Alameda String Academy business update

Hi folks,

I’ve mentioned several times on here that I help my wife Erica run the Alameda String Academy, which is a music school in Alameda offering lessons in violin, viola, cello and guitar with a particular focus on chamber music. I spend about 8 hours per week working on this (and Erica spends a lot more than that), and it’s a significant part of our family life.

From a business point of view, this is a business that we started from scratch 3 years ago, and it might be interesting to look back and see how things have developed over that time — hence this update.

Note that my job in all this is to be the numbers guy — so I’m looking at this from the business point of view. There’s also a lot that could be said in terms of musical development and programs and performances, but that’s Erica’s side of things, so I’m going to gloss over much of that — even though that’s the most important aspect of the school.

ASA by numbers — snapshot July 2016
Since I like numbers, maybe I can give you just a few to help you understand what ASA is like.

  • 3… years since founding.
  • 6… teachers, including Erica.
  • 60… active private students.
  • 6… adult students.
  • 4… age of youngest student.
  • 30… minutes in the most common lesson (45 and 60 minute options also available).
  • Monthly revenue: $10-$12K, out of which we have to pay for rent, all the teachers, concerts, advertising, taxes, etc.
  • Average Monthly Profit for the business owners (that’s us): $165. So we’re rich, hooray!

Actually, I’m being slightly misleading here, because Erica is getting paid as a teacher for the actual teaching she does — so we’re making more than $165/month. That $165 is simply our reward for the other ~80 hours/month of non-teaching work that Erica does on the business, which equates to a marvelous $2.06/hour.

Do you know what are even better than numbers for someone like me? Graphs.
First, I have a graph showing the number of private students over time. Encouragingly this is a graph that goes up over time, although there was a period in the middle of 2015 when growth was stagnant which had me worried.

Most students have weekly lessons, but some have intermittent lessons.

Interestingly, when you look at the numbers for 2015, it wasn’t that we stopped getting new students (well, there were a couple of bad months), the problem was more that we were losing students almost as fast as we got new ones. A music school is effectively a subscription-based business — people pay a monthly tuition fee to continue their lessons — and with any online SaaS company one of the most important business metrics is churn.

Your monthly churn is the percentage of your current subscribers who leave every month. Initially it’s fairly irrelevant, but as you grow, if your churn remains the same (as a percentage) then it gets harder and harder to replace the students who leave — i.e. 10% of 10 is 1, but 10% of 100 is 10. In our case, churn was hovering around 7% during 2015, which meant we were losing an average of 3 students per month. One of the most encouraging things about the past few months (Feb 2016 and onwards) is that we’ve had a lot fewer students stop lessons than during the corresponding period last year. Losing fewer students obviously really helps growth.

Each data point averages the churn over the preceding 3 months to give a monthly percentage.
And finally, the revenue and profit graph — showing income increasing over time but very little in the way of profit.

Conclusions: What do we learn from the story so far?

I’m not sure I’m wise enough to pull any great lessons from the ASA story so far, but there are a few things that we’ve done that proved to be really helpful, and a few things that are hard in our business.

What’s good?

  • We rent our classrooms on an as-needed basis from a local church. From a financial point of view this was initially hugely important because it meant we weren’t immediately hamstrung by a huge rental bill for a space that we were barely using. Our rental costs grow in proportion to our business.
  • As a result of the rent situation and also because our staffing costs are also (mostly) proportional to income, we were never in great danger of failing as a business. The first 6 months were rough, but we fairly quickly reached a point where we weren’t losing money — only our time investment — and then this past year we’ve finally been able to pay Erica for her teaching work. In other words, low fixed costs make it easier to start a new business.
  • The community that has built up around the school has been fantastic. There are now well over 100 people (students and their families) who have ASA as a part of their weekly lives, and many more who we’ve interacted with at some point over the years. The City of Alameda already has a small town atmosphere but starting ASA has significantly increased our connection to our chosen home town.

What’s bad?

  • Margins on a private tutoring (one-on-one) business are tough. The business is taking the tuition fee from the student, paying the (highly skilled and educated) teacher, paying for the classroom, and then there’s not a lot of money left to cover our other costs (admin, various online software, advertising, outreach events, etc). Group lessons would be much better, but on a complex physical skill like playing a musical instrument it’s much less effective to have a group lesson unless the students are at a very similar level of development. We have some ensemble classes (as add-ons to the lessons) and hope to grow that aspect in time (since group playing is actually a core part of our musical vision), but for now that’s a fairly small part of the picture.
  • Collecting money is both expensive and stressful. When you’re sending monthly bills to 60+ different people, collecting payment through a mix of checks and credit cards, then it becomes a real hassle to keep track of who has paid and who hasn’t, to chase overdue invoices and to deposit the checks. And then the credit card fees take a chunk out of our already slim margins. Software helps with part of this, and we’re constantly looking for better ways to do things, but it’s not fun.

So what does the future hold?

I don’t know, but I can tell you the questions we’re asking.

1. Is there an optimal size for the school? How many students do we want and what would the consequences be (from both a financial and a cultural point of view) of reaching that point?

2. How can we grow our group ensemble lessons (these are an additional class on top of the individual private lessons)? These programs are great for building community in the school, great for the musical and social development of the students and have potential to be more profitable than the individual lessons.

3. How can we improve the income/effort ratio on the business? Can we improve the way we handle invoices to make it more automated? Can we hire someone to do some of the everyday tasks and still be profitable?

4. How can we continue to reduce churn? Or, to put this another way, how can we make sure that we are attracting the right students and then serving them in a way that delights them — so that they become enthusiastic and committed members of our musical family.

Lots of questions, but as yet, no answers. I hope you find this snapshot of our little business interesting, and maybe even helpful.