Running a business, private or public, is about matching capacity with demand by managing the four P's --- people, pricing, product and productivity. Of course, matching capacity with demand is never easy to do, but that's always the basic objective.
A private business is started only when interested investors believe they can achieve at least an adequate return on the capital they invest. A business only stays in business if over time revenues exceed costs to the extent that investors decide to keep their capital employed in the business.
Accordingly, if there is not sufficient profitability for an interim period of time, managers have to find a way to "fix" the problem by raising revenue, lowering costs, or preferably both. This is analogous to raising a bridge (revenue) and lowering the water level (cost) at the same time, thus enabling the ship (investor profit) to pass through the opening.
In a monopolistic public business, when costs go up, the public entity generally implements the "easy fix" by raising the bridge through substantial price increases. The captive customer pays the toll. The monopoly isn't especially concerned with either costs or getting and keeping customers. It has no price based or other competition.
For a more complete explanation of cost based pricing compared to price based costing, please refer to Chad's July 12 post about "Different Approaches to Pricing and Taxing".
Unlike a monopoly, a business with competitors assumes the very real risk of losing revenues and customers when it increases prices. If the market won't allow price increases suffcient to cover cost increases, the business has no choice and must seek other ways to raise revenues, lower costs or both.
With that background, let's review North Dakota's extremely successful "revenue management" approach to increasing the state's college enrollment and revenues over the past ten years.
Revenue management is a proven way of reaching acceptable levels of revenue growth and profitability through low pricing. This revenue enhancing technique is the basic business model followed by Wal-Mart and serves as a good example of the low price, low cost, high revenue, high market share, high profit and high investor profitability approach to business. There are countless other similar examples in the private sector as well.
Any business which needs to grow and has excess capacity should consider using revenue management to achieve market share gains and increased volumes, thereby achieving greater profitability. This aggressive market share oriented strategy is often an excellent way to increase an enterprise's profitability. {We won't get into the tradeoff between price decreases, excess capacity, competitive reactions and revenue increases at this point. The idea of focusing on marginal costs and marginal profits through more competitive pricing and volume gains is a topic for another time.}
Now let's return to the North Dakota public college system and its revenue management winning approach. More than ten years ago the state had to either downsize its educational system or enroll more out-of-state students, since resident high school graduates were declining rapidly.
The state adopted a growth strategy by attracting out-of-state college bargain hunters looking for affordable colleges to attend. North Dakota started pricing aggressively instead of charging out-of-staters as much as they possibly could through a more conventional premium pricing strategy for out-of-staters. Contrary to the practice of most other states, North Dakota chose not to price gouge these potential "customers".
Since North Dakota residents graduating from high school were in decline (almost 20% fewer North Dakota high school graduates in 2010 than 2000), the only way to achieve a meaningful increase in enrollment was to look beyond the state's borders. So that's what they did and as a result, the state's college enrollment has grown by 38% in the past ten years, led by a 56% jump in nonresidents. Nonresidents now account for 55% of North Dakota's college student population. By enrolling these out-of-state college bargain hunters, North Dakota has proven to be a great place for attending college. Frigid North Dakota is A Hot Draw For Out-Of-State College Students tells the story in detail.
Most out-of-staters can attend a North Dakota university for $7,000 annually in tuition and fees. In contrast, out-of-staters attending college in California are charged five times that much, or $35,000 annually. In fact, North Dakota charges less for out-of-state student tuition than residents pay for in-state tuition charges in such heavily populated states as California, Illinois and Pennsylvania. Similarly, neighboring Minnesota charges its own residents 28% more than North Dakota charges those same Minnesota residents if they attend a North Dakota college.
As marketplace competition begins to heat up for college student enrollment, there will be both winners and losers among the states. The winners will compete hard by managing aggressively both costs and pricing, by offering a solid product and by finding ways to grow market share. The losers will act like the monopolies they've been and continue to do what losers always do. They'll raise prices to the fullest extent possible to offset declining federal and state subsidies, they won't manage costs well, and their competitive posture will continue to weaken relative to other states who adopt a market based approach. That's the future, and that's as it should be.
By adopting a market based approach to education, the climate for college attendance is definitely looking good in North Dakota. Long live competition.
Thanks. Bob.
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