Strategic Tuition Pricing

Transcription

1 Strategic Tuition Pricing

2 Strategic Tuition Pricing Offers Universities the Opportunity to Increase Revenue and Improve Student Quality Public and private universities are increasingly searching for ways to raise revenues as their costs continue to rise, legislatures are cutting financial support, and students are in need of more financial aid. An area of opportunity that is emerging is developing pricing strategies for tuition that aligns more with pricing strategies used by other industries. For many years, colleges and universities have approached the question of setting tuition as a one-size-fits-all equation. But experiments by other industries in differential pricing, such as the multiple prices passengers pay for seats on the same flight, should be cause for universities to consider the way they are determining prices. Why do most colleges charge undergraduates the same for upper-level courses as for lower-level ones? Why is tuition the same for students whose majors are in highly regarded departments as for students in departments that have lesser reputations? Why do universities charge students who enroll in five courses per term the same as full-time students who enroll in only three? To be fair, some universities charge more to students who take a large number of credit hours per semester, a few have different charges for students in different majors, and some charge more for international students. However, the current financial conditions in higher education calls for even more re-thinking. The current strategy for many institutions is a categorical approach to offering university-controlled need-based and merit-based aid; that is, universities most often offer a discount to admitted students (in the form of aid) based primarily on the student s GPA and SAT scores, or sometimes based on these scores and the student s financial circumstances his/her ability to pay. While many universities have invested significant dollars in enabling technologies related to admissions, few fully utilize this technology to optimize their net tuition revenues. To truly optimize net tuition dollars, a university should look beyond these traditional measures and get a clearer picture of an admitted student s true propensity to enroll, based on a much wider base of student data affiliations, geographic proximities, and demonstrated prior interest, among others. Using additional data can allow schools to move from categorical offers of financial aid to individualized offers of financial aid and, more importantly, allow universities to avoid over-discounting their tuition for students who have a greater ability to pay. Colleges and universities already have much of the data they need, but that data is often under-utilized, remaining idle in their electronic storage systems. College leaders and institutional governing boards should focus more on analyzing these treasure troves because in an era of data-driven decision-making, this data can be used to guide institutional pricing and discounting strategies. When used appropriately, a pricing strategy that helps the institution recognize and capitalize on its often unrecognized competitive advantages can drive gains in both student quality and tuition revenue. The Financial Atmosphere in Higher Education The vast majority of public and private universities were beginning to face tough financial times before the recession, and the recession only exacerbated the situation. Endowments were hit hard by the market decline and have yet to fully recover. Money from state legislatures nationwide is decreasing significantly for nearly all activities. Many public universities have been huronconsultinggroup.com

3 Strategic Tuition Pricing reducing their reliance on state appropriations for some time. Nevertheless, this decline in public revenue sources has considerably increased many public institutions reliance on tuition to support operating costs. To meet the widening difference between revenues and costs, colleges and universities typically focus on implementing a variety of cost reduction activities and tuition increases, with tuition increases filling most of the financial gap. A recent review by Huron Education suggests that some institutions have relied on tuition increases to fund as much as 60 percent of that gap. Unfortunately, these increases typically take the form of across-the-board tuition hikes, adding fuel to the concerns raised by the increasing costs (to consumers) of higher education in the United States. Universities could benefit measurably if they develop reliable, long-term revenue streams by pricing services based on data and market-driven analyses. Most universities still make across-the-board tuition pricing decisions that keep tuition pricing flat for all or most students. While this direction might seem to offer some immediate relief from financial challenges, these acrossthe-board tuition hikes have led to protests and unrest among students as well as concern and frustration among parents, students, and potential applicants. Even worse, some constituents, alumni included, are losing confidence in higher education s ability to operate in a fiscally responsible manner. They see undiscriminating tuition increases and across-the-board cutbacks, and often conclude that colleges and universities lack the knowhow to balance budgets, plan appropriately, and adjust operations to match market conditions. Most universities, particularly public institutions, have not had mechanisms to develop deep enough understandings of the true cost of their programs and services. The opportunity becomes more apparent when comparing higher education to other industries, such as the airline industry. That industry has been utilizing and mining its extensive customer data for years with great impact and relative success, applying the laws of supply and demand to implement variable price models that attempt to match the cost per seat to the value an individual customer places on that seat. Colleges and universities have adopted aspects of this model by using their financial aid and enrollment management programs to match an applicant s perceived value to the price paid. Strategic tuition pricing, however, can go deeper, helping an institution better understand the value of particular programs and activities to individual students and price according to perceived quality. The strategy can be implemented in many different ways. Tuition Pricing Strategies Credit-Hour Pricing: At most public and private universities, full-time students are those who have enrolled in the equivalent of 12 or more credit hours per term. Many universities charge students the same amount if they are enrolled in 12 to 18 credit hours, allowing students taking more than 12 hours to benefit from free credits. The argument in favor of this approach is that students will maximize their educational experience by taking additional classes. However, there is limited evidence to demonstrate that students are actually taking advantage of this opportunity in the intended way. More notably, this model results in de facto subsidies that may unfairly target low- or middle-class students because the model artificially inflates the imputed minimum credit hour price. For example, the struggling student with two part-time jobs who enrolls in 12 credit hours per semester effectively subsidizes the full-time student with fewer outside activities who can take 15 credit hours at a lower cost per credit hour. Changes such as credit-hour pricing can be costly and difficult to administer. This approach requires the institution to monitor individual student course-load, especially following add/drop periods, and to make adjustments to tuition billing accordingly. In addition, the model often doesn t track costs and revenues on a program or class basis, forcing the institution to make assumptions about allocations of tuition revenue to various academic units and increasing the difficulty of managing instructional resources. If those challenges can be overcome, this can be a successful method for colleges to increase revenues. Upper- and Lower-Level Pricing: The per-credit-hour model addresses what college finance administrators refer to as consumption costs, but it fails to fully capture the true educational delivery costs incurred by universities. 2

