Transparent Pricing in Higher Ed

If you haven't read it yet, I recommend that you pick up a copy of Paul Tough's book The Years that Matter Most: How College Makes or Breaks Us. In particular, the section starting on page 182 of the hardcover is a revealing picture of how college finances affect recruiting.  You can find the same (or very similar) content in this New York Times article.

In short, most private colleges need to balance academic admissions requirements with what are essentially financial admissions requirements. The latter are needed to ensure sufficient revenue to make a budget. Public institutions are not immune either, since for many of them their revenue also depends heavily on tuition. Academic goals and financial goals for recruitment vary widely from one institution to the next, depending on market position, endowment, and other factors. This leads to a lot of variation in the actual price a given student might pay at different institutions.

Every college now has a net tuition calculator, which--given a prospective student's characteristics--estimates the out-of-pocket cost, which often includes loans. However, this is just an approximation.

Mark Salisbury's idea was to make college pricing transparent by sharing real offers received by accepted applicants: crowdsourcing the problem. The site is about a year old, and you can find it at tuitionfit.org. To get a sense of how it works, look at this article. It looks like his timing (and co-founder Kimberly Dyer) was stellar, given the increased competition colleges are seeing from demographic changes and from the new acceptance of "student poaching" as an enrollment strategy.

Planning Resources

As we get into the season of setting tuition, finalizing aid policies, tweeking strategic plans, and prognosticating about enrollment, it's handy to have a reference library.

Some of these links have been cited before, but I wanted to put them all in one place. I will likely add to them without bothering to add "update" to the post, to make this a reference page of sorts. If you have a good one, please forward it.

Strategic planning:

• Six Essentials—and Six Common Mistakes—in Cabinet-Level Strategic Enrollment Planning
• NACUBO Benchmarking tool
• IPEDS Peer Comparison Tool
• NACUBO Financial Services Benchmarking Survey
  

Retention/Success:

• Noel-Levitz: 2009 Student Retention Practices and Strategies at Four-Year and Two-Year Institutions
• The Pell Institute: Publications on Opportunity and Successful Strategies
  

Recruitment:

• 2009 Student Recruitment Practices and Strategies at Four-Year and Two-Year Institutions
• Lawlor Group: The Year in Review College Admissions Averts a Crisis
• Lawlor Group: When Market Conditions and Public Perception Collide A Looming Crisis
  for Higher Education
• NACUBO:New Survey Predicts Enrollment Will Hold Steady at Independent Institutions
• Applywise.com: New Survey Indicates that College Bound Teens Will be Particularly Hard Hit by Economic Crisis
• IBM and Marist Survey Shows U.S. College Students Want Technology Skills to Compete for Jobs
• Index of whitepapers at Education Dynamics (requires free sign-up to download papers)
• 2009 Report on the Impact of the Economy On College Enrollment
• Index to SEM Works white papers
  

Pricing:

• Admission, Tuition, and Financial Aid Policies in the Market for Higher Education
• Research Tools to Guide Tuition and Financial Aid Decisions
• Overcoming price sensitivity … Means marketing affordability, and it's what every IHE needs to do - On The Money
• College Board: Trends in College Pricing 2009

Financial Aid:

• College Board: Trends in Student Aid
• Noel-Levitz: 2009 Discounting Report
• 2007 NACUBO Tuition Discounting Study Summary Results
  

Web Strategy:

• Scrolling Toward Enrollment Web Site Content and the E-Expectations of College-Bound Seniors
• Web Content Management Systems

Pricing Higher Ed

My last post included a link to "Admission, Tuition, and Financial Aid Policies in the Market
for Higher Education" by Epple, Romano, and Sieg from 2003. In the paper, they test economic models against actual data and reach some very interesting conclusions about how pricing works. One of the assumptions is "In our model, colleges seek to maximize the quality of the educational
experience provided to their students."

I thought about this for a while. It's not obviously true, is it? I'm trying to remember how many meetings I've sat in where someone talked about the quality of educational experience. Of course, in many small ways programs, individual instructors, chairs, and so on do bits and pieces that impact this quality. And the SACS Quality Enhancement Plan is supposed to turn this into a visible project.

But by and large, I think most of my meeting time has been spent on solving problems, grinding away at the routine bureaucracy, or (once in a while) trying to make the bureaucracy work better. Of course, outcomes assessment is supposed to lead to continual improvements in the quality of education, but it would be a wonderful thing if board meetings were opened with the sentiment: we're here to improve the quality of educational experience.

As it turns out, I'm in the middle of a project to improve the "experience" part of that by helping organize strategic planning action items along those lines, and I'm going to start using that language.

In the article, the authors give some dependencies for quality:

1. peer ability of the student body
2. a measure of peer-student income diversity
3. instructional expenditures per student
   

Quality is relative, and two of the dependencies listed above are intuitive: students don't want to attend classes populated with students who are all less able than themselves. They also perceive the institution's ability to spend money in the classroom. This one is reflected in college rankings too (see "Zza's Best Liberal Arts Schools"), which probably has some affect on decisions. The second dependency, however, is surprising to me.

They see a distinct stratification that bestows economic benefits to the top schools:

Colleges at low and medium quality level have close substitutes in equilibrium and thus a limited amount of market power. Admission policies are largely driven by the “effective marginal costs” of educating students of differing abilities and incomes.

