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2003 Presidents Institute Post-Conference MaterialsCharting the Course for Tuition Pricing and Discounting:
Kathy Kurz
Across the country, higher education institutions are taking a wide variety of approaches to tuition pricing and discounting. Some have historically taken a high price/high discount approach. Others have kept their price and discount increases suppressed. Some have cut their prices, while others have dramatically increased price to reposition against their competitors. Some are spending as much as 90% of their institutional aid on merit scholarship programs, while others are still predominately offering need-based aid. During today’s session, three presidents will discuss three very different approaches that have proven successful for their particular institutions. The key to charting the right course for your institution, however, lies in asking the right questions and gathering the right data to clearly assess your position in the higher education “food chain”; in short to understand accurately the price sensitivity of your market. Questions to ask as you chart the way: Regardless of the type, size, and prestige of the institution, there are some universal questions to be asked to understand your market position and pricing/discounting opportunities. And, there are specific data to be gathered to answer each question. Those questions (and where to find the data) are detailed below. #1. Are we perceived as worth the price we are charging? The answer to this question is critical as market strength is all about perception and value. What people are willing to pay (and therefore the financial aid discount they will demand) has everything to do with what value they place on what they are buying. Consequently, understanding your market position—your position in the competitive “food chain”—will go along way toward helping an institution understand the price sensitivity of its applicant pool. There are several different indicators to answer this question. First, you need to know your admission trends from the point of inquiry forward. Have inquiries and rates of conversion from inquiry to applicant been increasing or decreasing? Are there any trends to those changes? For example, if applications have declined, are you disproportionately losing students who would be paying your full price? Second, you need to understand your price position against your primary competitors. Is your price in line with your student quality profile? Importantly, there is a strong correlation in the marketplace between measures like selectivity and average SAT score, and the sticker price charged. Third, what is happening to your retention rates? Again, are you disproportionately losing your full pay students? If so, it could be an indication that you are not perceived as worth the full price you are charging.
Again, there are multiple indicators to examine in answering this question. First, you need to know how your competition changes from the point of initial inquiry to matriculation. If, early in the process, you compete with a mix of public and private institutions, but by the time students are admitted your overlap is entirely with other private institutions, that shift could be an indication that a portion of your initial pool doesn’t see you as affordable. Second, you need to know how the socio-economic mix of your applicant pool is changing. Do you find extremely low yields on a growing portion of your pool that does not apply for aid? That could be a reflection that students are losing interest quickly after applying, or that they don’t believe you are affordable and so don’t bother to apply for aid. There are some very simple techniques—such as publishing in your admissions literature information about the income profile of your incoming students—that will help communicate that students from all walks of life have found a way to meet your expenses. Finally, you need to know what is happening to yields on students of different income levels. If you find a particular income or need range where yields are consistently falling, that may be an indication that they no longer find you affordable—particularly if they choose to attend a low cost public alternative instead. #3. Are we spending our aid dollars efficiently? The financial aid budget is often second only to the salary line as the biggest expense item in the operating budget. Consequently, this is a question near and dear to the hearts of chief financial officers. Once again, good data can be gathered to answer this question. In fact, some enrollment managers and financial aid officers are becoming quite sophisticated in their data analysis, using sophisticated modeling techniques to understand the impact of grant and other student characteristics on the probability of enrollment. For institutions that may not have explored this question before, however, a good place to begin is to look at yield rates on different quality groups of students, segmented by $1000 or $2000 increments of need and grant. This technique is known as “table analysis”. The goal of this analysis, as with the more sophisticated approaches now becoming popular, is to understand the impact of institutional grants on the probability of enrollment in order to better target finite institutional aid resources. A sample of the output of “table analysis”, along with the conclusions to be drawn, is provided in Table #1 below. Table #1
In this example, yields suddenly jump for students with SAT scores between 1100-1150 and need between $10,000 and $12,000 when $5,000 to $6,000 in grant is offered. Offering more than that level of gift aid will lower net tuition revenue, as yields increase only modestly. Offering less than that level of gift aid will lower net tuition revenue as yields fall off substantially. (Obviously, smaller institutions need to be cautious of drawing hard and fast conclusions from cells that contain only a few examples. Often it is helpful to combine more than one year of data in order to increase the sample size.) #4.) Are we investing the right level of institutional resources in financial aid to meet our enrollment goals? This question is all about institutional trade-offs, and is particularly appropriate for institutions that are at capacity and are now focused on shaping the class, rather than simply making the class. Institutions in this position often need to make deliberate and data-driven decisions about trade-offs between desirable class characteristics and net tuition revenue. A first step in understanding these tradeoffs is to look at the average net tuition revenue currently received from different subgroups. For example, what is the difference in net tuition revenue generated by students with high SAT scores and GPAs versus students who are at the lower end of the quality continuum? Using the table analysis described above, the institution can then ask itself how much net tuition revenue could be garnered if less aid was offered to meritorious students, resulting in a decline in their yields, and then more lower quality students were admitted to “fill in” the class. How much would overall class quality characteristics be impacted? These are value-laden issues, but having the data to more clearly understand the tradeoffs will make the discussions more meaningful. At one Scannell & Kurz client, for example, when the community understood the difference in net tuition revenue generated by transfers versus freshmen, they began to ask themselves how they could become more “transfer friendly.” Summary There is no one strategy or approach to pricing and discounting that will work for every institution. Each institution must chart its own way, using information about the competition and historical data on the behavior of admitted students to understand its market position and then weighing institutional goals and priorities to arrive at the best approach.
Scannell & Kurz, Inc.
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