4 Instructional costs vary, rising substantially as students begin taking upper-level courses, which often are taught by well-paid, senior-level faculty in relatively small settings. A full professor teaching 20 students per semester at three credits could cost as much as 25 times more per credit hour when compared to a non-tenured instructor teaching a lower-level course to students. This economic challenge is poised to grow. The White House is currently pursuing a number of community college enrollment initiatives that will likely result in significant shifts in the pipeline of students who traditionally attend four-year colleges and universities. If this enrollment trend evolves, more students will take their first two years of instruction at community colleges before transferring to four-year institutions for their upper-level work. The financial impact could be highly detrimental for traditional institutions. Not only do they lose the profits on the large entry-level courses, but their current pricing structures leave them handing out subsidies for the high-cost upperlevel offerings. Universities may need to consider the possibility of charging students more to enroll in upper-level courses to reflect the higher level of services they receive. The additional fees would mostly impact upperclassmen, who tend to be less price-sensitive than freshmen and sophomores because they have already invested more in their education than have underclassmen. The upper- and lower-level pricing structure may require universities to offer additional financial aid to some students, especially double majors. And universities that implement this structure face the challenge of effectively communicating the structure s rationale to their constituents. Phasing in the different tuition levels over time while explaining the cost differential to parents and students can help make the transition more acceptable. Program Differential: Universities large or small, public or private know that demand varies among the wide variety of programs they offer. They know which programs students and their parents view as strong or otherwise more desirable, as well as those that are less in demand. They also know that prestigious programs invariably attract high-quality students. The market perception positions universities to charge more for programs that are widely viewed as prestigious and popular, just as businesses charge consumers more for sought-after products and services. Learning the price elasticity for specific programs can be tricky, but colleges and universities need to be willing to test different pricing models. They should begin their research by knowing the price that students pay to enroll in similar but lesser programs at peer institutions. For truly exceptional programs, Huron Education anticipates that a higher pricing structure can be used without hurting the quality of students and without large increases in financial aid. For example, a recent peer analysis study that Huron Education completed for a Mid-Atlantic public university found that this institution could increase tuition and fees at its most prestigious program by more than 30 percent and still be near the average cost for nonresident students at the top 10 universities in this particular discipline. Universities should consider taking advantage of opportunities like this to enhance tuition revenue. When pursuing alternative pricing strategies, it is important to recognize that many universities, particularly regional public ones, will generally compare their prices to other public institutions within the same state and perhaps an adjoining state, especially if the institution or state has established a reciprocal tuition pricing agreement for nearby applicants. If an institution has a discipline that is highly ranked nationally, however, it should use a national peer group rather than a local peer group to help determine the price range that potential students would be willing to pay. Some universities implement differential pricing strategies for their graduate schools, but may also want to start considering the same strategy for undergraduate programs. Trends demonstrate that students will pay for quality. Execution Executing on some or all of these strategies requires welldesigned plans and effective communication. Implementation planning starts with analyzing and understanding the data. The vast majority of universities have already developed revenue models to help them forecast future tuition revenue and financial aid expenses. These analyses could be further enhanced by building enrollment models to help predict future enrollment decisions by students. Building an enrollment model requires institutions to analyze tuition and fee pricing, financial aid and merit awards, room-and-board pricing, student demographics, as well as the tuition and fees, and room-and-board at peer institutions. 3