Colleges with high quality have more market power. These colleges do not face competition from higher-quality colleges. Hence, they can set tuitions above effective marginal costs and generate additional revenues that are used to enhance quality.

This suggests a Darwinian struggle for schools at the low and mid-levels of means and quality. In a catch-22, they lack the pricing power to enhance their position much. But once breaking through a ceiling, it becomes easier. At least that's my interpretation.

On the subject of price, the authors illuminate the second dependency (financial diversity):

We also find that colleges at all levels link tuition to student (household) income. Some of this pricing derives from the market power of each college. This allows colleges to extract additional revenues from students that are inframarginal consumers of a college. However, as noted above, our empirical findings suggest that market power of lower and middle ranked colleges is limited. This suggests that pricing by income may be driven by other causes.

I found an explanation of what an "inframarginal consumer" in another source "The inframarginal consumer is willing to pay more for the good than is the marginal consumer." So, if your college has a good market position, you can charge a premium. But the authors argue that that this isn't the whole story:

In this paper, we then also explore the role that income diversity measures play in determining college quality. Our findings here indicate that colleges and students believe that the quality of a student’s educational experience is enhanced by interacting with peers from diverse socioeconomic backgrounds.

Obviously there are many reasons for wanting a diverse student body, but the authors propose to actually use that as a factor that contributes to the price model. This begins to make more sense in Section 6 of the paper, where they verify empirically that college quality increases with income diversity, stating that "To attract students from lower-income backgrounds, colleges give financial aid that is inversely related to income as detailed below." While this is no doubt true for some institutions, others have a more directly self-interested reason for giving need-based aid: to increase enrollment in those students who couldn't otherwise afford to attend. I talked about the revenue-generating effect of this "gap filling" in "The Power of Discriminant Pricing."

Also in Section 6, they make an observation about college size:

Absent scale economies, peer effects and endowments create a force for colleges to reduce size to increase student quality–in the limit maximizing quality by admitting a handful of brilliant students and lavishing the entire endowment on educating those students. The countervailing effect of scale economies is captured in our cost function primarily by the c3 term in the cost function.

This outlines a good strategy for an elite school: keep it small because it's easier to maintain a high level of average student quality, but not so small that the economies of scale drive up costs unreasonably.

A hundred points of SAT is worth between $4688 and $10363 in merit aid (in 2003), according to the model output. The difference depends on what tier of college the applicant applies to.

Conclusions: First, remember I'm not an economist. But the paper is clearly written, and you can skip the mathy bits easily enough. The model presented has errors, as the authors describe, but the approach seems to lead to some insights, like the relationship between size and quality, the effect of financial diversity on institutional quality, and price sensitivity by student ability and income. I have not delved into all of these in my notes above. I don't know how hard it would be to simulate their model numerically to actually use it to build your policies (e.g. by running scenarios), but it's probably worth showing it to your IR office. And if you have an economics department handy, maybe they can shed some light as well.

Price Elasticity

Soon enough, boards and presidents, committees and task forces, will take up the question of setting tuition for next year. The discussion must vary considerably from institution to institution, but for tuition-driven privates, it's a nail-biting exercise.

The unthinking version goes like this:

President: Well, we have all the budget requests now. How short are we?
Finance VP: We're a million short, after trimming.
President: How much do we have to raise tuition in order to close the gap?
Finance VP: (calculating) About seven percent.
President: Great. That settles that. Next on the agenda is the parking problem.

The list of reasons why this won't work is long. First, one must of course account for additional financial aid awarded when the tuition goes up: probably in the neighborhood of 40% of the gain. But it could be worse than that. It might happen that net revenue actually decreases when one raises tuition. This is related to price elasticity or price sensitivity: how does the demand for education at your fine institution vary with cost?

I have started a survey of ideas out there for approaching this problem, and this post will provide links to some articles. Down the road, I'll try to give more analysis and detail. For several of the articles, you need access through your library to get them.

University Business takes the question head-on with "Research Tools to Guide Tuition and Financial Aid Decisions," from 2007 but still quite applicable. They describe a tuition pricing study:

A tuition pricing study involves a blind survey of prospective students and their parents. Since response rates are better, and the sample can be controlled more carefully, most studies are conducted via telephone.

Here's an old (1995) article called "Tuition Elasticity of the Demand for Higher Education among Current Students" in Journal of Higher Education. An even older (1987) article in the same journal is "Student Price Response in Higher Education."

A 1997 case study can be found in "Some new evidence of the character of competition among higher education institutions" in Economics of Education Review.

There are a lot of old papers you can find on google scholar, but not many recent ones. Here's a magazine article, again from University Business (2003) "Overcoming price sensitivity ... Means marketing affordability, and it's what every IHE needs to do.(On The Money)" that makes an interesting charge:

Unfortunately, the financial aid award letter itself, although a critical component of communicating affordability, comes too late in the process to influence anything but yield on admitted students--significant, certainty, but in many instances, not sufficient.

This is an interesting practical problem, and the article poses some great solutions. Forward this one to your FA director today. Seriously.

If you like economics, you may find this one palatable: "Admission, Tuition, and Financial Aid Policies in the Market for Higher Education," in Econometria (2006). Their models shows "that the model gives rise to a strict hierarchy of colleges that differ by the educational quality provided to the students." Also:

Our empirical findings suggest that our model explains observed admission and tuition policies reasonably well. The findings also suggest that the market for higher education is quite competitive.

It's very dense with formulas. I'll try to read the tea leaves when I have more time.

