Tuition pricing is becoming an increasingly acute problem for colleges and universities; in virtually every higher education consulting engagement these days, we at Kaufman Hall are asked for tuition pricing recommendations.
As tuition prices have climbed, so has the size of tuition discounts. Published tuition rates are now comparable to hotel “rack rates”—the extremely high per-night rates posted for hotel rooms that virtually no one actually pays. Yet high tuition prices can discourage students (and their parents or guardians) from applying if they do not understand that they are unlikely to pay anything near the full tuition price.
There also have been significant shifts in how students, their families, elected officials, and employers perceive the value of different majors and programs. The liberal arts—and particularly the humanities—have been particularly hard hit as the focus has shifted to STEM majors and vocational programs. Enrollment in, and funding for, humanities programs have both declined.
Some institutions have addressed the problem by instituting across-the-board tuition resets. But there is some evidence that these resets are only a short-term solution. A tuition reset is essentially a move to make published tuition align with what students actually pay; it does away with the discounting process to make actual tuition transparent to prospective students and their families. But doing away with the discount also does away with the opportunity to offer prospective students “a deal.” And as in many other areas, higher education customers often conflate higher price with higher quality; an institution that sets a published tuition price well below that of competing institutions may appear less prestigious from the customer’s perspective.
We believe a better approach to tuition pricing is one that combines evaluation of the competitive landscape with a careful analysis of the institution’s current academic product mix, and then making informed decisions about the academic product mix and the prices the institution’s programs and majors can support.
The competitive landscape
In an earlier blog on developing a customer-centric strategic planning process in higher education, we noted that a customer-centric focus does not mean losing sight of the competition. As in any business or endeavor that sells a product to the public—including higher education—the competitive landscape should help inform strategic decisions.
A competitive landscape evaluation should consider several key questions:
- Which institutions do we compete against?
- Are there any institutions or organizations we compete against that are not traditional higher education institutions?
- Is the competitive landscape for our undergraduate programs the same as the landscape for our graduate programs?
- Do our different departments, majors, and programs compete differently and pull from different student pools?
- How much do the dynamics of our competitive landscape affect our ability to attract desired students to our institution?
As these questions suggest, the evaluation will likely result in a range of competitive landscapes and their corresponding prospective student pools that shift according to department, major, program, and degree level. Once these landscapes have been identified, their attributes can be further defined. For example, does the landscape contain a significant number of non-traditional “disruptors”? What are the attributes of the students attracted by competitors? How are program-specific competitors pricing the products they offer?
The academic product mix
Pricing analysis of an institution’s academic product mix must be based on an objective, data-rich assessment of the institution’s programs and majors. The ultimate goal is to determine the profitability of each program at the different degree levels at which it is offered (e.g., undergraduate, professional, graduate, etc.). This requires data on the program’s revenue (based on enrollment at current and historical tuition price points) and the program’s expenses, including the cost of resources used, program length, faculty requirements, and extra expenses such as lab space or software.
For successful programs—those that are profitable—key questions are whether the program has room for growth, whether the tuition charged is appropriate vis-à-vis the competition (particularly whether the market could support a tuition increase and at which degree levels it could do so), and how the institution can provide sufficient resources to sustain or enhance the program’s success.
For unsuccessful programs—especially those that are losing money for each enrolled student—the questions are more difficult. Is there a reasonable opportunity to improve the program’s performance, either by reducing the program’s costs or increasing its revenues? Note that increasing revenues is not just a question of increasing enrollment; if a program is losing money for each enrolled student, a situation that happens more often than might be expected, increasing enrollment may only increase the scale of the program’s losses. If tuition for the program is low compared to the competition, there may be an opportunity for a tuition increase that could move the program to profitability. There might also be opportunities for partnerships that could reduce expenses or provide additional resource support. A nursing or health professionals program that is losing money, for example, might be able to partner with and receive financial support from a local health system that is looking to improve its talent pipeline.
If there is not a reasonable path toward profitability, leadership must seriously consider whether the resources devoted to that program would be better used in support of the institution’s successful programs and/or to start new ones.
An analysis across programs and majors and at different degree levels may also indicate the potential for a differential tuition pricing strategy. Graduate programs might be priced higher than undergraduate; STEM programs may be priced higher than humanities; online programs might be priced below in-person programs. Again, the competitive landscape analysis will help identify where opportunities lie for tuition increases, and where current tuition levels might be negatively affecting enrollments.
Conclusion: Tailoring tuition pricing and the academic product mix
A broad-based tuition pricing reset is unlikely to be sustainable over the long term. Lower prices might create a market perception of decreased value, and importantly, it is nearly always difficult to resist the temptation to resume tuition discounting. If tuition has been lowered, and discounting creeps in again, the institution will find itself in a situation even worse than what it was facing before.
A combined assessment of the competitive landscape for the institution’s programs and majors with a profitability analysis of the institution’s academic product mix can identify opportunities to tailor both tuition pricing and the academic product mix. This process can help the institution create a portfolio of programs and prices that will offer a significant component of the solution ensuring the institution’s long-term success and sustainability.