A Big Score for SAT Tutors

A new college-entrance exam is boosting outfits like Kaplan and Princeton Review. When the panic eases, can they still make the grade?

By Burt Helm

It's test time. On Mar. 12, high school students, mostly juniors, will be taking a new version of the SAT, the most common college-entrance exam in the U.S. Among the changes: three sections instead of two, a top score of 2400 instead of 1600, harder math, and a new writing component that will require a hand-written essay.

Anxiety among students and parents is running high, and test-preparation companies, which offer books and other materials, classes that typically cost $900 or $1,000, and personal tutoring that can fetch $100 to $400 an hour, are cashing in. But while college-admissions officials will be judging the students' results, investors will be keeping a close eye on how the test-prep companies, which are competing in a sector estimated at $960 million this year, utilize this marketing opportunity to boost their bottom lines.


  By and large, the SAT changes aren't drastic. The math section involves more sophisticated algebra but retains the same level of geometry.

The major addition, the new writing section, is very similar to the SAT II Writing Exam, though the essay question will be more specific than that test, says Sandra Riley, a representative for the nonprofit College Board. The multiple-choice questions will be similar to grammar questions found on the PSAT, which most students take before taking the SAT.

But the specter of an unfamiliar test compels parents to seek expert help, says Adam Newman, vice-president for research and client services for Eduventures, a Boston-based research outfit that tracks the education business. "This is a pure marketing and expansion opportunity" for test-prep companies, says Newman.


  And those outfits are riding a big bounce. Kaplan, which has 24% of the market, according to Jefferies Securities analyst Richard Close, saw a 50% year-on-year revenue increase in its SAT-related business in the latter half of 2004, says Jennifer Karan, national director of SAT programs at Kaplan, a wholly owned subsidiary of the Washington Post (WPO ). At the Princeton Review (REVU ) the market leader in SAT prep with a 27% market share, Executive Vice-President Steve Quattrociocchi was reluctant to predict revenues, but he indicated that a boost of somewhere between 20% and 50% in SAT-related first-quarter revenue is likely.

That would make it a spike similar to 1994, the last time the College Board modified the exam. Meanwhile, competition for students seeking entry into competitive colleges continues to heat up, with 14% more students taking the SAT than five years ago, according to the College Board, which also predicts that college applications will continue to rise until 2009, as more baby boomers' children come of age.

Test anxiety has reached an a new high. "Parents are using business terms like ROI [return on investment]," and asking for quantitative estimates of score increases before signing up, says Lisa Jacobson, founder of privately owned tutoring business Inspirica, which has offices in New York and Boston. Jacobson's home answering machine no longer accepts voice messages but directs callers to her e-mail account. "They start calling at 6:30 a.m., and they don't stop until midnight," she says.


  While Inspirica continues to focus on its one-on-one tutoring service, bigger fish like Princeton Review and Kaplan are introducing a host of new products to capitalize on the burgeoning market. In addition to classes and books, they're marketing online classes and PDA- and cell-phone-based quizzes. Last year, Princeton Review rolled out "premier" tutoring services similar to Inspirica's one-on-one product.

Test prep and tutoring services in the U.S. took in an estimated $702 million in 2003, and that's expected to grow to $960 million this year, according to Eduventures. But the U.S. still lags behind other countries in standardized test-prep spending. In Japan and South Korea, the vast majority of students sign up for prep courses, says Eduventure's Newman, vs. from 15% to 20% of eligible students in the U.S. In those countries, all students must pass a test to be eligible for top universities.

As states require additional testing to satisfy the No Child Left Behind Act, U.S. students will be taking more standardized tests at several stages of their academic careers. But test-preparation services for public school exams, which depend less on the bank accounts of upper-middle-class parents and more on the finances of beleaguered school districts, have had mixed success.

Princeton Review has had trouble securing contracts with school districts in recent months. It has missed Wall Street's earnings estimates in four of the last five quarters due to lagging performance outside of its SAT business, including declining enrollment in graduate and law-school admissions exam-preparation classes.


  Still, experts expect to see growth well beyond the new-SAT spike. "We live in a society where testing is not going away," says Close. "There will continue to be growth here [for test prep companies] in the 5% to 10% range" for the next several years, he says.

Parents are accepting the trend with resignation. "It makes your child mature very early on. It's a very early lesson that you always strive to do your best," says Antica Black of Manhattan, whose daughter is a sophomore at a private high school in Connecticut. Her fifth-grader son just finished the Independent School Entrance Examination and Manhattan Private School Assn.'s standardized test before applying to five different kindergarten-through-eighth-grade schools when they moved to the city.

Black says she isn't too worried. "I've already been through this a lot," she says. And just in case, test-preparation companies are there to help, every step of the way.

Helm is a reporter for BusinessWeek Online in New York

Edited by Phil Mintz

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