Mark Mangrum | 08.14.2023

A Tale of Two Providers

In North Texas, two child care centers are separated by the proverbial train tracks. Both serve the same population of socio-economically vulnerable children in similar neighborhoods, yet their own economic sustainability is starkly opposite.  Their differences, and the reasons why, offer policymakers unique proof of child care complexity.  

One thrives and one survives by aggressively pursuing every new grant and subsidy. 

Both centers have about the same enrollment of approximately 60 students. 

Each is owned by a woman of color with decades of experience. 

The clients of one are as loyal as the clients of the other.  

The profitable center targets only government subsidized students; the struggling center serves about half subsidized and half private pay tuition. 

The profitable center pays its teachers approximately $1 more per hour than the struggling center. 

The profitable center operates one proprietary Montessori-friendly curriculum; the struggling center incorporates a variety of programming associated with different support programs tied to supplemental funding—an attempt to draw down as many additional resources as possible. 

Growth is limited by lack of qualified teachers to meet regulated ratios at the profitable center. There is actually a waiting list of students who cannot enroll for lack of a teacher. The owner finds it difficult to recruit and retain quality teachers with the work ethic and talent that she can train to her exacting standards. In contrast, the struggling center’s growth is limited only by expensive space expansion. The owner has loyal teachers who have all worked in her program for over a decade, except for the newest teacher, who grew up in this center from infancy.  

Surprisingly, both centers maintain the highest quality rating possible: Texas Rising Star-4. 

So how is it that one center defies conventional wisdom to achieve profitability, while the other follows traditional industry practices and struggles financially? That is a trick question, because it partially reveals its own answer.  

Despite conventional logic, the profitable center aggressively targets subsidized children, because it knows that families in that area cannot afford private pay; and because the government subsidy is reliable, no effort is spent on collections. No discounts are offered, except teachers get a mere $5 off for their own children. Also contributing to its success is that the center is one-of-four owned by the same person (she also co-owns a construction business), so there is an economy of scale for back office and other expenses. The rapid growth of this center is enabled by well-designed and rigorously enforced systems and processes. To an extent, this independent business owner has set up their own shared-services model.  

The other center struggles to balance its books, because few of its private pay clients can afford even as much as its subsidized families. The published tuition rate is much higher, but the effective rate after scholarships and discounts is often lower. It continues to accept at risk students who do not qualify for subsidy, although their families may still need the assistance as they are just above the income threshold or disqualified from subsidy eligibility due to technicalities (e.g., have exceeded the 90-day job search limit, the parents are undocumented, etc.). Management’s altruistic practices at the expense of its financial viability have hobbled growth.  

Trying to turn the profitable center’s success into a blueprint to impose on the struggling center is a non-starter. Even after cost-estimating what increase in subsidy-receiving children would do for the business—the numbers still didn’t add up. Their business expenses and operating models are too different. Not to mention, with only a fraction (~12%) of eligible children actually receiving child care subsidies, there aren’t enough funded families to replicate the profitable center’s approach at scale, anyway.  

Yet, there are many signs of hope for improvement. Through comprehensive, client-driven business advisory services, business best practices can be shared that are customized to solve challenges in baby steps. Efforts are also underway to reimagine the child care subsidy system so that existing child care funding is used to incentivize best practices, support individual programs and address equity gaps for entire communities, rather than individual families (Read more about the Tarrant County Prime Pilot, here.) 

Quality child care is a complex puzzle that can be solved by trial and the risk of error. The pieces that are obvious and more easily adjusted need to be fast tracked, while we must invest in pilot programs to experiment with more systemic solutions such as new public financing approaches that incorporate increased teacher pay and foundational program support.  Policymakers can (and should) incentivize goals around quality and access by tying them to public funding, but must be willing to pivot when unintended consequences or gaps arise.  

The positive impact that a robust supply of high-quality child care options has on young children, families, and the economy is irrefutable. Of course, each child care business is unique and deserves the flexibility to adjust to meet the needs of their community, yet continuing to let high-quality child care businesses flounder on the brink of a market-failure is not a solution. Let’s reverse the erosion of reliable child care providers in our communities and ensure that all child care programs have an equitable opportunity to thrive.