pricing strategies

Diversify or decline

The Institute of North American Studies (IEN) is one of Barcelona’s oldest, largest and most prestigious language schools. The IEN started teaching English to the local population back in 1960 and since then around half a million students have passed through its classrooms. A few months ago the Director of the IEN announced that the Institute would stop teaching English at the end of the current academic year (in June) and concentrate on organising cultural events instead. This news came as something of a bombshell to the 40 or so English language teachers who were working at the school, as well as the 1,100 students still studying there. There were even articles written in the press (see for example a piece in El Periodico https://bit.ly/2DJ0tSl ) which included subheadings such as ‘Crisis in face-to-face language teaching’.

The basic reason given for the closure was that it is no longer economically viable to teach English in the school while maintaining pedagogical and other standards. Improvement in the effectiveness of language teaching in mainstream education, an increase in the number of low-cost competitors, and the rise of online language learning opportunities were all mentioned as reasons explaining the decline in the IEN’s student numbers.

To those of us working in the language teaching business in Spain this has become a familiar story (see previous post ‘Where have all the adult students gone?’ from June 2016). Of course the IEN is not the first private language school in Spain to stop teaching. Hundreds, if not thousands of schools of all shapes and sizes have come and gone over the last 50 years, including some which caused a significant amount of damage when they crashed without any warning (e.g. the Wall Street chain and its competitor clone which, ironically, was called Opening). But the IEN always seemed to be an integral part of Barcelona society. It had always been there and had always been successful. So what happened?

I don’t have any reliable inside information, but it seems fairly obvious to me that, in addition to a sharp decline in student numbers, the IEN may have suffered from an ‘all our eggs in one basket syndrome’. So when the bottom fell out of that particular basket (teaching English to the local population) there was precious little left to fall back on.   

My own approach, adopted some 20 years ago, was to diversify both in terms of product range and geographically. That meant promoting Spanish courses for foreigners alongside a wide range of in-school and off-site English courses; it meant offering an extensive range of teacher training courses; it meant operating as test centres for various exam boards; it meant having our own study abroad department; it meant doing all of the above in various different countries; it meant developing our own online learning solution. Most recently it meant investigating the possibility of offering vocational training courses that may or may not have included a language learning component. Of course the danger inherent in this approach is that you end up with too many ‘baskets’ to handle effectively (aka over-diversification) and this is something I may have been guilty of, although my counter argument would be that there is no reason why a range of ‘baskets’ can’t be distributed among a team of competent managers.

The harsh but obvious truth is that with the possible exception of Facebook, Google and Amazon, no business will last forever. The writing has been on the wall for some time for those private language schools in Spain that still rely heavily on teaching English on their own premises. But there are other options. Some of these may require a significant amount of time or investment to get off the ground, but not all of them do. To quote from a slim volume called ‘Poke the Box’ by Seth Godin: Don’t let the risks inherent in starting something new stop you from trying.

Musings on pricing

pexels-photo-259092.jpegHow much should a language course cost? Needless to say the answer will depend on all sorts of variables: how long the course lasts; whether it is face-to-face, online, or a mixture of the two; where it takes place (country, region, town/city, location); whether the teacher is professionally qualified; how many students are in the class; whether the course is a standard ‘general’ language course or something more specialised; whether materials are included in the course fee; and so on.

For the sake of argument, let’s assume we’re talking about a general, ten-week semi-intensive course which consists of 100 hours’ face-to-face tuition, given by a professional language teacher in a private language school located in the centre of a mid-size town in the south of Europe, with a maximum of 10 students in the class. How much might a course of this description cost?

An easy response would be to say: ‘as much as a typical student is prepared to pay’. But what’s a typical student? Someone who is paying for her own course or having it paid for her by her company or parents? Someone who desperately needs to take a course to pass an exam? Or someone who is studying for no obvious reason?

Again for the sake of argument, let’s assume our typical student is a young adult who wants to improve her career prospects and her ability to communicate on her travels, but doesn’t have any urgent need to demonstrate her skills and is paying for her own course. How much could she be asked to pay for the course outlined above?

Is there any way of calculating a ‘Goldilocks price’ that is not too cheap (so the school ends up losing income unnecessarily) or too expensive (so that the student is frightened away)? This ‘just right’ price should help the school generate the sort of margin it needs to provide its services now and in the future, while giving the student the sensation that she’s getting good value for money. So what? More than 500 but less than 1,500 euros? That still leaves quite a wide range of possibilities to choose from.

There are dozens of pricing strategies designed to help companies determine the price of their goods or services (see for example http://bit.ly/2owp5Wz). A couple of the most familiar are cost-plus pricing and value-based pricing.

Cost-plus pricing is relatively straightforward: first work out your direct costs (the cost of the teacher, primarily, but also such items such as photocopies for students, course-specific advertising campaigns, etc.) and divide this by the average number of students per group. Let’s assume these direct costs come to 25 euros per hour and the average number of students per group is 5. Direct costs per student hour are therefore 5 euros. Next calculate your overheads or indirect costs (which means everything that isn’t a direct cost, such as your rent, lighting, administrative staff costs, etc.) and divide this by the total number of student hours you have over a given period (could be a month, a term, or a year). Let’s assume this adds another 3 euros to the cost per student hour, making 8 euros in total. Adding a gross margin of 25% will put 2 euros onto the total cost, giving a selling price of 10 euros per hour, or 1,000 euros for the 100-hour course. Sound reasonable?

The answer to this question will most probably be: that depends how much other schools in the same location are charging for a similar course. If a local competitor has lower salary costs and/or lower overheads and/or is happy to work with a lower margin, they could be offering a very similar service for as little as 600 euros. That’s a whopping 40% less.

So should we base our prices on what our competitors are charging? Well, we should certainly know what the going market rate is. But the danger of basing our pricing on what the guys down the road are doing is that it can easily lead to a price war, or a race to the bottom, leaving margins wafer thin or non-existent, and staff feeling underpaid, unappreciated and unhappy.

An alternative to a cost-plus pricing strategy is value-based pricing. This is based on the idea that the client (student) will pay in relation to the value she obtains from the service (course) she is receiving. In the case of a 100-hour language course, the primary value will most commonly be defined in terms of how much progress she has made developing her language learning skills. That can be measured in broad terms by progress tests and/or continuous assessment, but it will probably also involve ensuring our student feels that she’s made significant progress.

Other factors that contribute value will be less obvious but may be just as important: Is she enjoying the course and enjoying interacting with her teacher and the other students? Is the learning environment clean and comfortable? Does the timetable fit easily into her other commitments? Are the reception staff efficient and welcoming? Is the school easy to get to, and/or easy to park near? Does the school offer extra-curricular services and activities such as social events or access to digital study materials outside classroom times?

The value of all these additional factors can also be measured to an extent, but in many instances it could boil down to individual attitudes or preferences. So objectifying all these values can be tricky, never mind attaching a price to them.

As we all know, perceived value can also be heavily influenced by brand recognition and advertising. Car A may be objectively better (more fuel-efficient, more reliable, more spacious, faster …) than car B, but if car B is branded Mercedes or Range Rover (for example) it is likely to command a premium price.

Building brand value is easier said than done. It requires both delivering services that are perceived to be better than average (in some significant way) and communicating these differentiating values clearly and effectively. What’s more both delivery and communication usually need to happen over a prolonged period of time. But if we’re successful at enhancing the perceived value of our brand, the price of our sample course could be closer to 1,500 than to 500 euros. And no-one will complain.