Net Cost of College Drops

tl;dr Although sticker prices have risen dramatically at non-profit privates, actual average cost has dropped due to institutional discounting.

The College Board's "2009 Trends in College Pricing" (pdf) is a fact-packed publication worth perusing. The narrative in the popular press is by now well-established: tuition keeps rising faster than the consumer price index. Examples:

• "The True Cause of College-Tuition Inflation?" (April 2009)

• "The Skyrocketing Costs of Attending College" (October 2009) In this article, one's eye jumps to the dramatic graph, reproduced belowThere is a disclaimer that these prices are not what students actually pay, but that topic isn't mentioned again.

• "College Costs Keep Rising, Report Says" (October 2009) refers to the College Board source article at the top, but chooses to underline sticker prices rather than net prices.

Although that turns out to be true that tuition increases have outpaced inflation, one should pay attention to the fine print (quotes from "2009 Trends in College Pricing"). First the bad news:

Published tuition and fees at public four-year colleges and universities rose at an average annual rate of 4.9% per year beyond general inflation from 1999-2000 to 2009-10, more rapidly than in either of the previous two decades.

However,

The rate of growth of published prices at both private not-for-profit four-year and public two-year institutions was lower from 1999-2000 to 2009-10 than in either of the previous two decades.

Once one goes beyond sticker prices and looks at discounted prices, the price increase (on average, at least) vanish:

Although average published tuition and fees increased by about 15% in inflation-adjusted dollars at private not-for-profit four-year colleges and universities from 2004-05 to 2009-10, and by about 20% at public four-year institutions, the estimated average 2009-10 net price for full-time students, after considering grant aid and federal tax benefits, is about $1,100 lower (in 2009 dollars) in the private sector and about $400 lower in the public sector than it was five years ago.

The excerpted graph shows that the dramatic change in sticker price did not affect net price at privates:

(grey is room and board, light blue is advertised tuition, dark blue is tuition after aid)

Where does the aid come from, that makes the difference between gross tuition and net tuition? In the College Board companion report 2009 Trends in Student Aid (pdf), we learn that private not-for-profits are discounting more heavily:

Institutional grant dollars per FTE student increased by 7%, from $1,718 to $1,840 (in 2008 dollars) from 1998-99 to 2003-04, and by 19% to $2,190 over the next five years.

That 19% figure is pretty dramatic. Note that this doesn't mean that the average discount rate increased by 19%, but we would expect a 4-6% increase. The report doesn't directly track that statistic, unfortunately. There is a chart of all aid sources for undergraduates for perspective:


The institutional grants portion lumps together publics and privates, and so doesn't give a good idea of what the discount rate is for privates. For more on that we can turn to a NACUBO publication "Tuition Discount Metrics," where we learn:

In the 1990s and early 2000s, discount rates jumped rapidly. For example, from fall 1990 to fall 2002, the average tuition discount rate (the share of tuition and fee revenue devoted to institutionally funded grant aid) at four-year independent institutions increased from 26.7 percent to 39.4 percent, and the share of first-time, full-time freshmen who received an institutional grant award grew from about 62 percent to 81 percent.

Discounts have stabilized at that level since, the article continues, pegging the 2007 figure at 39.1%. No data for 2008 or 2009 are given in the article.

Note that average costs and individual costs are different things. So even though net tuition costs have dropped at privates (excluding for-profits), the way that happens affects different kinds of students differently; discounts are unlikely to be evenly applied across the board because this defeats the purpose of the policy, which is to engineer the characteristics of an incoming class while maintaining the revenue stream. Often this can mean discounting prices to high-income families because those students are most likely to have high SAT scores. (see "Money, Genes, and College"). More in that theme after I've had more time to dig through the data in the reports.

The story of dropping prices is apparently not the same at for-profits (quote from College Board cost report):

For students at all income levels, net tuition and fees at for-profit institutions increased 8% to 10% per year beyond inflation between 2003-04 and 2007-08, compared to 0% to 2% at private not-for-profit four-year colleges, 0% to 4% at public two-year colleges, and -6% to 3% per year at public four-year colleges.

Notice that is net tuition, not gross tuition. Aid patterns are different too:

In 2008-09, 88% of students enrolled in for-profit institutions used Stafford Loans, compared to 55% in private not-for-profit four-year institutions, 42% in public four-year institutions, and only 10% in public two-year colleges.

It's not surprising that the business model of for-profits would show up in this kind of statistic, and it underlines some of the politics and attention being paid particularly to federal aid and loan programs for the for-profits.

Zza's Best Liberal Arts Schools

US News college rankings get a lot of press, not just because of the rankings themselves. Critics rave about how arbitrary the scores are. Heck, I've done it myself. Just to show how easy it is, I decided to to create my own college rankings and become rich and famous just like them. All the data you need is freely available on the IPEDS Executive Peer Tool. If you want a numerical rating based on the best quality data you're likely to get it, that's the place to start.

I decided to look at mid-sized liberal arts institutions, so I picked Davidson College as my focus institution and then used the filters to select all similar schools. There were 171 of them. Unfortunately, the reporter will only spit out data on 100 at a time, so I had to break it into two groups. But never mind that. A sample from the data menu is shown below.

Note that the data is a little out of date, but it's the most recent in the system.

