Friday, March 14, 2008

Self analysis of tuition business

I thought it'll be interesting to analyse the business that I am now in - tuition. Specifically, I wanted to do a little more thought on the risks and economic moats relating to a private tutor in Singapore.

Here's the business risks about private tuition:

1. Low entry - there is no regulation nor certification needed to be a private tutor. Some of the stories I heard even involved people faking degrees and certs to have a better chance for assignments. Basically, tuition is one of the main thing that students/working adults do part time to boost their income.

2. Depending on the target segment, the tuition service is deemed to have little value added and is based primarily on price. This means that whoever provided the cheaper tuition rates will get the assignment, though I stress that this is only for certain target segment. Seems like little pricing power by individual tutor, since there are so many tutors around.

3. Hard to stand out - Advertising isn't too effective, unless it is consistent. Might have to rely on network of tuition agency, who will suck 50% of the first month pay of the assignment they passed over to you. Though there are free networks with no fees paid, there will be many people signing up for this network, hence net effect is still the same - hard to stand out.

Economic moat - pretty much non-existent. But really?

There is this powerful economic moat that can be established for this business, which is the networking effect. This effect is the reason why e-bay or microsoft OS is so hard to break through. How does this work?

Let's imagine a tutor is very good in what he is doing. Due to the low entry of tutors, there will be a lot of bad tutors around who are more interested in making a quick buck. As such, the percentage of better tutors are quite low. Once this good tutor manage to convince the parents and student of his capabilities, this family becomes a living advertising node of this tutor. Let's suppose that this family just introduce one new student to the tutor, very soon over a period of time, there will be a lot of advertising nodes for this tutor, all acting to introduce to their relatives/friends about this good tutor. Hence the networking effect works in two ways:

1. The number of students recommended will increase exponentially to the point that there will be too many students and too little time.

2. The student come with the mindset that this tutor is already good in teaching, hence there is less effort needed to impress and win over their hearts. It is positively biased towards the tutor.

When demand exceeds supply, the tutor will naturally gain pricing power over the rates charged. Not only that, a lot of families will also go out of the way just to have this tutor, hence again the effect of positive discrimination towards the tutor. By this same networking effect, there is no need for find agencies to recommend students and be subjected to a commission of 50% first month pay.

Another way to counter the price competition is this: look for another target segment that are not so price sensitive. Tuition service should not be a commodity and if one is providing this as if it's one, then of course pricing will have to be competitive. There are a certain group of people who do not mind paying a premium for quality educational help and this is exactly the type of people to target when choosing students. Tuition pricing is interesting - the cheaper it is, the less value you will add to the students since they feel it's cheap and hence will not value the service accordingly. Perception and personal branding is important here, as in all types of service industry.

Let's take a look at the factors that will determine the earnings growth.

Earnings growth factors:

1. Have more students (increase volume)
2. Charge a higher price (but not high enough to reduce the student intake significantly)
3. Teach more subjects, develop content (diversify revenue streams and cash flow period)
4. Teach in a group (charge cheaper but have more students to make up AND save on time)
5. Acquisition (buy over other people's time in exchange for passive income - save time)

The ultimate is to boost earnings through no.5. By doing that, one can achieve financial freedom and not use one's time to exchange for money.

Prospects:

1. There could be more regulatory control on tuition. Perhaps a license to operate as a independent tutor will be needed in the near future, something like that of a broker or insurance agent/property agent.

Impact: It's even better to regulate this industry. Less competition on all fronts and more serious tutors around. Better for both tutors and students alike.

2. Less children born could mean that parents will be more willing to spend a greater part of their income on education for their children. With more parents having 1 children, the propensity to spend on them is higher than for a family of 2/3 children.

3. More education reforms will be expected. It's hard to anticipate the kind of changes that will be forced down the road, so it's always good to diversify the revenue streams. I always remember the time when MOE basically rendered chinese tuition services out of business by reducing the importance of chinese in major exams. With ample diversification in different levels, a tutor can have a long term survivability in the ever changing landscape. It's also important to constantly update oneself on the changes in syllabus. This said, the long term prospects of education is not going to diminish as far as one can see.

Moral of the story? Be very good in what you are doing, if not, don't do it at all. Life is too short for a half hearted effort in the things you do.

6 comments :

Solomon Grey said...

Let Grey propose a way to combine your 5 earning growth factors into a business strategy;

2 tutors could be equally extremely good, yet one is happy to be a self-employed, while the other has a more business bend;

So, you could make use of the network effect to increase your students and thus initially charge a higher price for new cases who've heard about your reputation;

Eventually, you could turn your reputation into a brand name, and then start a private tutor agency, that has your seal of quality, ie, your brand;

When you have the agency, you'll attract tutors who'd like to work with your agency, and you could select those who could perform up to the standard you think is necessary to uphold the reputation of your brand;

By then, you'd have acquired other's time and each tutor who work with you is like a pipeline of income, the more the merrier;

You could then deploy some of them to teach in groups and others for other styles of teaching;

After some years when your business system is well-established, perhaps you could even relinquish your role to a CEO hired for the purpose; Then your business will be able to operate without your involvement, and it'll be a major source of passive income;

When your passive income is huge and secure, you might even find time to become a private tutor, but this time, for fun;

After a while, you think bigger, and decide to lobby to the authorities that some certification is necessary to uphold the standards of private tutoring; The authorities are always happy to receive fees for issuing licence;

You could then propose to set the standards, and now your brand name is not only a famous seal of quality, but also the symbol of the standard to follow;

Of course all these takes work; That's why the CEO is hired; You'll only need to supply some visions from time to time;

30 years later, LP monopolized the private tutoring arena in Spore, and franchises are already booming all over the world;

A bit far-fetched yet not impossible;

la papillion said...

Hi Grey,

Thks for the vision you had for me :) To quote addidas advertisement: Impossible is nothing.

skyalps said...

Hi Lp, interesting analysis on the tuition business. Your argument is based on the assumption that the network effect would increase the reputation and value of the tutor. However, the network effect can also work against you. One major screw-up and bad impression left on the student or parent could ruin all the good work you have built up. Therefore, it is a double-edged sword. Well, I have been busy with work and sorting out my career plan, I do hope I would have more time to catch up with you guys and focus on my investment. See ya ard!

la papillion said...

Hi sky,

Long time no see :)

Actually it wouldn't affect it negatively because while parents would recommend good tutors to others, they wouldn't tell others specifically that this tutor is bad. Why? Because it's more of a norm, so that's nothing new. In other words, limited downside with unlimited upside potential :)

It's almost like the mythical hydra with many hands. If one hand got chopped off due to major screw up, there are still many other hands to spread. It's like a nuclear reaction.

But i'll still say this: Be very good in what you're doing, if not don't do it at all.

Shine in Rain said...

Not sure whether there's such a thing as trademark or copyright in the sg tuition industry. If there is, then having some kind of TM in the teaching materials or teaching /counselling method could possibly help in the branding and marketing your tuition service and make it "stands out" from competitions. And as of any business, I am sure you have your USP (unique selling point)to keep it rolling. ;)

la papillion said...

Hi SIR,

Wow, this is such a old post :) Haha, the trademark I have is not in the materials. I can easily pass the materials to anyone. It's the unique way that I teach that makes me stand out lol :)