options are a host of new, lower cost competitors that include for-profit schools, charter schools and a la carte enrichment services. As Executive Director of Secondary School Admission Test Board (SSATB) Heather Hoerle noted in Sizing up the Competition: Exploring Educational Choice in Today’s Independent School Market, “There is an explosion of school choice across the country and the world – and it is not just home schooling and back-to-basics charters any more. New for-profit school types – well-financed by private equity – are coming into both the public and private school markets, determined to lure the most discriminating families by competing in the very domains that have long seemed independent school strengths: academic excellence, progressive learning environments, personalized attention and more.” 2
“Schools that don’t astutely anticipate and plan for the impacts of demographic shifts, disruptive wars, economic downturns, cultural sea changes, and technological revolutions are more likely to be sabotaged by them than to benefit from them.” Jim McManus Executive Director of the California Association of Independent Schools 5
Let’s take a look at these alternative school models: Charter Schools Charter schools are predominantly an alternative to low-performing public schools or low-cost parochial schools. They are typically academically rigorous and serve students from disadvantaged backgrounds and compete to surpass the best academic programs in their regions, often outperforming many of their counterparts in testing. Some of these schools are part of larger charter school networks that have national reach. Examples include KIPP, DLN, Success for All, High Tech High, Yes Prep and the Uncommon School Network. These charter schools resemble public schools in terms of their business model, but they have more independence when it comes to decision-making; they are not part of a district and they have no superintendent. While they must take the same state and district-mandated tests, they have more choice with regard to curricular approaches. Charter schools do not typically draw students away much from independent schools. But it is worth noting that in 2012-2013, they accounted for 6.3% of public schools – a huge growth from their
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inception in 1992.3 And they continue to grow. It is also important to point out that there is notable growth in high performing charter schools moving into affluent school districts. Many of these schools follow a curricular model that looks very similar to independent schools. One such school, the International Academy in Bloomfield Hills, MI, has been rated as one of the top high schools in the country by US News and World Report and is regularly competing for students with the private schools outside of Detroit. While charter schools are publicly funded, there are downsides to this option: Admission is by lottery, and it is a basic, no frills model. They offer little in the way of athletics, arts, music, special programming and mentorship from coaches, counselors and administrators.
For-Profit Schools For-profit schools leverage what they learn from traditional independent schools, charter schools and startup companies to deliver their mission. Their business model provides them with a healthy profit margin because they are able to save costs by capitalizing on technology; centralized administration, marketing and development services; standardized curriculum and assessment; and low-cost facilities. In the case of online, for-profit schools, facilities are obviously not required, providing additional savings. Examples of for-profit, corporately owned schools include AltSchools, Fusion Academy and BASIS Independent Schools. In many cases, families would not even know that these schools are for-profit entities because they market themselves in the same way that private, independent schools do. But they have proven to be quite lucrative businesses.
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Micro-Schools Many, but not all, for-profit schools fall under the micro-school category, a new school model that has emerged in the marketplace over the last ten years in response to parental dissatisfaction with the status quo in public, parochial and independent schools. Micro-schools focus on finding innovative, low-cost options of achieving student success. Because they offer flexibility in both pricing and scheduling, they are becoming an increasingly attractive option to parents. Pricing is based on a sliding scale, and parents can select a basic or premium model or something in between. They are able to cut costs by utilizing smaller, less expensive physical plants, few administrators, few or no extracurricular programs, no lunch program, vertical integration of all school functions, flexible scheduling and programming and centralized curriculum development. The concept has become so popular that even independent schools are beginning to consider establishing non-profit micro-schools under their brand in order to increase accessibility to their educational missions. Lakeside School, a high-achieving independent school in Seattle, is currently exploring this idea in earnest. In doing so, they are hoping not only to increase accessibility to excellence in education, but also to minimize their competition. As Kyle Booth, acting Head of School at Lakeside notes, the school’s plan is “to provide an excellent academic education; build a community with strong student-teacher and student-student relationships; and realize cost savings by using space in creative ways and having teachers take on administrative roles.�
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Online Schools Online schools, both non-profit and for-profit, have been gaining in popularity due to their flexibility, affordability and personalization. Enrollment in these schools can be part or full time, and enrollment has increased dramatically in recent years. The approach is bare-bones, with most families outsourcing “extras.” Some examples of online schools include Global Online Academy, Online School for Girls, BlendEd, Visnet and Stanford Online School.
Enrichment Services These enrichment services offer a la carte options so that parents can customize and optimize their child’s learning experience. They are typically for-profit entities and include companies like Kumon, Kaplan and Tabtor. Many families who home school their children opt to use these enrichment services.
Home Schools Home schooling has also increased dramatically in recent years, and not just among religious conservatives. Many parents see this as a viable option enabling them to design an educational experience that draws on the support of the home schooling network combined with online and/or a la carte offerings in their community.