To keep things simple, I decided to see where you're likely to get your money's worth as a student. I chose several variables to look at, including headcount, average tuition, average institutional aid award, and instructional costs per FTE. In the end, the ranking formula I chose was a simple one:

Value = Benefit/Cost = (amt spent on instruction/FTE) / (tuition - inst. aid)

Here, (tuition - institutional aid) gives us the actual average cost to attend. Dividing this into the amount spent on instruction per FTE should give us an idea of how much quality one gets for one's dollars.

Without further ado, here is the list for all institutions with Value > 1.0 (rounded).

The ratios are quite striking. For every dollar you spend on tuition at Williams College, you're getting over five times as much in return, just for instructional costs! No other institution even comes close to that.

I also looked at how much endowment income per student was in relation to how much institutional aid was awarded. I assumed a nominal 5% return on investment. These numbers give you an idea of how much of the endowment return is spent on financial aid: the ratio of endowment return per FTE divided by average aid per FTE gives you an idea of how the school uses its endowment. For the top five schools on the list above, this is more than 100%, meaning that each of them has endowment draw left over after "paying out" institutional aid. This "Endowment Power" index is labeled Draw/Aid below.

I would take this to confirm these five as being a good value for your money considering the professorial talent on hand and the extra money that goes to fund administration and other wonderful things. Of course, you have to get admitted first...

In case you're wondering, the US News list has these top five liberal arts colleges:

1. Williams College
2. Amherst College
3. Swarthmore College
4. Middlebury College
5. Wellesley College (tied for fourth, actually)
   

Pomona is tied for sixth. Middlebury College isn't on my list because it doesn't have tuition data listed in the IPEDS dataset I got. I dug around on their website just now and found the current tuition to plug in, but the value quotient only comes to 1.0 (rounded), so they wouldn't have made my list anyway.

It's interesting to graph the Value, as I defined it against the Endowment Power in a scatterplot, shown below.

The outlier on the left is Brigham Young University-Hawaii. The cluster above and to the right of the main mass is our top five. They really are in a category of their own. Zooming in is interesting: it shows further differentiation, as if there's a power law at work here, but I haven't checked that.

If you'd like to play with the data yourself, you can download it in tab-delimited text format here. The following institutions had missing data of one sort or another, and are not included in the set:Bates College, Colby College,Connecticut College, Lindsey Wilson College, Middlebury College, Union College,St Lawrence University,Whitman College.

I guess I have to take back any snarky comments about US News I may have made. It looks like their top five rankings for liberal arts schools are pretty sound. This isn't to say the rest of the listings aren't a bunch of hooey--they may be, but I haven't seen it yet. I was all prepared to argue (see my previous few posts) that they were generating and selling estimator error, but this is a case of a nice theory encountering actual facts.

A whole other line of thought involves the actual costs of these schools. Notice how low the tuition - aid averages are? And this is just institutional aid, or discounting as it's sometimes called. The prices on that list don't seem to jibe with all the rhetoric about inflation of higher ed costs. But I may be premature...that's a topic for another time.

You can head over to IPEDS and roll your own metrics.

Update: A commenter (see below) caught the fact that not all students receive institutional aid, which means the conclusions only apply to students who get that aid. Some stats on that are given in my comments below. This fact would also skew the ratio I called endowment power, since denominators are different in aid/aid_students and return/all_students.

I also fixed a typo.

Update 2: I posted another list for full-pay students here.

Discounting the Recession

Has the demand for the products of higher education risen or dropped during the recession? There are suggestions from some quarters that shoppers are more discerning, and don't take for granted that loans for an education may be worth the cost (see here for example).

The Lawlor Group, an educational consulting outfit with a snazzy website, advises in their recent publication "When Market Conditions and Public Perception Collide," by Amy Foster:

Forget what you thought you knew about supply and demand.

As for supply, the article shows a map of the United States with projected change in high school graduates over then next decade. This picture varies dramatically from state to state. A section showing the southeast is reproduced below.

In opposition to the numbers of college-seekers is the price of higher education, which as we know from unrelenting media coverage has been on the rise: 4.6% in recent years, compared to the consumer price index of 2.2% per annum. Much of the cost is deferred:

The amount of loan debt carried by the typical graduating senior has more than doubled over the past decade, from $9,250 to $19,200—that represents a 58 percent increase after adjusting for inflation. (pg. 11)

The debt load has been exacerbated, the author argues, because of low savings rates and stagnant earnings.

Financial aid policies make no sense in many cases. There is an over-emphasis on merit aid over need-based aid:

[M]eritbased aid is more efficient in attracting high-achieving students—the type of student body that can make a college appear more elite in national rankings like U.S. News & World Report’s America’s Best Colleges. (pg. 17)

If you follow the research reports in Postsecondary Education Opportunity you won't be surprised by this--it's been a trend for a long time for universities to bid up the price of the "best and brightest" and perversely throw more and more money at those who can best afford college to begin with. Socio-economic status correlates with attractiveness in the admissions funnel.

I've argued that low-SAT students are disproportionately under-priced because of this effect, and that using indicators like non-cognitive variables, we can find excellent students, build a diverse student body, and feel a lot better about how our institutional aid budget is spent.

With this as background, some numbers from Noel-Levitz are very interesting. In their "2009 Discounting Report" they analyse the financial aid strategies and outcomes for 121 private colleges that partner with the company. The data set is from 2007-8. Among the highlights, they note that:

• Tuition rose 6% on average
  
• Unfunded aid increased by about 10%
• More aid is going to meet need
• Discount rates increased 1%
• Freshman enrollment increased 2.7%
• Net revenue increased 8% !!!

