Opening a daycare center is a strong business idea. Parents are always going to need safe and reliable childcare, and the demand for childcare is regularly increasing.
More families have two parents working, and more flexible work schedules lead to more people needing daycare options as well.
The industry is on the rise and will continue to grow stronger. The child care market in the U.S. is estimated to grow to $95.13 billion by 2034, at a compound annual growth rate of approximately 4.3%.
More than that, the industry is worth approximately $71.7 billion currently and has shown steady growth over the last couple of years.
More daycare owners mean more possibilities for businesses. But the real thing that matters to you is whether a daycar is a profitable business model.
Like any other business, the answer is, ‘it depends on many factors’. Your location, prices, employee costs, and government regulations are all contributing factors.
Some daycares are very profitable, while others are not as profitable due to high expenses. So, whether starting a daycare will work for you or not will depend on how you play the game.
Luckily, we have covered everything in this article that will unpack the data—profit margins, revenue, expenses, and other common challenges to help you determine if a daycare facility is a good fit for you.
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Is a daycare profitable?
Indeed, a daycare can be quite profitable. Daycare centers often operate at gross margins of 30% to 50%, meaning once they pay for direct costs of running the daycare—supplies, snacks, utilities, and staff wages—a large portion of income remains.
If, for example, a daycare earned $15,000 per month with a 40% gross margin, it would have a gross profit of $6,000 after receiving a deduction for every other expense responsible for keeping the business running.
However, net margins, which is what remains after all business expenses are factored, will typically be much lower.
Most daycares operate at a 5% – 20% net margin. For instance, if the daycare above made $15,000 in a given month, after deducting rent, insurance, marketing, and taxes, the daycare can expect a net revenue of approximately $1,500-$3,000 in profit.
That said, daycares can have a solid income because they provide a much-needed service: parents work, and they need childcare, so demand is always high.
Most tuition at daycares is paid weekly or monthly, which provides the owner with predictable cash flow.
Many daycare businesses add additional profit with extra service options such as after-school programs, meal plans, enrichment classes, etc.
The finances of different daycare formats vary, meaning each format has unique earning potential.
For example, home-based daycares have very limited overhead and offer far more flexible hours than traditional commercial daycare centers, though their overall income is likely lower due to limited available space.
Commercial daycare centers require more upfront investment, but they also have more spots available to fill; therefore, their revenue is often higher than that of home-based daycares.
There are franchises, such as Kiddie Academy or The Learning Experience, which provide brand recognition and a tested model. However, these can come with large start-up fees and ongoing costs.
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Revenue potential and profitability breakdown:
A daycare’s earnings are determined by the number of children enrolled and the fee per child.
Most daycare centers charge $700 to $1200 per child per month, depending on location and services. This means a child may generate $9,000 to $14,400 annually. Many variables affect revenue, including location, licensing, fees, and related enrollment.
Daycare centers in the city charge higher fees due to the higher cost of living and demand, while rural daycare centers typically charge lower fees.
For instance, daycare tuition in New York City can exceed $1500 per month, whereas a daycare in a small town might charge as low as $400 per month.
The overall size of the daycare matters just as much. A home-based daycare might take 6 to 12 children, while a commercial daycare would be able to take 50 to 100 children.
For example, if a day-care center has 100 children at $1,000 a month, they could potentially make $100,000 a month, which is $1.2 million a year.
However, these higher revenues also come with higher operating costs.
Profit Margins
After covering expenses, most daycares have net profit margins of 5% to 20%. A daycare that is efficiently run and has consistently high enrollment numbers can be even more profitable, while less organized daycares or those with high expenses can struggle for profitability.
Startup Costs
Opening a daycare involves initial capital, and this amount will be different based on the size and location of the daycare.
Common startup costs include:
- Licensing and permits: The licensing and permit fees vary widely based on state, but are usually between $500 and $5,000.
- Rent or mortgage: The operational cost of a daycare facility rental in a city may be between $3,000 and $10,000 monthly, while in-home daycare may have little or no rent.
- Equipment: Nursery and education equipment like cribs, toys, books, and educational materials or resources will cost around $5,000 to $15,000.
- Safety requirements: Safety measures (e.g., fire alarms, emergency exits, child-proofing, etc.) will cost between $2,000 and $10,000, depending on state and local laws.
- Marketing and website: Initial marketing campaigns and flyers, plus your website setup, will typically cost between $1,000 and $3,000.
Ongoing Expenses
Once your daycare is operational, there are monthly costs to consider:
- Staff wages: Wages are usually the largest expense for a daycare and account for anywhere from 50-70% of total costs. The Bureau of Labor Statistics states that daycare teachers usually earn around $22,000 to $43,000 per year.
- Rent, utilities, and insurance: The monthly costs for rent, utilities, and insurance can be from $2,000 to $10,00,0, depending on the location and size of your facility.
