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Strategic Tuition Pricing & Discounting

What's right for your IHE? If you don't ask the right questions, you can't get the right answers

Few topics are hotter right now than that of tuition pricing and discounting. And that's because across the country, colleges and universities are taking no end of approaches to the matter. Which institutions are on target? Which are not? Some have historically taken a high price/high discount approach. Others have kept price and discount increases suppressed. Some have cut prices, while others have dramatically increased price to reposition against competitors. Some are spending as much as 90 percent of their institutional aid on merit scholarship programs; others are still offering predominately need-based aid. Where is the key to charting the right course for your institution? Answer: It lies in asking the right questions and gathering the right data to clearly assess your position in the higher education "food chain"-in short, you need to clearly assess the price sensitivity of your market.

Regardless of the type, size, and prestige of the institution, there are four universal questions to ask, to help you understand your market position and pricing/discounting opportunities. Just as importantly, there are specific data to be gathered in order to answer each question.

1) Are we perceived as worth the price we are charging? The answer to this question is critical, because 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 a long way toward helping your institution understand the price sensitivity of its applicant pool.

You'll need 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? Increasingly, there is a strong correlation in the marketplace between measures such as 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.

2) Have we convinced students that we are affordable? Again, you'll need to examine multiple indicators to answer this question. First, you'll need to know how your competition changes from the point of initial inquiry to matriculation. In other words, which institutions do you compete with early on; which later? Here's an example for private institutions: Does your school compete with a mix of public and private institutions early in the process, but mostly with other private institutions by the time students are admitted? If so, 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 socioeconomic 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. Simple techniques-such as publishing income profiles of incoming classes in the school's admissions literature-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 these applicants no longer find you affordable-even if you are a low-cost public institution!

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 respond to this question. In fact, some enrollment managers and financial aid officers are becoming quite sophisticated in their data analysis, using advanced 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 $1,000 or $2,000 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 the chart below.

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, in order to meet our enrollment goals? This question is all about institutional tradeoffs, 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 tradeoffs 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 we've described, 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 affected?

The issues around tuition pricing and discounting are value-laden ones, but having the data to more clearly understand the tradeoffs will make the discussions more meaningful. For one of our clients, for instance, understanding the difference in net tuition revenue generated by transfers versus freshmen, prompted them to ask themselves how they could become more "transfer friendly."

There is no one strategy or approach to pricing and discounting that will work for every institution. You must help your college or university to chart its own way, using information about the competition and historical data on the behavior of admitted students. In that way, you may better understand your institution's market position. Only then can you weigh institutional goals and priorities to arrive at the best approach. U

Kathy Kurz and Jim Scannell are partners in the enrollment management consulting firm, Scannell & Kurz, Inc. (