Here, Net Revenue = Enrollment * Tuition * (1-Discount rate). The net revenue per student is the real cost passed onto the student on average. Charts in the paper show that while discount rates have remained largely stable at about 33%, the actual cost to students has risen dramatically from $13,065 in 1999 to $19,660 in 2008, an annualized increase of 4.17%. The enduring strategy seems to be to raise tuition 6% and give two thirds of it back as discount, for a 4% net increase.

What is not spelled out in the article, is a fact that a careful reader can discern from the juxtaposition of the two sources for this post: that low-income students subsidize higher income students. This is because the former don't get as much merit aid because of lower SAT scores and other common predictors of success. They may get more need-based aid, but those sources has not kept up with the rising real cost of education. So they take out loans so that (in effect) colleges can bid up the price of the most attractive students, and secure a place in the US News report. This is a bit cynical perhaps, but not far from the truth.

This strategy is unsustainable. With the factors at play in the economy, this rate of cost increase will inevitably falter. Net revenue increases will have to shift from cost per student increases to enrollment increases. Institutions with excess capacity should benefit from this, if they take advantage of it by tailoring aid packages to meet need at an appropriate level, and by ignoring what US News has to say about their SAT scores.

The Power of Discriminant Pricing

Imagine that every time you went shopping, prices of the items you bought depended on your ability to pay. If you were flush with cash, a cheeseburger might be $7, if not, you might get it for $5.50. It sounds terribly unfair, doesn't it?

Now think of the same question in a different context. The public schools that our kids attend typicially get a large portion of their funds from property taxes. But this tax depends on the value of the property, which is a good proxy for ability to pay. Rich folks live in McMansions and pay a lot more than the owner of a more modest home. Is this fair? It's the same question.

It's easy to see the downside (unfairness) aspect of this discriminant pricing, and perhaps that is psychological. But think for a moment about the inherent cost of fixed pricing. Imagine that you want a soft drink, but only have $.50 in your pocket. The machine requires $.55. It won't give you the time of day unless you pay full price. Suppose, however, that it were sentient, and you could negotiate with it. You could sometimes pay a little more and sometimes a little less, perhaps averaging around $.55. Wouldn't that be more efficient for all concerned? You get more soft drinks when you want them, and the vendor has a steadier cash flow. If this were done to all consumers, not just you, the average price of the soda could perhaps even be lowered because of the increased volume and attendant economies of scale. Let's say it's possible to decrease the average cost to $.50.

Taking this one step further, there will be people who can always pay more, and will always be paying, say $.55 for each fizzy beverage. They are no worse off than before the smart vending machines arrived, but lots of people are better off than before. Is this situation not fairer than the one where everyone pays the full original price? That point is perhaps debatable, but it seems a bit mean-spirited to deny the discount to those who benefit most from it.

In practice, this kind of thing goes on all around us. Store issues coupons and have limited-time discounts. Those with less money to spend are more likely to pay attention to these opportunities than those with more money, for whom their time is perhaps more valuable than the savings. The same thing applies to where you shop. If you want an upscale shopping experience, plan to pay more for the same items (or functionally similar, anyway) than you would at Wal*Mart.

The same principle applies to institutional aid. I wrote an article about this some time ago, but had to present these ideas recently in meetings, and so I did a rethink to try to make it more comprehensible. It's hard to explain average probabilities and demographic slices--it all sounds too theoretical.

Imagine that we look at a sample of applicants to our institution and have insight into their willingness and ability to pay for costs of attendance. This is represented in the graph below. Each bar represents an applicant, and the higher it is, the more cash they'd be be willing to cough up to come to our fine university. Generally this will likely look like a power law distribution, but I didn't try to hard to reproduce that here. It won't matter.


In the ideal case, we could use individually tailored aid packages to collect 100% of the area in those bars if we wished. We'll ignore the marginal costs per student in this exercise and just think about revenue. So the total revenue possible is the sum of all the bars, which could only be attained through discriminant (i.e., individual) pricing. What happens if we have a fixed-price model? The graph below shows two variables that depend on the price we set.


If we set the price at zero, everyone can attend. This is the blue line, which starts at 100% on the left, and decreases as the price increases. This is an obvious effect--the higher the price, the lower the attendance with fixed pricing. Revenue (the tan line) is more complicated because it's enrollment times price. This increases to an optimum price, and then decreases again as enrollment drops toward zero.

Notice that the maximum amount of revenue that's attainable in this fixed-price example is between 50% and 60% of the total. That is, by using fixed pricing, we cut our possible revenue by almost half. This is a powerful demonstration of the cost of the inflexibility of a single-priced model. If you think about the kinds of things you can buy for thousands of dollars--real estate, cars, college tuition--these things are generally negotiable. There's a good reason for that, as we've just seen.

The discount rate is the usual way to talk about how much institutional aid is being given. It may be assigned for reasons other than to increase attendance or revenue. For example, applicants seen as particularly desirable may be given 'merit' awards. The discount rate is the amount of unfunded aid given divided by the cost to attend.

A 2006 report from Noel-Levitz puts the average discount rate for private institutions at about 33%. You can also use the IPEDS comparison tool to compare your college's institutional grant average to a peer group you choose (and a lot more).

