Feb 7, 2024
Why the Private Education Sector is Struggling
The private education sector is struggling. You might not experience it directly at your school or college, but there are signs all around us that private education is, yet again, at another inflection point. The writing is on the wall, from softening demand, college closures and school consolidations.
Private education has dodged many a bullet in the past. Yet, it has sustained itself during some of the toughest of conditions, including economic downturns and pandemics. However, I am afraid that the industry will not be able to overcome looming challenges unless some real structural change takes place in the future. Schools and colleges will need to be much more creative and innovative in how they deliver their programs.
When I reference private education, I want to be clear: I mean tuition-charging schools and colleges that are — at some level — independent. These are the schools and colleges that possess the ability to choose their own mission, programs and students.
Private schools know that their business model is broken and unsustainable. For at least two decades, I have watched speakers at professional development conferences assert as much. They know that they must change. But, save for a handful of exemplars, the industry remains stagnant in their business model, failing to solve the structural challenges that have plagued it for decades.
Private schools and colleges follow business practices that literally threaten their existence and, as a result, struggle with a relevant marketshare . Did you know that private schools in America serve roughly 9.6% of the available school age children in a given metro area? And, even more shocking, independent schools serve roughly 1% of school age children in America. Most people are surprised to learn that independent schools barely scratch the surface of marketplace penetration.
Consider some of the fundamentals of the independent school business model and see if you can make sense of it:
- Price: Independent schools price themselves at the highest price point in the market where a tiny fraction of their metro area can afford them, therefore placing severe limitations on their marketplace.
- Admissions: They also attempt to follow selective admissions, seeking to choose their students from narrow entrance requirements, placing yet another limitation on their potential available market.
- Marketing: They place undue pressure on their advancement and strategic enrollment management people to find “more full pay families”, building aggressive marketing campaigns to sustain their operations. Heck, there are even professional development seminars aimed at finding more full pay families. That, alone, should tell you that a market correction is on the horizon.
- Reserves: While fewer than a handful possess endowments that actually spin off legitimate earnings to subsidize operations, most of these schools believe that building a large endowment is both likely in their future and is the key to their financial sustainability. And, many of these schools are nearly a century old and they still don’t possess a legitimate source of financial reserves.
- Diversity: Even though they have severely limited their potential enrollment down to 1% or less of the school age children marketplace, they then try to thread the needle by trying to acquire more diversity in their enrollment. It is hard to build student and faculty enrollment and workforce composition like the rest of the world around you when you only serve 1% of the marketplace. Our firm is deeply committed to the growing access to these schools. However, we know from lived experience that their lack of diversity is a result of their failed financial model rather than cultural barriers.
It is an insane business model, where price goes up, enrollment goes down, and, most importantly, the overall relevance of the industry is severely limited. Honestly, how can you have a significant impact on the world through your products and services — and even claim to be somewhat diverse — by serving 1% of a marketplace? I used to call independent schools the “Swiss watch” of the education industry until I learned that Swiss watches serve, as a cohort, a larger segment of their industry than independent schools.
I used to be concerned that we have too many private schools in mid-sized to large markets that are trying to do the same thing and competing for the same, full pay families. That was five years ago. Now, I have a different worry.
Independent schools – and all of the high tuition, small enrollment schools and colleges out there trying to live in that limited space – are on a path to irrelevance and extinction if they don’t get creative.
And, with all of these market issues plaguing private education, let’s remember that there are other adjacent issues muddying the picture, too. What education will look like in the future will dramatically shift in the next decade. There are at least four major issues facing the future of education beyond the marketplace:
- Use of time and space. The pandemic taught us that we could work and learn when and where we want. And, while the future of this trend is still getting sorted out, the future of learning will be real-time, anywhere and everywhere. The agricultural-era linear, daily schedule that runs on one school or college campus from 8 am to 3 pm will likely not hold a monopoly for the future. Customers will demand a better, more flexible and more relevant canvas for learning, whether it be online or in the mountains.
- Measuring learning. The entire system of assessment – which includes accreditation – is at a fundamental tipping point. There has been — and will continue to be — an industry-wide challenge to how we measure true learning. There are many new solutions to this challenge, from a renovated transcript, to non-standardized testing, to project-based and portfolio learning. The reality is that the Carnegie unit model of seat time in class will not be with us too much longer.
- Role of education. There is a societal shift taking place about the overall role of education in one’s life. Just read the news and talk to a few people who have headed the advice of some entrepreneurs to take a gap year or avoid going to college. The general role of education in society is shifting and, over time, it will evolve into a new model.
- Talent sourcing. There is a shortage of keen, available teachers and educational leaders in North America, as well as around the globe. The pandemic left a lot of educators exhausted, ready for retirement and depleted of energy from emerging talent. It will take at least another decade to build and source the next generation of faculty and leaders for these schools and colleges.
The late management guru Peter Drucker reminded schools that they live and operate in the non-profit space. The mission of non-profits is transformation, not profit, as it is for corporations and not policy, as it is for governments. He would argue that the only reason a non-profit would grow is that you believe the world would be a better place if more people had access to your goods or services.
I have a simple thesis: if the independent school industry wants to thrive and create more impact in the world, it starts with 1) developing best-in-class products and services that can be 2) scaled and delivered to different audiences in order to 3) grow marketshare and relevance. If more people had access to independent schools through different modes, my guess is that their impact would indeed spread beyond their existing market share.
Don’t get me wrong; I’m bullish on the future of the private education industry if it begins to make structural, creative and innovative changes. There are four ways the private schools and colleges can still thrive in a changing world. They include:
- Scale and price your programs to distinct audiences. In the process, move away from a “one size fits all” model to a nimble, flexible model that targets specific audiences with specific programs and price points.
- Commit to being the best at something that matters. It has never been more important to be distinctive. But, being unique is not enough. You must be unique — and the best — in something that actually matters to the world. I didn’t say that you had to be the largest, or the most expensive, or the most selective. Be the best in something that matters.
- Make a decision now on how and why you will integrate AI and AR into your programs. These are the greatest threats to the future of formal learning institutions. We had better figure out how to lead society in leveraging these tools. If we don’t, those tools may eat the industry alive.
- Stop doing things that don’t matter. Schools and colleges don’t like to sunset programs and services — and it shows in our expense structure and price point. We have to reduce irrelevant expenses to make room for the future innovations that will propel the industry.
I throw down an interesting challenge to the industry: what if independent schools could increase their market share of school age children to at least 5% in a decade? Imagine the impact on the world. That vision starts with developing a different way of thinking about the limitations of the business model.
I have often believed that independence is the greatest asset of independent schools. It is in their name. Independent schools, as well as most private schools, can choose their mission, their delivery mode, their access points, and the markets they choose to cultivate. Can we move beyond trying to “find full pay families” and selective admissions as the holy grail of their existence toward true relevance in the coming decade?