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Comparing business models Comparing the varying business models that many of these schools espouse underscores the disparity among schools with regard to the dollars invested in each child. The chart below highlights a simple but significant point: Independent schools spend more than they cost; the other models cost more than they spend. There is both good and bad news in this data. Simple logic dictates that because independent schools spend more than they cost, they provide a better product and value. The downside? They remain prohibitively expensive for many consumers. There have been many surveys done asking families which type of school they would send their child to “if the cost of the school were not a consideration,� and private independent schools are always the most popular choice. It is not that the market place doubts the excellence of schools like Hawken, but they appear to be doubting the value of the benefits for the cost. As these new school type options become increasingly part of the educational landscape, independent schools, by
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and large, have ignored them‌relying on their historically strong reputations. And that worked for a time, because the alternatives, as small startup ventures, did not pose any real threat. Families who could afford the tuition or who received adequate discounting continued to pursue independent schools because they maintained a stronghold in their niche, and enrollments remained strong and steady. But times have changed, and increasing shrewdness on the part of consumers, combined with the rise of innovative entrepreneurs, drove the inception of new, for-profit educational business models that can no longer be ignored.
How serious is the threat? Consumers today are savvier than ever before, particularly given the plethora of alternatives available to them. Presented with options, most of these consumers weigh the value proposition before making a decision. Consider the choices: Taxi cab or Uber? AirBnB or traditional hotel? Amazon Prime or a trip to the mall? These examples highlight the fact that getting too comfortable with a traditionally successful business model can become risky business. Look at what has happened to so many brick and mortar stores – to companies like Kodak and Polaroid – in this age of information technology. They failed to adequately compete in the marketplace and, as a result, went out of business, had to reinvent themselves or became a much smaller entity. The same thing could happen to independent schools that choose to ignore the rising competition. It will only be a matter of time before they are replaced by schools that offer something comparable for a better price or for more convenience. The new, for-profit schools are not trying to make the case that they provide a better education than a school like Hawken; they are making the case that they provide 80% of the value for 50% of the expense. They are making a “value” argument. As independent schools face increasingly greater competition while continuing to increase their price, they will be forced to re-evaluate their business model or lose market share to those schools competing on value.
Even without the emergence of competing models, hyperinflation increasingly prompts families to weigh the value proposition of an independent education. When faced with the options of a parochial school versus an independent school like Hawken, for example, they might acknowledge that Hawken offers a superior product. And while they might be willing to pay more for that product, there are limits as to how much more. Many consumers conclude that the difference in quality isn’t enough to make up for the massive difference in price – even with potential discounts. Besides, they reason, why dangle the carrot of a Hawken education in front of your child if (after a long and arduous process of admission and financial aid hurdles) there is still a possibility that in the end the carrot is still out of reach? Thus it’s clear that the changing face of the modern consumer, coupled with the perpetuation of an outdated business model, translates to a decline in non-luxury customers for independent schools and colleges. The reality that fewer and fewer families are able or willing to pay the ever-increasing price tag of independent schools poses a significant threat to their viability.
“Learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow.” William Pollard Physicist, Executive Director of Oak Ridge Institute of Nuclear Studies (1946-1974)
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The appeal and success of alternative models Enter the entrepreneurial mindset embraced by tech-savvy start-ups, who have duly noted this gap in the market between excellence in education and families who are willing or able to afford that education. True to their enterprising spirit, they seized the opportunity to solve the problem by attempting to deliver the results parents wanted for less money. Their plan of action was quite simple: Using a new and different for-profit business model, they first compete on value by replicating what independent schools do well and by leveraging technology to more efficiently implement personalized education; and second, they rely heavily on venture capitalists for funding, thereby cutting tuition rates. To further enhance their appeal, many of these for-profit enterprises don’t have an admission process and don’t offer aid. When combined with the significantly lower price tag, it makes them a straightforward purchasing decision for consumers. Many of the new schools emerging in the marketplace are succeeding in their mission of providing a strong education at a lower price point; they are fulfilling a need and expanding their reach. And they do well in some areas that parents care a lot about: academic acceleration and personalization. In short, they have proven that inefficient education doesn’t really have to be all that expensive if approached in innovative ways, including leveraging technology and centralizing administrative and curriculum development functions. Examples include Altschool – a “chain” of schools that is making a name for itself in prominent cities across the nation – and High Tech High – a charter school in San Diego that does an impressive job educating students for about $9,000 each (less than the national average). Although these schools may not have a varsity football team, many customers don’t care so much about that, especially after weighing the value proposition. Class sizes are no doubt larger, but they seem to have found
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ways to manage that thoughtfully and effectively. These new schools have performed so well, in fact, that in certain areas of the country they are significantly ramping up the competition for independent schools.
