Setting rates

The process involves five key steps:  

1. Determine how much your costs are currently
2. Scan the market and look at what the other rates are like in your area
3. Assess how much care is costing you versus the going market rate in your area
4. Set your rates
5. Review and adjust your rates at least once a year to make sure that you're keeping up with the market 

Before we dive into it, it's important to understand the difference between the cost of care and pricing. The cost of care is how much it actually costs you to care for children. Pricing takes this information and considers other factors, such as how much parents can afford. For this guide , we'll focus on pricing and helping you determine how much you should charge families. 

Step 1: gather your data 

Start by gathering some data to use in your calculations. Collect about six months of costs, if you can. That will give you a good sense of how much you're spending on a regular basis. For larger organizations, this pulling these numbers out of QuickBooks or your CCMS or other systems. For smaller family care providers, it may be going through your checkbook, your business checkbook, and your credit card statements.   

As you collect your costs, break them into two different categories: direct and indirect costs. Direct costs are those ones that are directly related to caring for children. For example, in the infant room of your center, this could include the cost of providing formula. In a toddler room, it might be the cost of the teachers assigned to that area on a regular basis. Indirect costs are those that cover your entire business. If you're a home-based business, a lot of these costs may relate to your home, such as your mortgage and utilities. If you're a center, these can take on a variety of things like rent, mortgage, and utilities or shared items and expenses, like maintenance on the playground that is used by many different classrooms within your facility. Indirect costs can include the cost of running your operations as well, such as the wages for a financial manager or executive director. 

After you collect your costs, you can organize them in two different ways. Having a per child cost overall may be the easiest. Take the number of children you served on average over those six months and dividing the total cost by the number of children. For a more complex operation, you may want to break down the costs by different ages, such as cost per child in infant and toddler care versus pre-school. You will use this information in combination with the data collected in our next step, local market prices, to help determine your rates.  

Example cost of care analysis – Lisa is a home-based child care provider with an average of $4,000 in monthly direct and indirect costs to run her program. Lisa averages an enrollment of 6 children per month. Based on that, Lisa conducts this simple of cost of care analysis:

In this case, Lisa has a few options: 

1. Aim to breakeven, with monthly revenue totaling costs to run the program.
2. Aim to turn a profit by increasing rates to exceed her current cost of care.
3. Aim to turn a profit and keep rates the same by increasing enrollment, as applicable. 

Step 2: research local market prices 

As we know, the quality of your child care and its location are the most important things for parents. Because of this, local market prices can vary drastically depending on several factors. This is why it's so critical to review local market prices rather than just the national market. For example, if there are a lot of choices within your area, prices might be a bit lower, even if prices may be higher within your state or country. Conversely, if there aren't many, prices might be higher because parents don't have many choices . This is how supply and demand works. 

Try to compare apples to apples, meaning if you run a family child care, look at prices for other family child cares in your area. Getting information about centers is good too, but family child care prices will be more useful for setting your own prices. The same is true for centers. Know what family care providers are charging in your area, but it's more important to know what other centers are doing. 

You can start with TWCs market rate studies. These are conducted every year and are available at www.twc.texas.gov/programs/texas-child-care-market-rate-survey. These studies show how much similar child care providers are charging in your area. This is a great source of data that can save you a tremendous amount of time. You can also supplement it with other data that you collect on your own. You can also post on social media platforms and ask parents what they pay. Or, you could call other providers in your area and ask about current rates. Starting with the TWC market rate data is a good first step and it might give you enough information to move to the next step. 

Step 3: assess your rate 

So far, you have how much it costs you to care for children, and you have a sense of what parents are paying for care in your local market. Now, you have to figure out your rate. To do this, you need to determine your profit margin. Sometimes child care business owners may feel uncomfortable talking about profit because it might seem wrong that you're trying to profit off families.  

However, profit helps compensate you for your hard work and it contributes to the long-term viability of your business. Your profit is what allows you to set aside funds to fix things, like the fence in the backyard, or pay for training for your teachers. Profit is important to the sustainability of your business, your employees, and the children that you serve. You might need adjust the numbers to compensate for local market rates. To start, you can create profit margin by setting a percentage, for example, a 15-20% profit margin.  

If you have a 15% or 20% margin, how much does that translate to in your total rate? Essentially, you take the current costs you have, add the profit margin, and then that total is your rate. So, the cost plus profit margin equals rate. This calculation can be done using the information below.  

Table 1. Profit Margin (percentage method) 

Step 4: set your rate 

You've created rates with different profit margins and market data. Now, how do you then determine a rate? First, look at your rates you calculated. How do they compare to the market? Is there one that's closest to what the current market rate? You'll also want to compare your current rate to your new rate. What are parents able to pay for your child care? You can also use the chart below and compare your new rates to the market rate at the 75th percentile (a higher-than-average rate) and note the difference. This would give you identify the rate closest to the current market. 

Table 3. Setting your rates using example numbers from Table 1. 

If you find that the market rate is far below what you are currently charging, consider adjusting your rates to increase the number of children in your care, if possible. Conversely, if the market rate looks like it's far higher than what you're charging, maybe it would be a good time for a rate increase. Again, this increase isn't about trying to take money from families. It ensures that your business will remains viable so that you can continue to provide your services to families in your area. 

Step 5: reevaluate your rate annually 

Pricing is an exercise you should do at least once a year. Feedback from parents and guardians about your rate may also be another factor that can trigger a rate reevaluation. If you find a rate change is warranted, you may want to first think about testing new prices. In some cases, if you have to do a price increase, it's tempting to do it as soon as you realize the price increase is needed. However, you may want to do it incrementally. Rather than increase your price by 15% all at once, perhaps you slowly increase by 5% every three months over a nine-month period. This approach allows parents to adjust to the new pricing and lets you put the brakes on the pricing changes if you start to get negative feedback. 

Be sure to update your rates in your parent handbook and anywhere your rates are published, such as your website. With any change, communicate it to parents in advance. 

Disclaimer

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.