While the 20%-50% revenue increases tutoring companies enjoyed in Fall 2015 are now squarely in the past, a number of folks have expressed concern that overall business is declining. Phones have quieted, demand has slowed, and anxiety has begun to surface among some of the test prep community. Theories abound over exactly why this is happening (my favorite is that Khan has taken over) but few are attributing the drop off in business to timing.
After years studying the demand curves for test prep, tutoring, and admissions counseling at Kaplan, it is easy to empathize. I remember worrying if my center would “make its month” when the phones slowed or walk-ins ceased to…well…walk in. What I learned was this: a perceived decline in business often has less to do with random external pressures and more to do with the natural business cycle. In test prep & admissions these cycles are typically impacted the most by regular events or dates.
Said differently, the important dates related to tests, admissions deadlines, or school exams probably have more of an influence on consumer behavior than other external factors. So if demand seems to be waning, perhaps it would be best to look at the calendar, determine which dates constitute anchor-points (my word for important date) for the business cycle, and then apply the logic espoused here.
Let’s take test prep for example: First, we’d need to back out the important dates or anchor points. Consider the fact that April State Testing for the SAT has just passed, the April ACT test date has just passed, and the May SAT General Test is not all that popular because the ultra-competitive students are focusing on APs. If you buy in to the logic, the Spring cycle is complete and we’re in a “trough” so to speak; but the next cycle is beginning!
To expand this logic, if we deconstruct the various important dates for test prep, tutoring, and admissions work, we find similar results. In test prep the business cycle is largely dictated by an official testing date. In tutoring, the business cycle is largely affected by exam dates or/and grade card dates, and in admissions counseling the business cycle is largely determined by admissions deadline dates (early, regular, late).
Okay enough about dates, what about external factors? This year we have a significant one in test prep: the redesigned SAT. The general recommendations from counselors and experts have been something like: “don’t be a guinea pig” take the ACT instead. If this sentiment is shared by students, we’re likely to see a demand curve that looks more like the 2005 SAT change. To recap that change: SAT demand flattened and then dipped in the year of the last test change and recovered shortly thereafter…and…ACT demand increased during that same period. Preliminary albeit anecdotal feedback suggests this is exactly what is happening again: an increase for the last administration of the pre-March 2016 SAT and double digit increases in ACT demand. But people were expecting this and many re-tooled so that the corresponding increase in ACT would offset the decrease in SAT business. So, in a sense, this may have been a zero-sum game for folks who planned well.
So what about Khan? In reality, test prep market share is likely to migrate to a free open course platform like Khan particularly in light of the relationship it has with the College Board. It is hard to say how impactful this will be to small to medium sized tutoring firms but if you have any concerns, use them as fuel to improve your business model. Here are a two past blogs that suggest diversification or integration strategies.
Having said all of this, the attached graphic showing web search behavior over the past year supports the idea that the test prep business is cyclical and predictable. Just note the ACT, SAT test dates in relation to the web search statistics. The web search data for Khan is correlated with those same test dates. In a sense, this is just a data point that supports the cyclical nature of test prep. I chose Khan because of its obvious advantage in the space. And the correlation should show 1) cyclical alignment with smaller players 2) the same perceived relationship with important dates in the business cycle.
Which brings me to planning for the dynamic nature of the test prep and tutoring business landscape. Demand for exceptional one-on-one tutoring is unlikely to disappear. Further, it is arguable that clients who can afford exceptional one-on-one tutoring won’t see Khan as comparable–at least not yet. And, overall demand for all products: test prep, tutoring, and admissions consulting is likely to increase. Why? High schoolers are dialed in to college admissions tests as never before; they are also over-scheduled, competitive, and technologically savvy. For those reasons, among others, aggregate demand should increase over the next few years.
My feeling is that Business innovators and early adopters will have an upper hand during this expansion. The industry will likely continue its shift to online courseware and asynchronous learning platforms.
To that last point, many companies have focused on the mode of delivery in response to the change in student behavior. Khan has a great model for this group and, although the strong one-on-one tutoring companies are somewhat insulated from this dynamic, it seems prudent and timely for all firms to reflect on the mode of service delivery over the next few months. A strong product or service is likely to persist as long as it adapts to environmental shifts.
Test prep business slipping? Don’t worry but be ready.