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Middlehurst House is a preschool center which can take care of 120 children in the daytime. Today, the center has six groups amounting to 80 students in total and defining the size of each class in accordance to the state regulations.
Demand of the two-income families for higher quality of the company’s service and more places for children lead to group restructuring ideas reveal several opportunities to increase revenue. Most parents would appreciate better child/instructor ratio and new classes for infant care. Besides, there is a number of children in the waiting list who could also be serviced if the number of groups increases.
The memo presents a discussion of possible options to increase revenue and/or quality of the center. There are several ideas to be reviewed. In order to improve quality, the company can decrease the number of students per class, but this will necessarily increase the tuition fee. Then, it is possible to create a new class (or classes) from the waiting list with or without change in the size of groups. Finally, an infant care group can be created based on the existing demand for it.
On order to state which of the options is attractive in terms of operating outcome, one can refer to the usage of mathematic logic. This means, one needs to “define and develop” hypothetical outcomes which are “context free” or based purely on calculations (Reitano, 2010, p 23).
Moreover, defining the profitability of the alternatives, one can use the concept of relevant costs. Except for option one, only marginal analysis is performed, meaning that the profit is defined based on the variable values. Fixed costs are not taken into consideration as they do not change as the company established more or fewer classes. Fixed costs here include: fixed profit distribution to the director (Mr Friedman), wages and staff benefits paid to the part-time cook, fixed part of the supplies expenses, and occupancy and other administrative expenses. Besides, adjustments to revenues are also assumed to be stable. Calculations for all of the options are provided in attached tables.
Option 1. Improving quality
There is a possibility to decrease the number of students in classes as follows: age group 2 to 3 – from 10 to 6 students per class; age groups 3 to 4 and 4 to 5 – from 15 to 8 students per class; and age group 5 to 6 – from 15 to 10 students per class. As the company then needs 11 tutors for 80 children (compared to only 6 tutors for larger groups), it will have to increase fees by around 44% in order to keep profits on the same level.
As not all of the parents would agree with such an increase, there is a high risk too see losses if this policy is implemented.
Option 2. Create classes from the waiting list
If the company does not change the group size and creates a new class including 11 children at the age of 5 to 6, it will have to attract only one more tutor. Thus, its expense will increase by 2,274 US dollars (in variables), revenues expand by 2,860 US dollars, and the company will receive profit for the month which is 586 US dollars more than the profit without this option.
Changing the number of students per class, the company will realize significant increase in profits, provided that the new fee structure is implemented and all of the “old” students stay at the center. New profit may amount to about 4,500 US dollars.
However, there is very high possibility that most of the students aged 5 to 6 will leave the center if fees increased. This will affect profits of the firm leading to a loss of about 1,000 to 1,500 US dollars.
Option 3. Infant care group
If a company opens classes for infants, it will have to pay salary for one tutor per each five children. However, variable costs decrease by the amount spent for food. Then, the firm will realize losses if the fees stay unchanged, and gain profit with the increased ones.
Based on the mathematical logic, one can conclude that the company should definitely use the option two, i.e. involve children from the waiting list. If the management does not intend to take high risks (related to the possible loose of students aged 5 to 6 when fees increase), than organizing an incomplete class from the waiting list is the best choice. At the same time, when group size is changed and fees increased, the company will receive an extensive profit from existing age groups. Infant care group also becomes profitable when the level of fees is changed.
However, before taking the final decision whether to implement one of this options or not, one needs to consider several external factors that may influence the final outcome critically. Changing the group size will definitely increase quality of the center services. But it also leads to higher fees, which means that the company will concentrate more on higher-income families and loose most of the lower-income customers. Practice shows, that such strategy is very risky. Improvement of the relationship with existing customers (for example, by opening incomplete groups from the waiting list if they are profitable) could be much safer option. The theory of loyalty marketing underlines that maintaining “business with current customers” will cost less than “acquiring new ones” (Baran, Zerres and Zerres, 2012, p 3). If the company raises its fees, it will be forced to look for new students coming from the families with higher income level.
In order to forecast future outcome from changing customer base, the company needs to draw plan for a sequence of further actions and results, or use the iteration planning process. This process allows to develop “the content and schedule” of actual intermediate results (Ahamed, 2010, p 22).
Another important factor is the changing surrounding of prospective competitors. Switching to the higher-income families brings the company to the layer of premium quality preschool centers. Here, it may face stronger competitors than in the medium quality market and fail to find new customers.
Besides, choosing the option of infant care group, the company needs to consider available resources. The most significant problems could occur in finding appropriate staff who will become tutors for infants as special training may be needed for that.
Taking into consideration the market revenue conducted among existing customers, one can infer that parents of different age groups’ children vary in terms of demand for smaller class size. Therefore, a reasonable option would be to increase fees different percentage for each group. For example, parents of the age group 2 to 3 are the most conscious about smaller group size and all of them are ready to pay higher fees. At the same time, none of the parents of children from the age group 5 to 6 will pay the proposed increase in fees by 44%. So, the company could cut down the group size for younger children classes and leave the older ones unchanged. In this way the firm will obtain more revenue from the age groups 2 to 3, 3 to 4 and 4 to 5, while revenues from the oldest group, aged 5 to 6 remain unchanged. Besides, there is very high probability that parents of infants (aged 0 to 24 months) will pay even higher fees as they are more motivated to receive the premium quality service.
Overall conclusion can be made, that the company has high potential to increase its profits by changing the quality of its service, varying the fee structure and group size, using the waiting list when profitable, and opening new classes for other age groups.