Repositioning Price

Repositioning Price

As they compete against private institutions, public IHEs need to rethink financial aid.

As higher education lurches into the 21st century, the lines of distinction between the private and public sector are becoming more and more blurred. From advancement (fundraising) to academics (honors programs) and from housing (residential colleges) to sticker price (the Miami University of Ohio model), there is less and less difference between what used to be very distinct institutional types. Low cost at public colleges meant access. Private colleges provided more choices through the generous use of financial aid. Today both public and private colleges and universities are competing on net price (i.e., sticker price minus financial aid), especially for nonresident students. This competitive playing field is one in which the private sector has over two decades of experience. The public sector needs to catch up fast to figure out how to get the net price (or discount) "right." So, looking to the private sector to model behavior makes sense, at least as a start.

But tuition discounting (currently practiced primarily by the private sector) has come under fire recently in studies such as the USA Group Foundation report released in December 2000 called "Discounting Toward Disaster" and the May 2003 Lumina Foundation research on "Unintended Consequences of Tuition Discounting." These studies point out that, in the aggregate, institutions that have increased their discounts have not seen corresponding improvement in their results (e.g., quality profile, enrollments, etc.). Certainly it is the case that, within those aggregates, some institutions have been successful with discounting strategies, while others have not. We believe that those who have succeeded have done so through a disciplined use of data.

Any IHE embarking on price
sensitivity analysis must ensure
the integrity of its records.

Any institution embarking on price sensitivity analysis has to begin by ensuring integrity and completeness of admissions and financial aid records. Because for the most part admissions and financial aid offices at state-supported institutions had never been called upon to use data from their files to do the kind of analysis necessary to understand price sensitivity, some critical elements may not have been captured in the student information system or may have been "written over." Similarly, many institutions, regardless of sector, have not annually retained financial aid offers for those students who were admitted and awarded but did not enroll. Price sensitivity analysis requires an understanding of enrollment behavior based on the need of the family, the financial aid offer, and other student characteristics. Such analysis is possible only if all information is available on both enrollees and non-enrollees.

One way some institutions have begun to understand differences in student net revenue production is to look at differences in the average net tuition revenue generated by students with different need and quality levels, segmented by in-state and out-of-state students. While very few businesses would survive if they didn't know precisely what customers "paid" to purchase their product or service--in short, what the net cost to the consumer was after average discounts--many colleges (private and public) just now are taking the time to figure this out. Routinely institutions track tuition income and financial aid expenditures in the aggregate. However, they are less likely to examine net revenue generated by a particular population of students. For public institutions the most obvious differential is between resident and non-resident tuition and fees. However, with merit and talent awards as well as need-based aid, it is likely that subpopulations of students within these categories also "pay" at very different levels depending on their quality, special talents, and need. Creating quality, talent, and need matrices that reflect the average net tuition revenue generated in each segment (e.g., low need, low quality; low need, high quality; high need, high quality; and high need, low quality) can be very instructive.

It is also instructive for institutions to be aware of their trends over time. Segmenting by in-state and out-of-state, freshmen and transfers, the type of trends which need to be followed would include:

Yield on merit-only recipients

Yields among aided versus ineligible versus non-aid applicants

Yields by need level, etc.

These segmentations often take the form of yield matrices segmented by need and grant from all sources at defined levels of quality. Note: If in- and out-of-state charges are different, you must do resident and non-resident versions. This exercise is frequently referred to as "table analysis."

It is also important to know how those institutions with whom you compete are marketing their affordability. In particular, it is important to monitor what merit programs they are advertising. You will want to understand both the award levels and the eligibility criteria. Most institutions advertise their merit programs; however, in many instances the eligibility criteria either aren't specified or are stated as making a candidate "eligible for consideration," thus stopping short of guaranteeing an award at the specified quality level. The difference between these approaches and a guarantee is that the guarantee has the potential to build new demand as well as increase yield on accepted students, while non-guaranteed approaches are only likely to affect yield. Students meeting guaranteed eligibility criteria know before they ever apply that the price to them, before need-based aid is considered, is the sticker price minus the guaranteed award.

In learning about financial aid leveraging from the private sector it will also be important for the public sector to avoid the most common mistakes. First, because more than one department is frequently making awards to students, some institutions suffer from a lack of coordination of funds. For example, admissions offices frequently determine which newly admitted students should receive merit awards. Some athletic departments have grant-in-aid funds to be awarded to athletes depending on division and conference. Many performance-related departments, such as music and theater, award scholarships to new students based on auditions and portfolio reviews. The financial aid office handles need-based institution, federal, and state funds. And of course, some academic departments have their own restricted scholarship funds. If these awards aren't coordinated effectively, institutions run the risk of overfunding some students while underfunding others.

The second common mistake is targeting funds to students who have already decided to enroll, or who are most likely to retain without additional funds. For example, some institutions offer grants to continuing students based on certain GPA or departmental achievements. However, these successful students may be the most likely to retain. Consequently, to ensure the effective and efficient use of institutional resources, awards to continuing students should be targeted to those identified via cohort retention analysis to be leaving the institution disproportionately (e.g., high achievers, students at certain need levels, etc.).

Analyzing price sensitivity is an annual event because of both internal and external changes. Each year a new pool of admitted students funnel through the financial aid awarding process. Their responses to offers of admission and financial aid need to be analyzed and compared to prior years or even incorporated into predictive models in order to understand how enrollment patterns have changed at various levels of quality, need, and grant from all sources. Each cycle is a new event because, in addition to institutional policies changing, there are external variables at play (e.g., what the competition does, changes to state and federal awards, etc.). Not analyzing the most recent year's experience and adjusting awarding policies accordingly could cost an institution in either forgone tuition revenue or unnecessary financial aid expenditure.

For public institutions this is a new frontier. It will require discipline and commitment to gather and analyze the data needed to identify appropriate and efficient pricing and discounting strategies that are likely to be unique to each institution, even those that are part of a state system. Whether it be location, program, reputation, or mission, each institution has its own distinctive value proposition which determines what people are willing to pay for that particular educational experience. Understanding that willingness to pay, based on data, is what will help public institutions "get it right" as they turn their attention towards enhancing net tuition revenue.

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


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