Transcript: Episode 065 – Andrea Miller

Transcript for Episode 065 – Andrea Miller on Incentives at Work in Music Studios

Transcript

Welcome back! A couple of weeks ago I aired an episode with Ryan Benthall about different lead generation platforms like TakeLessons.com and Thumbtack.

After hearing Ryan talk about the different platforms and the business models behind them, my economics nerd radar was buzzing.

This was a perfect illustration of incentives and how they influence consumer and business behavior.

I started preparing a little econ lesson for you. Soon that little lesson became giant and I decided to make it its own episode. And that’s what you’re going to hear today.

It’s been a while since I went on an economics excursus in the podcast – actually, I think the last one was in Episode 009 with Sean Murphy talking about how he scheduled 100+ students a week for lessons, but I do love nerding out about econ every chance I get.

Anyway, I hope you’ll stay with me. I promise it’s interesting AND practical. And you’ll feel smarter by the end.

Now, I was an entrepreneurship major, not an econ major, but I devoured my econ classes. I appreciate the way economists look at the world and these classes actually played a big role in developing my entrepreneurial intuition and how I process through problems I’m trying to solve.

I hope today’s episode gives you a little glimpse into an economist’s way of thinking. 

I’m doing a deep dive econ case study. We’ll be looking, primarily at TakeLessons.com as an example of incentives at work. We’ll look at how incentives influence user behavior and outcomes, what happens when the business’s incentives and the user’s incentives are misaligned, and of course, we’ll be talking about why this matters for us as music studio owners.

If you haven’t listened to episode 064 with Ryan Benthall, it does give some context for this discussion that might be helpful, but I’ll give you a little background.

Background: TakeLessons.com

Ok, let’s look at TakeLessons.com. TakeLessons makes money by matching students with teachers and then managing the financial part of the student/teacher relationship on an ongoing basis.

This generates monthly recurring revenue for TakeLessons, which is great from a business finance perspective. It stabilizes revenue from month-to-month and generates money from existing customers, rather than constantly having to bring in new ones. It also gives TakeLessons.com an incentive to keep teachers and students on the platform for as long as possible.

Now let’s look at the teacher side of this equation. A teacher signs up on the platform to build their studio. Once the teacher and student are connected, the value of the platform shifts from lead generation to essentially a billing department. If a teacher decides they have enough students, they don’t need the platform to collect money for them, and they’d rather earn the full cut of their students’ tuition payment, then their incentive to stay on the platform disappears.

Now, going rogue and taking students off the platform, I’m sure is against Terms of Service, but I’m going to set that aside because we know people don’t always act according to the terms they agreed to, and I really want to focus on the natural incentives at play.

The challenge with the TakeLessons model, is that there’s potentially a conflict in the platform’s incentives and the teachers’ incentives.

If the teacher feels they’re no longer receiving enough value from the service TakeLessons.com provides, they are incentivized to get off the platform. TakeLessons recognizes this and also knows that they can’t trust people to just “do the right thing” and follow the Terms of Service, so they have these built in communication mechanisms and policies to control the experience and keep users locked into the platform. TakeLessons does this primarily by prohibiting the exchange of contact information and requiring all communication to take place on the platform

As Ryan noted in his interview, sometimes these mechanisms made for some awkward interactions. Even innocent requests from students to talk on the phone or meet in person would get censored by the platform and the students didn’t always understand what was going on. And now, because of this conflict in incentives, the platform is inhibiting the student/teacher connection, rather than fostering it.

Things can get a little weird when natural incentives aren’t aligned and artificial enforcements are put in place to bridge the gap.

Application

Multi-Teacher

Now I want to apply this case study on a studio level.

In a lot of ways, a multi-teacher school operates like TakeLesson.com. The school brings in students and provides a set of ongoing services, perhaps studio space for the teachers, collaborative opportunities, admin services, and other offerings.

In some cases, a teacher may decide they no longer want to teach through the school. Most of the time this transition is smooth, but not always. Sometimes a teacher is branching out on their own and decides to take what they consider “their students from the school” with them.

It’s common to prohibit this through contracts and studio owners can take legal action if a teacher breaches a contract, but just like the TakeLessons scenario, it can get a little weird.

Afterall, if a student wants to go with the teacher who’s leaving and the school owner tries to intervene, it doesn’t really matter what the contract says, the school owner ends up being the bad guy and the interference can leave the student with a negative opinion of the school.

This is where I go back to thinking about incentives. We could spend our time and energy policing teachers, but I think everyone is better off if we put that energy towards providing value. Putting incentives in place that make teachers want to stay, rather than feeling locked in.

Reflection

For the multi-teacher studio owners in the audience: What ongoing value do teachers receive by being a part of your studio? Could they make more money teaching elsewhere? How much? Does the value your studio provides make up for the opportunities they’re foregoing? If not, how can you build in incentives that will keep teachers around for the long haul?

I’ve seen studio owners do this by providing ongoing teacher training for their teachers, by paying their teachers more than they could earn teaching through local colleges, by investing heavily in marketing to keep teachers’ schedules full, and by providing ways for teachers to earn passive income by providing online classes under the school brand. (Check out the episode with Kathy Rabago to hear more about that last one. I’ll link to it in the show notes.)

