Agreements vs. Contracts
One of the biggest mistakes many schools make is not having some type of Agreement in place for students. You’ll notice that I did not use the word Contract. The reason is that you want to the student to Agree to pay a monthly fee for the classes that you teach.
A Contract implies the same thing but with harsh conditions. Such as late fees, interest, court action, and a host of other binding items usually in favor of the school … not your customer.
Here’s the bottom-line. You want to use some type of agreement. This commits in the mind of your member that they’re going to be there for a certain length of time and that they must pay for that length of time. The length can be anywhere from 3 months to 12 months.
As I said in the beginning, this is an Agreement. That means you also agree to teach them the classes that they made the Agreement to take. It’s a two-way street.
Many schools shy away from Agreements because they are afraid it will scare members away or maybe they just do not believe in them. Both are foolish. Number one is how do you manage your budget? If you do not know how much money is coming in, you cannot make plans for expenses that include the basics such as rent, phone, heat, electric, water, etc. The second problem is how your business will not be able to do any common business transactions that range from accepting credit card payments to getting business loans. In other words, your business will not be credit-worthy.
Month-to-Month Terms
This is a membership tool that allows a member or student to cancel at any time with some type of notification. The issue with this term is that a minimum of 4-7% percent will cancel monthly. When calculating loss rates, you always compound the monthly loss rate annually. In other words, if 100 students join in January you can expect on a month-to-month membership tool that 48-84 out of the original 100 will cancel. When kids are involved, this loss rate jumps to 8% monthly which means 96 of the original students who signed up a year ago will leave, or only 4 will stay.
24- and 36-Month Contracts
These types of contracts are a staple of the industry are NO longer financially the best way to do business. Let’s look at the underlying assumption behind why these were created.
Assumption 1- Students must make a long-term commitment to reach their black belt.
What you are really saying is that I’m afraid that I can’t renew a student after 12 months, so I’ll get them to commit to a longer program.
Assumption 2- You make more money with a 24-36-month contract. The industry has never considered:
- The loss rate on these terms
- The cost of training to sell these types of memberships
- Is it still viable for the NEW consumer in today’s economy?
This assumption doesn’t consider that the loss rate on a 24-36-month contract is 3-5 percent monthly. Compound your loss rate 3-5 percent annually for 24-36 months and your loss rates increase exponentially. In other words, you will collect more tuition from renewing a student three times on a 12-month contract than you would from collecting on a 24 or 36-term contract…
Assumption 3- A longer commitment means they will pay. Let’s be honest if someone is unhappy and doesn’t want to pay they won’t. They will stop payment and then get upset and go on a crusade to tell the world how your school wouldn’t let them out of these long-term contracts. If a student is on contract, by law, they can turn off an automatic draft and the contract becomes uncollectible…
Assumption 4- It has always been done this way. Would you sign a 36-month contract? A 24-36-month contract is a much harder program to sell which requires more sophistication on the back-end sales system which leads to more expensive sales training costing you money… Valuable training resources move away from student service and shift to sales training for the upgrades costing you more money… You now have created a more expensive staff that’s focused on upgrades rather than student service. The school turns into a lead-chasing school to fill the upgraded pipeline which is a characteristic of an outdated model.
Assumption 5- A financially successful school is centered around upgrades. That is incorrect. A SOUND financial school is built around having high monthly receivables (Step 1). A predictable cash flow coming from high monthly receivables on term contracts creates stability, predictability, and value for your school.
Assumption 6- 24-36 Term Contracts Are Best for The Student What’s best for the student is a viable, yet fair term for both you and the student… For example, a student gets a statement from the billing company after joining a 24-36-month training program that shows 33 payments left on a $8,000-dollar program for the next three years.
Their jaws drop, and buyer’s remorse sets in. A few months later they start to feel that they are not getting the same quality of service after the 24 or 36-month commitment. This is because the model is designed around new student acquisition, so they ARE RIGHT!
After a couple of months, they call you the owner, wanting to cancel their 24-36-month contract making you the bad guy… (They are even begging you in your office to let them out of the contract). The school’s training equipment starts to become outdated, they see less of the owner, and the school itself starts to look run down without any facility upgrades.
Would you continue to pay for 15 or even 17 more payments if you weren’t satisfied with a service? Can you see my point?
A 12-month contract creates:
- The most stable of all contracts
- Easiest to collect
- Fair to the consumer
- The lowest loss rate of all contracts
- Simple to sell…
A 12-month contract should be the primary membership tool with your flagship program, upgrades, and renewals.
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