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There are several ways for students to pay for martial arts lessons... per month, per lesson, and contracts. What are the advantages and disadvantages of each of these for both the student and school? Specifically, what effect do each of these have on student attrition? Do per month/lesson make it too easy to leave or take a break without any consequence, that its all too easy to not come back?

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Contracts can be both good and bad for the student. It can encourage them to keep coming to class for sure, but if they really don't like it anymore, it is just another expense they pay until the contract is over even after they have stopped going. Students who take a break tend to not come back... life gets in the way. A contract is at least one incentive for the student to come back to class. Overall contracts are not evil, but for those who drop out they are perceived to be. –  pdavis Mar 8 '12 at 15:23
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In my experience as both a student and an instructor, I've found that there are advantages and disadvantages to both parties from all forms:

  • Per lesson

    Instructor:

    • Advantages: Able to demand higher rates for the convenience. More flexibility in asking students not to return. Students pay or are not taught.
    • Disadvantages: Students feel more free to come and go, meaning less reliable income. Higher rate of attrition in the long term since students don't commit.

    Students:

    • Advantages: More flexibility in their scheduling. Not held to a contract, so they can leave at any time.
    • Disadvantages: Higher cost per lesson.
  • Per month

    – Instructor:

    • Advantages: More reliable income. Lower attrition rate (students commit to at least the month). Better overall quality of students. Able to teach at a higher level because of larger class sizes.
    • Disadvantages: Students can still come and go with only the loss of the rest of a month.

    Students:

    • Advantages: Per lesson cost reduced (more you attend that month, the lower the per-lesson cost). Greater flexibility than contracts. Better lesson quality. Reliable training partners.
    • Disadvantages: Must commit more money up front.
  • Contracts

    – Instructor:

    • Advantages: Commitment of payment for a whole year or longer with legal recourse. Strangely, lower attrition rates.
    • Disadvantages: General mutual distrust between the school and its students. Fewer students join out of distrust for contracts.

    Students:

    • Advantages: Possibility of higher training quality (since many of the students commit, they tend to work harder. If the instruction is good, the training quality goes up because those that commit do so for longer meaning higher level students). Reliable training partners.
    • Disadvantages: Stuck with the contract. Contract break fees. Higher probability of McDojo.

There are exceptions to the rule in every scenario, and many that offer monthly rates also offer per-class rates which combines the two advantages and disadvantages somewhere in the middle.

While easier to leave does usually mean easier to not come back, contractual billing can lead to extremely bad press for a dojo and is usually not a good sign. Many of the contract billing services for martial arts schools have horrible reputations and lead to more threats from lawyers than happy students.

Remember, every choice has a consequence; choosing a specific type of payment plan can have both good and bad repercussions. If at all possible, schools should offer all three at staggered rates – this way, you can maximize your benefit, put the consequence of the choice upon the shoulders of the client, and you'll have an easier time managing threats and have a better chance of winning any small claims you choose to pursue. A great example of this is:

Assume a monthly rate in line with your environment (other teachers in your art locally). If the market is at $100 a month, make this or slightly higher your monthly rate. Now, figure a two month termination fee ($200, equivalent to charging for first and last month). Divide this by 12 to get $16.66. Subtract this from $100 and round back up to the nearest $5, which gives you $85. This is your contract rate. This way, you're offering a non-trivial (15% discount), but making clear up front that there is a termination fee, and if they plan to leave, it might be better to pay month-to-month. For your per-lesson rate, figure out how many lessons your students will be attending each week for an average (4 week) month. My students, for instance, attend 2 classes a week, so about $12.50 a lesson (in this case). Of course, we have a convenience factor to this, so we raise this rate a non-trivial amount (I would round up to the nearest $10, so each lesson would be $20). By doing this, you're creating a fair and scaled pricing schedule, and offering them an advantage to committing longer.

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An important variant form of per lesson plan I've been seeing is to purchase lessons in bulk. So you can purchase, say, a set of 10—30 lessons together in one package but when you use them is up to you. This has the advantage from a teacher standpoint of securing a certain amount of income up front, while providing the student significant flexibility. –  David H. Clements Mar 14 '12 at 21:36
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@DavidH.Clements: Good point. I used a system of tickets for a while when I was teaching private lessons; I'd sell lessons in packs of 5, and they'd get a ticket book to redeem the lessons (like a gift certificate, except I had a matching serial-numbered half of their book to compare against). For group classes, I found it problematic to track since I'm a one-man operation. –  stslavik Mar 14 '12 at 21:55
    
To add, the dojo I attend works on a "per belt" basis, which is three months per belt (or four months, for white belt). It allows for many of the advantages of both the monthly and the contract (though there is no contract), because of the slightly longer commitment (lowering attrition). Additionally, I've seen dojos charge on a monthly basis, but only allow 2 classes per week (and charge for each additional), effectively nullifying the per-class savings. So always ask about their structure and class allowances. –  Shauna Apr 10 '12 at 17:22
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