Cutting Price: Factors to Consider

Cutting Price: Factors to Consider

Helping to determine if this high-risk strategy will have high rewards

IN THE CURRENT ECONOMIC environment, it comes as no surprise that some higher ed institutions are beginning to wonder whether a radical strategy like reducing sticker price would be the best way to maintain market share. This spring, deposits were lagging at many private IHEs, even at campuses where admit numbers were up. More families were appealing financial aid awards, and more institutions were responding to those appeals. Officials are concerned students may “melt away” before fall. Clearly, families are more reluctant to make significant financial investments in higher education than they were even a year ago.

In response, institutions are becoming increasingly transparent about how students can meet tuition, room, and board charges. Common approaches to making the case for affordability include offering guaranteed merit programs, providing online aid calculators, listing case studies, and sharing income profiles. Presenting financial aid is no longer just about the steps in the application process.

Some institutions are considering an even stronger message - a reduction in tuition charges. This high risk but potentially high reward strategy of cutting sticker price has been tried. Muskingum College (Ohio) was among the first to implement an across-the-board reduction, followed by others such as Thiel College (Pa.), Wells College (N.Y.), Heidelberg University (Ohio), West Virginia Wesleyan College, and Bethany University (Calif.). Results have been mixed.

Other IHEs are reducing tuition for specific populations. Saint Leo University (Fla.), for example, recently introduced a 10 percent reduction in tuition as an incentive to enroll new online students. Gary Bracken, vice president for enrollment, explains they were able to offer it after greater proficiency in generating online leads drove costs down. “It was only fair to pass these savings on to the new students we were able to enroll once the savings were realized.”

Presenting financial aid is no longer just about steps in the application process.

Southern New Hampshire University, a private institution charging $26,112 for tuition on its main campus is offering a lower cost ($10,000), low amenities option to students studying at three of its satellite campuses. Even public institutions are selectively cutting sticker prices. For example, under a new program at Youngstown State University (Ohio), out-of-state tuition is reduced for students from eight Pennsylvania counties.

The decision to cut sticker price cannot be made lightly. It must be supported by evidence that it would best meet desired enrollment goals, including building demand. Typically, there are some basic conditions that must be met before even considering a price reduction.

  1. The institution needs to be significantly under its enrollment capacity for the strategy to make sense financially. This is because schools that cut tuition are hoping to make up the lost revenue through increasing enrollment.
  2. The financials for an across-the-board cut will work best when almost all students are receiving institutional grant aid at or in excess of the amount of the planned tuition reduction. Aid can be cut when price is cut and most students will pay the same amount. Communication about the cut needs to be clear regarding how aid will be affected. When Blackburn College (Ill.) announced a 15 percent tuition reduction, for example, officials made this statement: “The tuition reduction is made possible by restructuring financial aid policies and significantly reducing what is known as tuition discounting.”
  3. For those offering a tuition reduction to a specific subpopulation, the financials work best when the target population is large but the institution’s current “share” of that market is very low. That way, the cut will have a relatively small impact on current revenue but a potentially large impact on enrollment if demand can be built from the target population.
  4. The marketing of the cut needs to be handled in a manner that gives the public confidence that it is not an act of desperation. Although the “Chivas Regal effect” (the public association of high cost with quality) has been dead for some time, potential students and their parents may still see a dramatic price reduction as a sign of institutional weakness. So those taking that route must develop a communication campaign to reinforce the institution’s value proposition.

This last point is the reason some of the most successful private colleges have deliberately kept sticker prices low all along. Take York College (Pa.), where the tuition and fees figure of $13,680 is less than half the Pennsylvania private school average of $28,800. How can they do this? For one, discount rates are much lower than at the typical Pennsylvania private school. And, contends Frank Mussano, dean of administrative services, “a properly managed private college can provide a unique opportunity for outstanding value. York’s administrative structure is streamlined without the typical heavy bureaucratic layers, creating a cost-effective, agile operation that quickly responds to an ever-changing environment.” Academic administrative and support services are budgeted and monitored in concert with the college’s overall strategic long range plan, which minimizes duplication and waste, he adds.

Many private IHEs have increased tuition at a slower rate for fall 2009 in light of the current economy. This is particularly important when sticker price relative to primary competitors’ is higher than the “prestige” position would justify. Slowing tuition increases for two or three years could result in a better alignment of price and perceived value.

Yet few IHEs have successfully implemented tuition freezes or policies that allow students to lock in tuition at the entry rate. In theory, this latter approach should be attractive to families because it allows them to better plan their finances. But the increase in the upfront tuition charge needed to make such a plan work financially is off-putting.

Other institutions are reducing price another way, by reducing time to degree. For example, an initiative at Lipscomb University (Tenn.) allows students to earn a bachelor’s degree in three years. As the university’s website explains, the plan “requires classes during two summers, resulting in a $10,000 savings and the opportunity to enter the workforce or pursue a master’s degree a year early.”

Regardless of the strategy used to help overcome the very real problem of increased price sensitivity, affordability messages must never replace messages about academic and co-curricular program quality and benefits. Families are looking for value, which is the intersection of price and quality. If messages exclude one of those elements, the institution will not achieve optimal enrollment results.

Kathy Kurz and Jim Scannell are partners in the enrollment management consulting firm Scannell & Kurz. They can be reached via their website, www.scannellkurz.com.


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