How to Set Prices for Your Child-Care Service Learn to determine pricing that will make you a profit but won't scare away parents.

In Start Your Own Child-Care Service, the Staff of Entrepreneur Media Inc. and writer Jacquelyn Lynn explain how you can start a child-care service, whether you want to start a small homebased operation or a large commercial center. In this edited excerpt, the authors offer tips on setting the right prices for your child-care service.

The fees you charge for your child-care service will provide the financial base for your company and your income. They need to be competitive in your market, reasonable and affordable for the parents, and also fair to you. You need to consider a variety of issues, including your costs, the profit you want to make, the going rates in your area, and what the families you're targeting can afford. Setting your rates, explaining—and often justifying—them to parents, then collecting the money are all part of being in the child-care business.

Because you'll be offering a carefully planned curriculum that's far more than a mere baby-sitting service, you're justified in establishing a fee structure similar in design to a private school. A one-time enrollment charge of half a week's tuition will hardly raise an eyebrow, but it will fairly compensate you for the cost in time, paperwork, and special attention each entrant needs.

Calculating how much to charge for space in your center will be based primarily on three variables:

1. Labor and materials (or supplies)
2. Overhead
3. Profit

A fourth factor uncommon to most businesses but significant for a child-care center is the limit to the number of children you can accommodate. In child care, state laws and practical reality limit the number of children you can accept, putting a lid on the income potential of your business. To overcome this, successful child-care operators often open more locations in nearby areas to increase their client base and income.

Until you establish records to use as a guide, you must estimate the costs of labor and materials. Labor costs are the wages and benefits you pay your employees. As the owner, your salary (if you don't take your personal income directly from net profit) must be included in the total labor charge. If you make no official allowance for yourself but merely draw from the net profit, you should include your labor, proportionate to your input, in the total labor estimate.

Labor cost is usually expressed as an hourly rate. A little research should give you a good idea of the going rate in your area for different positions. As you calculate your labor costs, remember to include the hidden costs (payroll taxes, benefits, etc.).

To determine the weekly tuition for a full-time attendee, you first have to determine the child-to-caregiver ratio. For purposes of this example, we'll use a 6-to-1 ratio. If the hourly labor cost is $13 (including wages, taxes, and benefits) for one caregiver to watch six children, then the labor cost would be $2.17 per child per hour. You'll have to estimate your materials costs at first; 45 percent of labor is a good average to use until you have a history to measure.

Overhead includes the nonlabor, indirect expenses required to operate your business. If you have past operating expenses to guide you, figuring an overhead rate isn't difficult: You simply total all your expenses for one year, excluding labor and materials, then divide this number by your total cost of labor and materials to determine your overhead rate. At first, you won't have past expenses to guide you, so figure overhead as 30 to 40 percent of your labor-and-materials cost. Most child-care center operators expect a net profit of 9 to 14 percent of their gross revenue.

In addition, most child-care centers charge according to the child's age, with parents of children who aren't toilet-trained or still prone to "accidents" paying as much as 20 percent more than slightly older children. Very young toddlers and infants also require lower adult-to-child ratios, which raises your labor expenses and contributes to higher fees for toddlers.

You may begin the process of determining your prices by using the three elements we just considered, but the only way to judge the viability of that price is to test it in the marketplace. However, even if you find out that other centers are charging less, think carefully before lowering your price. Can you reduce your overhead and maintain profitability? A business that doesn't earn an adequate profit is more vulnerable to total failure because it doesn't have the financial cushion that good profits provide.

Also, even though other centers are charging less, your services may be worth more, or those centers may not have any openings, which means your prospective clients can't place their children there, anyway. Of course, that doesn't necessarily mean families in the area will pay your higher rates; they may not be able to afford to. A little bit of research will tell you what families in your target market are able to pay. In general, families can afford to budget approximately 10 percent of their income for child-care expenses. A check of census data at your library will tell you the income ranges for your community; lower-income families may be eligible for child-care payment assistance.

Take your cost-plus-desired-profit figure and the figure of what families can afford, and see how closely they match. Although you certainly want to be sensitive to a family's budget, keep in mind that it's not your responsibility to help all parents afford child care. Rather, it is your responsibility to set up a quality child-care program based on sound business practices. If you want to serve low-income families, take the time to investigate the various government subsidy programs designed to help people who can't afford to pay the full price of child care. A good place to start is with your local research and referral agency.

You can charge for your services on an hourly, weekly, or even monthly basis. Charging by the hour generally means you're paid only for the time the child is in your care and you won't receive any income if the child isn't there. This makes planning your own time and budget more challenging. Weekly or monthly rates based on an anticipated amount of care make more sense and are easier to work with.

You can also add an overtime rate to your base rate to accommodate special needs of the parents. Let's say a mother typically drops her child off at 7 a.m. and picks him up at 5 p.m. Monday through Friday. But during the first week of every month, the mother's employer asks her to work an extra hour each day, which means she can't pick up the child until 6 p.m. That's an extra five hours for that week when you'll be caring for that child, and you can charge an hourly rate for that time. Depending on the circumstances, you may want to calculate the hourly rate based on your standard tuition rate, or you may charge a premium for overtime.