- Food and supplies: Providing meals and snacks for infants or children will probably run $500 to $2000 per month, especially if you are providing organic or required food options.
- Licensing renewals and certification: These expenses can add up to $1,000-$5,000 annually for compliance renewal, background checks, and worker training.
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Break-even Point
Generally, most daycare businesses take somewhere between six months and two years until they are operating in a profitable stage.
The timeline is dependent on enrollment, the management of expenses, and pricing strategies. For example, a daycare that starts with high enrollment and has a solid grip on expenses will likely break even in a year.
However, if the enrollment growth is slow and the startup investment is higher than expected, it will take longer to become profitable.
Again, one of the most significant variables will always be the speed of filling all available spots in your daycare center.
For example, the sooner a daycare fills in all its available spots, the more likely it will be operating in the profitable range.
Another aspect is keeping expenses as low as you can. There is plenty of opportunity for profit loss with rent, employee wages, and supplies.
You will need to monitor expenses to ensure profitability. Of course, pricing is important, too, but adjusting your prices based on what the market can bear will help you have continued enrollment growth while charging competitive fees.
Types of Daycare Models and Their Profitability
There are various ways daycare businesses can be structured. Some operate in a small, home-based situation, while other daycare businesses are larger centers or even a franchise that is part of a larger system.
Each of these models has different costs, rules, and profit opportunities.
Let’s explore each of these types.
Home-Based Daycare:
Launching a home daycare center is among the most economical ways to enter the daycare industry. Since it is a home-based daycare center, you do not incur commercial rent, which typically saves thousands of dollars each year.
Additionally, many states have less stringent licensing regulations for home-based daycare programs, especially for smaller programs.
In some states, home-based daycare can operate with very limited licensing if it cares for only a small number of children.
Revenue capacity is also limited, though. Most home-based daycare services care for only about 6 to 12 children, depending on space and local regulations.
For example, if each child is charged $750 a month, with 10 children, that is a potential of $90,000 a year.
Even though there is no rent, there are still expenses involved.
In addition to applying for and maintaining licenses, there is also food to buy, insurance, learning materials, and possibly hiring an assistant, if required by licensing laws.
In spite of these expenses, many small daycare owners have decent, reliable income from home.
Commercial Daycare Centers:
Larger daycare centers offer much greater revenue potential, but they also require a heavier upfront investment.
Unlike a home-based daycare, these centers can enroll dozens or even hundreds of children.
For example, if a childcare facility charges $1,000 per month and has an enrollment of 50 children, that childcare facility could bring in $600,000 per year.
That said, the costs can ramp up quickly.
Rent for a commercial space will often be between $3,000 and $10,000 per month, depending on size and location.
Staff salaries are often the largest portion of program expense, ranging from 50-70% of the total cost of running the program. Teachers in a daycare typically earn approximately $30,000 to $40,000 per year based on experience and location.
Other operating costs for a daycare center would include insurance, materials and supplies, marketing expenses, and utilities.
In addition to the costs that come with operating expenses, a commercial daycare has to adhere to many state and federal regulations.
Reporting for staff-to-student ratios, liability and safety regulations, and various standards for the facilities will take a large amount of time and provide a level of complexity.
While Commercial daycares can be very lucrative models, they require stable numbers of enrollment, along with careful management of expenses, to achieve long-term viability.
Franchise vs. Independent Daycare:
Some daycare owners will opt to purchase a franchise. Others will prefer to build their own independent centers. Both options have pros and cons, so the best choice usually comes down to budget, experience, and goals.
Franchises such as Kiddie Academy and The Learning Experience typically have brand recognition, training and support, and an established business model, meaning new owners can avoid some typical startup challenges.
But franchises are expensive. The initial franchise fee typically ranges between $50,000 and $200,000. Moreover, many charge an ongoing royalty fee, which is a percentage of revenue.
Additionally, franchise owners must adhere to strict rules regarding curriculum, pricing, and branding. While this consistency is important, it means that there is no flexibility with regard to what can be done in the center.
On the other hand, an independent daycare center will allow an owner to fully control their own branding, pricing, and curriculum. And the owners can develop a unique program to meet the needs of their community.
But without the established reputation of a brand name, owners will need to market the center and create a program to attract families.
Or you can leverage SEO to target these tens of thousands of parents looking for daycare centers. For instance, if we see the search volume of the keyword ‘daycare near me’, the search volume is over 100K. And it’s easy to rank for this keyword. Thus a big opportunity for new daycare businesses.
Therefore, marketing is very important for independent daycare centers. Local advertising, social media, and word-of-mouth referrals will help you build trust and fill enrollment spots.
Just like any business, the startup costs of an independent daycare center can vary. They can be as costly as franchises, depending on location and facility size.
