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Higher Education Policy and Practice

Pricing Pressures in Higher Education

Price as a market clearing device is sometimes distorted in higher education because of the academe’s not-for-profit social purpose and endowment income, for instance. Colleges also often distort price when their governance structures make them slow to react to market forces, unable to clearly articulate goals, and inefficient in the selection of technologies to deliver services or when the determine price solely as a function of internal costs of operation. No matter how wise or foolish we may be in determining the price we charge, these prices do inform prospective students and their parents about the colleges they will consider. And despite the effects of endowments and collegiate values, price remains a balancer between demand and supply. So, many mid- to low-quality institutions are using, and more will need to use in the future, an aggressive price discounting strategy to attract students.

Excess demand should mean higher prices or tuition rates, and excess supply should result in lower prices or tuition rates. While this is not always evident from posted prices, it is more evident when tuition net of discounts is used as the price of education. This pricing relationship is not as clear among wealthy institutions such as Harvard, Princeton, Yale, Duke, or Stanford that have high demand and also offer large pricing discounts. They use large endowments to subsidize tuition so that they can attract the best academic talent.

For the rest of our colleges and universities, pricing is a critically important matter. And there is a fundamental dynamic that determines an enrollment driven college’s flexibility in pricing: The rate of change in its enrollment. When enrollment falls or even when it is stable, these colleges are forced to raise tuition faster just to keep pace with their internal inflation rate. Unfortunately, this fundamental dynamic will eventually push a college’s price to an unfavorable position vis-à-vis its market. And more and more colleges may face this dynamic as student markets enter a period of tremendous demographic change. The west, southwest, and southeast should see strong growth in the traditional and adult components of their markets. However, the northeast and mid-west will see a drop-off in the number of high school graduates that will last through 2015. Even the adult market will decline here.

High school graduates with low grade point averages and low achievement test scores are already being recruited more heavily by mid- and low-quality colleges and universities. And these colleges are finding that the cost of educating these students has been rising dramatically. As some markets get pinched, these dynamics are likely to accelerate. But even if these colleges attempt to maintain applicant quality and address the shrinking market by recruiting students in more abundant yet distant applicant pools, the cost of enrolling a new student will increase while they spend more on travel, advertising, and financial aid. And one of the main competitive devices in these new markets will likely take the form of large price discounts as colleges in declining markets fight among themselves for more distant pools of students. The exasperating result will be pressures to increase in costs and to reduce cash flow from tuition.

Enormous pressures to reduce tuition are likely as markets get tighter, so most colleges are going to need to keep tuition increases in check. And to do that, they’ll need to take important steps to control cost or spend available cash more wisely.

Here are some suggestions on how to manage price and continue to offer a quality educational program.

  1. Carefully manage new costs – especially personnel costs that usually have the greatest potential of quickly driving up costs.
  2. Add new revenue programs or revenue sources at least every other year.
  3. Weed out programs by using responsibility management analysis to identify programs with costs that exceed revenue. This analytic method will take into account the issue of financial productivity for general education service courses.
  4. Develop a coherent financial aid strategy to target students that will enhance the college’s academic standing and its market reputation.
  5. Get auxiliary services to produce positive net income or out-source the program.
  6. Place a portion of positive cash flow into a quasi-endowment fund that can throw off income to reduce reliance on tuition income.

Originally posted March 16, 2008

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