The Talent Bubble

I've argued before that the last decade has seen tuition increases and discount rate increases driven in part by a red-queen's race for the most talented students. The best applications are often seen to be those with high SAT, high high school GPA, and extras like co-curricular activities. Competition for these is fierce, and institutions with the highest endowments, or otherwise can offer the best aid packages, are in a commanding position. The Internet facilitates multiple applications, and the price (from a college's point of view) gets bid up as in an auction.

I was part of a conversation today with an enrollment professional who put the proportion of second-generation African-American applicants at 15%. For an HBCU, this means the pool of "good" applications (in the standard recruiting definition) is tiny. It becomes expensive to create attractive packages for these students. There will be pressure to sacrifice need-based aid in order to buy talent.

This is a lousy business model in the short term. With a decade-long perspective, it's attractive to have a growing pool of successful alumni, but you can bankrupt yourself in the process. It's a zero-sum game--there are only so many really good applications. But is that really true?

In my study of an admission matrix at one institution, the student enrolled at the bottom end (provisionally) succeeded about half the time. That is, there's a 50% chance that an applicant that looks lousy on paper is going to defy expectations on the upside. This isn't really surprising when you consider that predictions of first-year GPA based on grades and SAT aren't very good. This is especially true for low social-capital applications, such as first-generation students.

I've argued that we overprice high SATs at the cost of under-pricing some of the low SATs. If we could tell which low SAT students would succeed, this would be a gold mine for any institution. I actually wrote to ETS years ago and suggested that they develop and alternative instrument, but never heard back.

Here's how it would work. In addition to high school GPA (and SAT if you absolutely have to have it), find other indicators of success. Things like high school attendence records ought to be useful, but there are surely surveys that can be developed that would help. The CIRP is very helpful, for example, in post-facto analysis of attrition. A few attitude and behaviour question slipped into the application form might be enough to get started. The danger is that applicants figure out what combination of responses will help them, and 'game' the responses. There may be some way around that.

If you crack open that puzzle, you find yourself with the 85% of the African-American students (or 65% for caucasian) who are not being bid for aggressively. Of these, perhaps only 20% are of interest to you, but if you can zoom in on that 20% you've done yourself a real favor: found good students who don't cost as much as the high SAT crowd.

This is a project I'll be engaged in soon. I'll start with the app form and add some questions of a the type identified from an analysis of CIRP responses compared to college GPAs. Once we've identified a few indicators of success, we'll focus a few questions on those topics.

The Rational and Irrational

The last two weeks I've been in the midst of a move, soon to take on the mantle of Dean [edit: I'll be Dean of Academic Support services, including responsibility for the library, IT, IR, faculty professional development, and service learning] at a small urban HBCU. I've gotten to enjoy the three things I enjoy least: moving, painting, and plumbing. The biggest moving challenge was around 200 boxes of books, half taken from the lovely library (pic) I built only a few years ago. The contractor hasn't been returning my calls, so it may be a while before the new one is built.

I've tried twice now to get a new driver's license, but the DMVs were full to bursting, and I'll have to get there first thing in the morning or else spend the day waiting apparently. I always keep a book handy for such occasions. It used to be A History of Western Philosophy by Bertrand Russell--the only such history I've enjoyed reading. Now I keep The Prince by Nicolo Machiavelli in the car. Both can be browsed easily. Lately I've been toting around a book I found while unpacking, called The Evolution of Cooperation by Robert Axelrod (wiki). I had bought it years ago when I did a session for high school counselors during a seminar on ethics. Most of the other sessions were touchy-feely. Mine addressed cold war strategies and TIT FOR TAT, a game theory strategy that Axelrod makes much of. I recommend the book, and while you're at it, The Selfish Gene (wiki) by Richard Dawkins, which addresses game theory in the context of biological evolution.

The argument is made that in relationships with others, the most robust (or at least one very robust) strategy is to have a short memory about past interactions, and to reciprocate immediately both cooperation and betrayal (called defection in the book). In terms of the workplace, this could be something as simple as being honest with co-workers. [aside: I always put the hyphen in co-worker, because otherwise it might be interpretted as cow-orker. I'm not sure what that is, but I wouldn't want to be one!] If initial trust is reciprocated, then the relationship works to the advantage of both parties. On the other hand, if someone is less than honest, TIT FOR TAT would have you reciprocate. In this case, probably not by returning the same behavior, as that would ultimately be self-defeating, but by exposing the behavior or otherwise addressing it head-on. One of Axlrod's main points is that reciprocity of negative acts can 'echo' in destructive cycles. Think of acts of ethnic-based violence, for example. He gives insightful examples of life in the trenches of WW I, where opposing units would often come to implicit terms of temporary truce. Violations of the truce were dealt with immediately and harshly.

One of the most interesting results from game theory is that in short-term relationships, the rational strategy is to betray (or defect). Only in circumstances where you will interact for an indefinite number of times with others does cooperation make rational sense. In human societies, this is ameliorated by the fact that our reputations follow us. But witness the behavior of people who are anonymous (as on Internet message boards) to see evidence of the unfettered behavior emerging.

Another book, this one on my Amazon wish list, is Predictably Irrational by Dan Ariely. I found an outline of it here that summarizes the main points. There are several bits here that are of interest to marketing higher education. These have to do with price and perception. The first is the power of comparison. An example is given of a bread-maker that wouldn't sell until the manufacturer came out with a 'deluxe' model, which made the basic model seem like a bargain. At the same time, higher prices are associated (arbitrarily, it seems) with more value. One institution I consulted for raised its tuition dramatically over three years just to be in the same league as the ones it aspired to be. That is, the increases were not financially motivated, but for marketing purposes.