For this reason, careful financial planning is essential. Managing expenses prudently can result in financial stability and profitability over time.
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How to make a daycare business more profitable?
Running a daycare can be both rewarding and profitable. But success depends on smart decisions.
From setting the right prices to keeping costs low, every move affects your bottom line.
Here’s how to boost profits while keeping parents and kids happy.
Charge fair but competitive tuition:
Parents want affordable care, but your business needs to make money.
Research local daycare rates and come up with a number that is high enough to cover your costs and account for profit, but low enough to be attractive to families.
Providing multiple pricing options (full day, half day, part-time) will get parents into your program while maximizing your revenue.
Get more kids enrolled:
More children mean more income.
Here is what you can do to get more kids enrolled: Promote your daycare on social media, partner with local schools, and encourage referrals with discounts for parents who recommend your business.
Hosting community events or free “trial” daycare days can help build trust with families.
Offer extra services:
Extra services bring in additional money.
Consider offering after-school programs, tutoring, summer camps, or even weekend babysitting. You can also add revenue by selling snacks, educational toys, or branded daycare items.
Parents appreciate convenience—in most cases, the more they can get from one place, the better.
Cut unnecessary costs:
Spending wisely means making more profit.
Here is what you can do to save money in the daycare business: Buy supplies in bulk, use energy-efficient lighting, and carefully manage staff schedules can lower expenses.
You can also look for government grants or childcare tax credits that can help reduce operating costs.
Grow by opening more locations:
If your daycare is thriving, the next phase may be adding another location.
If done right, a second (or third) location can double or triple that profit.
Just ensure the demand is there to make that leap!
Take advantage of government programs:
Various states and countries offer subsidies or deductions for childcare facilities.
Check with your local programs that fund daycares. You might qualify for some grant and tax subsidies or reimbursement opportunities, and these can help you increase profit and offset costs.
With a little luck and the right focus, child care should be a successful long-term business. Keep enrollment strong, costs low, and always look for ways to provide more value for parents.
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Challenges and risks in running a daycare business
Running a daycare is rewarding, but it’s not easy. There are strict rules to follow, high costs to manage, and competition to worry about.
Parents expect the best care for their children, and if a daycare doesn’t meet their standards, they will go elsewhere.
Strict regulations:
Daycare businesses face some of the toughest regulations in the industry.
Every state has licensing requirements that cover everything from child-to-staff ratios to fire safety. Some states require daycare owners to have early childhood education credentials, while others mandate regular inspections.
Failing to meet these rules can lead to fines or even closure. A daycare owner must stay up-to-date with changing laws to remain compliant.
High Operational Costs:
It can get quite pricey to operate a daycare.
Most of the budget is set aside for staffing costs. Teachers get paid between 30,000 and 40,000 dollars annually. In order to fulfill child-to-staff ratios, centers must employ a sufficient number of staff, which drives up costs.
Another big cost is rent.
Renting a space can range from $3,000 to $10,000 per month. The count goes up even further in more developed locations.
Insurance is a necessary expense. Just for taking a liability policy, one has to spend anywhere between 2,000 and 6,000 yearly. Other coverages add to the total cost.
The expense for food and supplies also needs to be taken into consideration. Having a well-balanced meal, good toys, and learning materials can all add up. The same goes for cleaning and maintaining the daycare.
It is incredibly difficult to offset these expenses when not all spots are filled. Each unoccupied spot is money lost.
Competition:
Parents have numerous options.
Home-based daycares, commercial daycare centers, and daycare services through businesses all vie for the same families.
Some employers are even offering on-site daycare for their employees, which further reduces the demand for private daycare centers.
New daycares really have to concentrate on differentiating their daycare from others by better programs, hours, or specialized care (like bilingual or STEM learning).
Parental expectations:
Parents look for more than just supervision.
They have a higher vision for a daycare that provides:
- A secure and safe setting that promotes health, safety, and security practices in accordance with regulations.
- Quality early childhood education lays the groundwork for children to be ready for school.
- Clean and well-kept facilities and the proper provisions to minimize the risk of spreading illness or other harmful substances.
If parents feel their expectations are not being met, the daycare could experience negative reviews and bad word-of-mouth. Therefore, it is critical to operate and provide a daycare in good standing that meets the expectations of parents and the community.
Economic downturns:
Daycare is usually one of the first expenses families eliminate in financially tough times.
When monetary resources are tight, some parents will stop working entirely to stay home with their kids, which leads to fewer enrollments at daycare centers.
In the case of the COVID-19 pandemic, for example, a lot of daycares closed down due to reduced demand.
It is important for daycares to prepare for economic downturns by providing flexible pricing, building emergency funds, and applying for grants from the government.
Now, after understanding everything that belongs to the daycare business, like profit margins, startup costs, problems and risks involved, you can easily decide whether you should start a daycare business or not.