“It may be hard for an egg to turn into a bird: it would be a jolly sight harder for it to learn to fly while remaining an egg. We are like eggs at present. And you cannot go on indefinitely being just an ordinary, decent egg. We must be hatched or go bad.” C. S. Lewis Novelist, Essayist, Lecturer
The start-up advantage Because start-up, for-profit schools don’t feel the need to compete with the likes of Andover and Exeter and Harvard, they have the “luxury” of creating a value proposition that is truly a value. They do not even attempt to meet the expectations of the “luxury” customer. Independent schools and colleges, on the other hand, are creating a luxury proposition. Creating a true value argument would require restructuring our entire approach, which would require a drastic shift in our historic branding position and become a violation of promises made to existing and previous customers. Not only would class sizes go up and other services (like the wide range of available extracurriculars) decline, but access would be severely limited. Movement in this direction carries a high risk, so independent schools continue to succumb to increasing pressure to create more and more high quality, but expensive, services to make our luxury customers happy. In the meantime, we are increasingly alienating today’s more value-conscious consumers, who write us off as inaccessible and therefore go elsewhere.
Many schools will continue to play the luxury service game until it is no longer sustainable, and then they will either become much smaller, be forced to reinvent themselves or go out of business. Independent schools need to keep a close eye on our competition and to learn from them. If we don’t, all but the wealthiest, most heavily endowed schools will eventually suffer mightily. The competition, lucrative and competent as it is, is clearly not going away.
“If a man empties his purse into his head, no one can take it from him. An investment in knowledge always pays the highest return.” Jean Piaget Psychologist and Child Development Expert 13
Competing in the new market The question then becomes: How should independent schools respond in order to compete, survive and excel? Above all, independent schools must respond thoughtfully and strategically. They have to ensure through every means available that they remain at the top of their game when it comes to delivering on their educational mission and managing and rethinking finances and revenue.
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That means learning from the competition just as the competition has learned from them. As Heather Hoerle (SSATB) explains, this new competition exploits technology in “intriguing and powerful ways, leverages private capital in a manner not seen before, and stands on the shoulders of the maturing charter school movement…. They compete by going head-to-head with independent schools in their traditional areas of strength” – and by offering a lower price point.4 It is time, then, for independent institutions to consider how they might compete in these new schools’ areas of strength. What can we learn from these for-profit, start-up schools that are offering such an attractive value proposition for many of today’s consumers? For starters, we ironically need to consider more efficient approaches – not ones that take us back to the industrialized approach to education, but rather ones that enhance the quality and personalization of the education and that cut costs without reducing quality. These new models utilize the following, among others, to fulfill their educational and financial missions:
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Teachers to provide certain administrative functions, thus reducing administrative costs and increasing teacher compensation. Technology that is used to deliver individualized personalization and differentiated instruction. Creative use of space that allows for large class sizes without sacrificing personalization. Economies of scale that enable efficient centralization of functions such as curriculum development, faculty development and administrative functions.
What would it mean for independent institutions to go head-to-head on these and other innovative approaches? And how could we do it better? For independent schools to think that they can compete only on luxury is a fool’s errand. They need to plan creatively, finding innovative ways to keep tuition from continuing to skyrocket, and they need to keep up with their competitors in the market. What does fiscal innovation look like? How can we reassess our value proposition in this new market and make it unique while strengthening our mission and our brand? These are the questions we need to consider to help guide us in the 21st century.
Beyond complacency: The saving grace of competition The beauty of competition is that it inevitably creates a better product, and so it is with schools. It’s easy for traditional independent schools to remain complacent, relying on past successes and achievements when their existence is not threatened. But given the unsustainability of the current business model in these times, independent schools will ultimately be forced out of their comfort zone to re-examine and re-think their approach to education and financial viability. And that is a good thing.
As I’ve said before, education is broken, and we are more determined than ever to fix it. There is more work to be done, but as long as we don’t allow ourselves to get stuck in the past as the rest of the world passes us by, we will continue not only to thrive, but to get better and stronger, fulfilling our mission of developing both character and intellect in the students we serve.
D. Scott Looney was named Hawken’s 10th Head of School in 2006. A DePauw University graduate and an influential voice in the independent school arena, he earned his master’s degree from Northwestern University. Scott is a former trustee and former executive committee member of the National Association of Independent Schools, a trustee of the Global Online Academy, and was formerly a trustee of the Ohio Association of Independent Schools. He has served on the faculty of the NAIS New Heads Institute, the NAIS Financing Institute Faculty and the Crows Nest Institute for Enrollment Management. He is also a former Executive Director of the Midwest Boarding Schools Association. He is a published author and frequent lecturer on the affordability and demographic challenges that face today’s independent schools. Scott and his wife Leslie Short have three sons. Zach ’17 currently attends Hawken and their two older sons, Tyler ’15 and Ryan ’12, are Hawken graduates.
Endnotes:
1. Heather Hoerle, “Sizing Up the Competition: Exploring Educational Choice in Today’s Market,” Secondary School Admission Test Board (2015), accessed May 10, 2016. https://admission.org/competition, 4. 2. Hoerle, “Sizing Up the Competition,” 27. 3. Hoerle, “Sizing Up the Competition,” 4. 4. Hoerle, “Sizing Up the Competition,” 5.
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