Buyout Clause

Now, we may do everything in our power to make a great working environment for our teachers and, still, a teacher may decide to leave. It happens. One way I’ve seen music school owners handle this scenario, is to have a buyout clause in their teacher contracts.

The buyout clause essentially establishes a price for taking a student from the school. It takes into account the cost of marketing to bring in that student and the profit the school would have earned from that student’s future enrollment.

With a clause like this, if a teacher decides to leave and wants to bring their students with them, they can buy out their contract.

I like the way this clause works with the reality of this nuanced situation and aligns the incentives and desires of the teacher, student, and school. The school, that has provided a valuable service recruiting and serving the student and teacher, receives compensation for the service it has performed and future profit lost; the teacher, who was going to leave no matter what, now has a fair and legal way to leave the school and take those students without causing significant financial damage to the school; and the student, who just wants to continue their lessons without any drama, maintains their relationship with both the school and the teacher.

How’s that for well-managed incentives?

Solo Teachers

Solo teachers aren’t immune to the challenge of incentives. Take the popular “no make up lessons” policy as an example. Generally, the natural incentives of this policy are positive – it incentivizes students to come every week, which keeps them engaged, minimizes trivial cancellations, keeps the teacher’s schedule and income consistent, and often helps weed out less committed students. This all sounds great, right? This is the kind of behavior we want!

But every once in a while, this incentive backfires.

Have you ever had a parent bring a kid who was obviously sick to lessons?

This is just one example of how that incentive that is so effective at encouraging positive behavior can also motivate some undesirable behaviors.

Reflection

Thinking about your studio policies, calendar, traditions, and habits, what behaviors are you intentionally or unintentionally incentivizing? Is there anything you need to adjust? Are there any behaviors you’ve noticed in your studio that you’ve been tempted to “make a rule” about? Could you use a natural incentive to encourage the desired behavior instead?

I’ve seen teachers use them in all sorts of ways to prompt outcomes they want in their studios:

• A teacher might incentivize paying electronically or setting up automatic bank transfers by discounting tuition by a couple of percentage points for students who pay that way.
• Leischen Moore from Rare Bird Studio incentivized participation in festivals by including the cost of these events in her flat tuition rate. Students were more likely to participate because they didn’t want to “waste” what they had already paid for.
• In an upcoming interview, I talk to a studio owner who incentivizes summer enrollment by including it in the tuition rate paid throughout the school year.
• One very simple and effective way to incentivize on-time payments, is to simply not teach a lesson if a student’s account has a balance

I’ve also seen some teachers come up with creative solutions to the potential negative sides of incentives. For instance, many teachers with that “no make-up lesson” policy build a week or two for make-up lessons at the end of the semester so if a student has to miss a lesson for being sick or any other reason, they can make it up then without having a significant impact on the teacher’s schedule or finances.

The negative side of policy incentives seems to come out most when the teacher/parent relationship loses that sense of shared humanity and becomes strictly transactional. In the same way that a multi-teacher studio owner needs to deliver ongoing value to its teachers and foster those relationships, a private studio owner needs to spend time fostering the relationship with students and parents.

Thumbtack

Before I wrap up, I want to briefly talk about Thumbtack and Lessons.com. I see these platforms as an example of how observing incentives can lead to innovative business models and practices.

Thumbtack and Lessons.com appeared on the scene just a few years after TakeLessons.com. They undoubtedly noticed the mismatch in incentives that teachers were experiencing and set up their business models differently to address it. In other words, they innovated!

On Thumbtack and Lessons.com, teachers pay for quotes or leads, which ensures the platform gets its due payment, and when the teacher and student are connected the transaction is done. There’s no incentive for teachers to try to find “workarounds” because they pay at the moment they receive value and then they’re free to communicate with students and handle their business however they want.

You can see how the natural incentives of the platform, the teacher, and the student are nicely aligned. It’s similar to the buyout agreement I described earlier.

And, from the teachers I’ve talked to who have used these lead-buying platforms, they all have very positive things to say about the customer experience and value the platforms provided for their studios.

And isn’t that what we want for our teachers and students, too?

We don’t want teachers “stealing” students (to use the common terminology), or for parents to feel like they have to bring their sick kid to lessons to get the full value they paid for.

Conclusion

Incentives can be really powerful, and they’re also a delicate thing to manage. A little thoughtfulness in how we arrange incentives can go a long way.

I truly think it’s about finding balance. My encouragement is to think about the intentional and unintentional incentives that are at work in our studios.

They’re all over the place – you might find yourself rethinking policies, payment terms and methods, practice requirements, recital participation – even how you use or don’t use stickers!

Consider the positive and the potentially negative implications of an incentive being taken too far and try to strike a balance.

Where are you noticing incentives at work in your studio? How does this lead you to innovate? Let us know in the posts for this episode on Instagram or Facebook.

A transcript and all the links mentioned in this episode can be found at musicstudiostartup.com/episode065

That’s all for today. I know this episode has been a little different than normal, so I’d love to hear your thoughts. Thanks for listening. I’ll be back next week.