The second chapter--on anchoring--has some powerful lessons for marketing higher ed, I think. Again, the theme is perception becomes reality. Black pearls are worthless until they're stuck in a pricey display window with a ridiculously high number on the tag. Since perceptions of prices in higher education are already high, the strategy would be driven by competition locally or within a niche. The lesson of Starbucks (given as an example) is to create something that's the same but looks new--to create new expecatations of price and experience. If there's a recurring theme, it's that perception drives experienced reality.

Finally (for this post), there's the idea that 'free' is often overpriced. That is, people often value something that's putatively free disproportionately over merely cheap. Amazon.com's free shipping is an example of a success story. Free online applications to college (waiving the normal fee) could be another. At my new university, students get a 'free' laptop--never mind that they pay a hefty technology fee. It makes me wonder what else we could package that way...

Gloom and Doom for Traditional Universities?

There's an interesting article at WebWire that I found linked to U. Bus. predicting the end of the traditional model of universities. This is predicated on the existence of disruptive technologies, that the higher ed industry is mature and incapable of much innovation, and that it is currently overpriced. The following quote attributed to Peter Druckeris is cited from Forbes:

Thirty years from now the big university campuses will be relics. Universities won’t survive. It’s [Internet technology] as large a change as when we first got the printed book…The cost of education has risen as fast as the cost of health care…Such totally uncontrollable expenditures, without any visible improvement in either the content or quality of education, means that the system is rapidly becoming untenable. Higher education is in deep crisis.

As an example of things to come, the author gives us Andrew Jackson University's 'sponsored tuition' program. It's a fascinating idea--pay for the marginal cost of instruction for those students through commercial sponsorship. Here's a quote from AJU President Don Kassner, taken from Wikipedia:

Most universities spend a tremendous amount of money to recruit students. Many spend as much as thirty-five percent of their revenue on marketing and advertising. They have to keep their tuition high to recover these costs. We eliminated these costs by structuring relationships with strategic partners that refer potential students to us. Therefore, we can operate a quality, degree granting institution without the escalating tuition and excessive fees deemed necessary by many schools.

That's a glimpse of the disruptive technologies part. What about inflexibility of the current system?

Anyone who's ever served on a committee will not find it hard to believe that higher education as an industry is not going to change overnight. A study from The National Center for Public Policy and Higher Education and Public Agenda called The Iron Triangle (pdf), which seeks to illuminate the gearworks of change in higher education. The authors quickly get to a central problem: "The various stakeholders must agree on the definition of the problem." Moreover, principles (according to the article) are locked into a mentality of thinking of cost, access, and quality as forming what mathematicians would call a partition--improving one variable necessarily has adverse effects for the other two. It's a zero-sum game, in other words. The stakeholders do not necessarily hold the same view--the industry is seen as bloated an unresponsive. Within the report are found comments by presidents on the subject of cost, access, and quality. These are very interesting and highly recommended for reading in detail.

Not all presidents bought the premis of the iron triangle. Here's a quote from one president, which resonates in light of current events in the auto industry:

Years ago I heard a speaker from the auto industry who asked, ‘What
happened to the auto industry in the 1970s? It wasn’t bad design. It wasn’t
planned obsolescence. It wasn’t unions. Fundamentally, it was hubris. It was
a belief that the American automobile industry had always built the best
vehicles, always would, and that the public would buy whatever we built.
We saw our problem not as a product problem, but as a marketing problem.

Maybe. I think it's a little more complicated than that. Here's one idea to consider.

What if the market for the best students has become more liquid, driving up their price? That would mean that for the same cohort of talented students, universities generate less revenue from them because they're bidding against each other. Who makes up the short-fall? Costs can get pushed down to the need-based crowd, which is what's been happening (see practically any issue of Opportunity for such an argument). This has been enabled by cheap money. So the combination of aid leveraging for talent and easy money could be part of the answer. It would be very interesting to see the financial aid matrices for various institutions over the last ten years, to see how they've evolved.

Financial Aid Woes

The front page of InsideHigherEd this morning has an article about Syracuse University, and the impact of the financial climate on student appeals for financial aid.

Syracuse University recently sent an appeal to alumni warning that approximately 400 students will be unable to return for the spring semester unless the institution can raise an additional $2 million in scholarship support by the end of January 2009.

They are putting out the call to donors for additional aid to bridge the gap. I tried to find a figure for the university's discount rate, and stumbled on an old self study that puts the 1989-90 rate at 10.5%, and describes the financial aid leveraging process they're putting in place.

An innovative awarding and measuring tool, based on econometric methods, factored in student academic qualifications and family financial need. This model enabled the prediction of enrollment outcomes and guided the University to a considerably more competitive pricing position. In the course of its implementation, the undergraduate tuition discount has increased from 10.5% in 1989-90 to 37.8% in 1996-97. While this approach has accounted for a considerable shift in net available revenue, it is also credited with helping to stabilize the quantity and quality of undergraduate enrollment. The undergraduate tuition discount rate is expected to level at about 38% in 1998-99 and remain there for the immediate future.