5 Strategic Tuition Pricing Here s an example of one: Overview of Tutition and Fee Model Generation Overview of Tuition and Fee Model Generation MODEL INPUTS MAJOR MODEL COMPONENTS MODEL OUTPUTS Tuition and fee pricing Financial aid/merit awards Room and Board pricing Student Demographics Tuition, fees, room and board at peer schools (current and future) Enrollment Model Predicts future enrollment decisions of students Revenue Model Forecasts future tuition revenue and financial aid expenditures Tuition scenario analyzer Enrollment forecasts Revenue forecasts Resulting student composition Revenue and enrollment models together provide guidance, not precise predictions, but they will help universities estimate revenue and student composition, which will help determine which tuition-related strategies to implement. A proven method for optimally evaluating options is to develop models that allow the leadership to evaluate various tuition scenarios and conduct sensitivity analyses, offering the institution an opportunity to predict the impact of certain changes on revenue and student composition. Such models can also help the institution define key performance indicators to help measure their progress and success in achieving stated goals. Financial Aid Decisions: It is vitally important that an institution s tuition strategy goes hand-in-hand with its financial aid strategy. Without financial aid investments, many of these strategies could result in a decrease in yield, potentially lower student quality, and/or lead to a less diverse student population. Some students will undoubtedly need more financial help if any or all of these recommendations are implemented, but crafting an appropriate strategic tuition pricing model that matches the culture and diversity goals of the institution can create a new infusion of revenue that more than pays for increased financial aid. The use of market-based tuition pricing for upper-level and high demand programs can support better strategic decision-making in the financial aid process by allowing the university to direct a greater portion of aid to high-quality, price-sensitive students rather than to students who are less sensitive to price when making these decisions. Enrollment Processes: The admissions and financial aid departments at many universities have become more advanced in recent years in developing attractive packages for sought-after students. Timing is critical, and admissions and financial aid offices must continue to work together to coordinate (1) when to make scholarship offers to students and (2) when and how to determine students financial needs. Universities will need to experiment in this area to some degree. For example, evidence shows that excellent students who receive aid labeled as merit aid rather than need-based aid are twice as likely to enroll because there is a more positive connotation associated with the words merit scholarships. To take advantage of this, admissions and financial aid staff must work closely together to jointly determine individual aid award strategies and to communicate offers to prospective students in a seamless and comprehensive way. To be most successful, universities should encourage a deepening relationship between the two functions that fosters and provides incentives for a coordinated approach to creating the right aid package for each candidate. 4

6 A Call for Action Universities are under significant pressure to reduce cost and raise revenue. Most of the low hanging fruit has been identified and is not sufficient to cover the gap. Many institutions have taken the approach of raising tuition and fees across the board, but are recognizing that differential pricing will likely result in a more sustainable, long term model. Establishing and executing a thoughtful tuition strategy that aligns with an institution s mission, goals, and culture offers many benefits. Optimizing tuition revenue offers the potential for improved resources, allowing the institution to better support applicants with the greatest needs and invest in the programs that are most critical to the institution s mission. A well-defined strategy can also improve an institution s ability to attract and retain a higher quality mix of students who can receive more value for their tuition dollar. About the Authors Tim Fournier is a Managing Director in Huron s Education practice. His professional experience spans nearly 25 years, including more than 16 years assisting academic institutions with business planning, establishing operations, assessing compliance, improving processes and management tools, and creating training and education programs. Prior to joining Huron, Tim was the senior associate dean for finance and administration and first chief operating officer for Northwestern University in Qatar. Benjamin Kennedy is a Director in Huron s Education practice. He has extensive experience with strategy and administrative performance improvement projects for higher education institutions, where he has also helped develop enrollment strategies for several universities. Ben also served as a member of the Duke University Board of Trustees and on the Board of Visitors at Duke s Fuqua School of Business. Prior to joining Huron, Ben was a consultant with Bain & Company and with the Corporate Executive Board huronconsultinggroup.com v 27Oct11