That puts the rate at 37.8% ten years ago, after a dramatic-sounding reformulation of aid policies. The InsideHigherEd article quotes $16,737 as the average award, but I wasn't certain from the context if this was all institutional. Apparently it is, because the IPEDS report tool puts last year's average institutional award at $17,136. That would be a discount rate of a whopping 52%, far in excess of the 38% target. This assumes, however, that they are not including other fees and such when they calculated the discount previously.

What to make of the plea to alumni for additional aid? This looks like a short-term emergency response, and as such might be quite reasonable. I would also argue, however, that they should also be taking a hard look at their leveraging model. All of us who give institutional aid in order to shape incoming classes will have to do the same. The basic calculation, is: what do you gain by letting these students walk out the door? With an average net revenue (tuition-institutional aid) of $15,443, the price tag would be almost $6.2M if all 400 left. Assuming that the requested additional $2M in aid is the right number to keep these students, it seems fairly obvious that the university is better off creating the aid out of thin air if it can't get the donations, rather than letting students drop out for financial reasons. Adding 2M to a 155M aid budget would be a small price if that's the total impact of this recession.

The article also mentions loans and the inability of students to get them as an impediment to attending. I tested my idea about institution-based loans with our Business VP yesterday. It seems like an idea worth pursuing, and I'll follow up here when I get a chance.

Google Trends

Would you like to know if your students or applicants are more concerned about tuition, aid, or loans this year? One global measure is how many times certain terms were Googled. Amazingly, this information is yours for the asking at google trends. You can restrict to geographic locations and time periods, and ask for several terms at once. An example is shown below, where I requested "tuition" and "financial aid" searches in the USA.
Note how regular these patterns are. Other trends are apparent too. There are more searches for tuition than financial aid, and the latter tails off in the winter. Also, searches for both terms have increased over the last years, but not dramatically. This could be due to any number of things, and one can get an idea by searching for "best college", which also shows an increase. It's probably a good sign that the charts don't change dramatically for the current cycle. If you look at "unemployment" on the other hand, it's a different story. A report at the bottom shows which locales most frequently googled the term. Fascinating stuff, and potentially important for your marketing.

A previous post mentioned a debate about SAT. Its chart is fascinating. Whereas the search trend is to decline slightly on average, the news volume (bottom graph) is clearly trending up.
The same thing (even more dramatically) is happening with ACT. Of course, "act" is another word that might be googled frequently, so that's more ambiguous.

As a bonus you can link to the results and export as a CSV file. From there, we could link to google documents or yahoo pipes. You could, for example, create a dashboard-type feature to show how many times your school's name was googled in your state (or was in the news), and graph it on an administrative portal beside applications received and awards granted.

Cost of College

There's an article in the New York Times about the decades-long rapid increase in the cost of higher education. Another one is on cnn's website. Both refer Measuring Up 2008, The National Report Card on Higher Education (pdf) from the National Center for Public Policy and Higher Education. In the Times article, the Center's President is quoted saying:

The report, “Measuring Up 2008,” is one of the few to compare net college costs — that is, a year’s tuition, fees, room and board, minus financial aid — against median family income. Those findings are stark. Last year, the net cost at a four-year public university amounted to 28 percent of the median family income, while a four-year private university cost 76 percent of the median family income.

I found median family incomes by state here, and looked up our state to find that it's about $53,000. According to the statement above, a private university would have a net cost of around $40,000. We're nowhere near that. In fact, family contributions are less than a quarter of that figure. But we have also not raised tuition much in the last decade--certainly nothing like the graph shown in the article (reproduced from the original report below).

In 1995 our tuition was $10,488. Now it's $18,792, but discount rates have increased too. Leaving that detail aside, it would be an increase of around 79%, or 4.6% per year average. The graph shows an increase of about 293% in the same period, or 8.6% per year. The point of this is that the averages conceal considerable variety.

Loans increased by over 100% in the last decade, according to the report (Stafford Loan borrowers increased by 50%). This leads naturally to the speculation that tuition prices have been inflated by the credit bubble along with housing. With loans harder to get, the grim calculus isn't hard to compute: some combination of fewer students enrolled and lower net tuition paid. This will reduce net revenue to many institutions.

What to do? Undoubtedly, there are efficiencies to be found at any institution. The luxury of NCAA division II (scholarship athletes) will be under pressure. Division III nominally has no athletic awards, which adds up to a lot of money quickly. Other ideas include:

• Instead of direct institutional aid, require some work-study for the money. This saves on part-time employees.
• Instead of direct institutional aid, make institutional loans. I don't know of anyone who does this, but it worked well for GM for a long time. Small institutions could form a consortium for this. The way it would work is to loan students money with repayment starting at some point after graduation. The money loaned isn't real--it's just discounted tuition, so no real money changes hands until repayment. There are probably legal issues here I'm not aware of, but it would alleviate the loan crunch and also let colleges eventually generate interest from these loans. Maybe later on they can divide them up into tranches and sell credit swaps (just kidding).
• Add or increase after-work classes for working adults. The infrastructure for a college or university is large and expensive. Using classrooms at night and hiring instructors is a small additional cost for the additional revenue generated. Flexibility in tuition structure can make it easy to meet demand with supply.
• Online classes are trickier because of the competition. This may or may not be a good investment for the institution, but even traditional or evening classes can be made more efficient by using a hybrid approach. If some of the class meetings are online, there are additional types of learning opportunities, as well as the potential to reduce some costs and make it more convenient for commuters.

In any event, I predict a growth industry in education consultants to come and tell you how to make your operation more efficient. This give the administration someone to blame when they eliminate positions.