Monday, May 20, 2013

Colleges Play Games with Pricing ... Informed Consumers Get the Best "Deals"

College is important. It's also expensive.

Students need to adopt the smart buyer approach to higher education. That means being an informed buyer in addition to being a serious student. Time spent in college is short, and its effects are enormous as well as lifelong.

So let's discuss the importance of understanding and applying the "value proposition" when entering the market to purchase a "valuable" college education.

Simply put, the value proposition represents the combination of the cost outlay in terms of both time and money in relation to the quality of what we purchase, which in the case of a college education is a college degree. The cost of getting "credentialed," in other words.

Let's use an everyday analogy to get started. Retailers establish "regular" prices and then discount prices to get to the "cash register" pricing. Consumers are theoretically attracted to the deal, and retailers get the business. That's the basic idea behind a weekend sale. During the week, the regular price is in place, but then the weekend arrives (Thursday through Sunday for retailers) and 90% or more of the out-the-door transaction business is done at the sale price. This high-low approach allows the retailer to convince the uninformed buyer that's he's getting a great deal, so he'd better buy now.

In order to enroll students, numerous colleges, and especially private colleges, are playing the same "price off" game as retailers but with one big exception. They are trying to get as much as possible from each separate "buyer" and will offer price discounts selectively. Not everybody gets the same price and to take just one example of quasi-individual pricing, airlines do it all the time. Accordingly, prospective "buyers" are well advised to understand the economics of the college decision.

Tuition price discounting is not off some legitimate average price but is deducted from the "regular" price offered by the institution. Varying pricing "discounts" are made available to almost everybody on an individual and selective basis (other than those very few individuals foolish enough to pay the list price, of course). The amount of the "discount" is impacted in large part by the sophistication of the buyer. If there aren't going to be enough "butts in the seats" (just like the airline example), the opportunity for the informed buyer to get a big discount increases. Thus, late entrants have the financial advantage when making college decisions and should use it.

Colleges Cut Prices by Providing More Financial Aid has the college tuition "on sale" story:

"Private U.S. colleges, worried they could be pricing themselves out of the market after years of relentless tuition increases, are offering record financial assistance to keep classrooms full.

The average "tuition discount rate"—the reduction off list price afforded by grants and scholarships given by these schools—hit an all-time high of 45% last fall for incoming freshmen, according to a survey being released Monday by the National Association of College and University Business Officers.

Students graduated from Ohio State University over the weekend.

"It's a buyer's market" for all but the most select private colleges and flagship public universities, said Jim Scannell, president of Scannell & Kurz, a consulting firm in Pittsford, N.Y., that works with colleges on pricing and financial-aid strategies.

It is likely that some private colleges will be forced to be even more generous with discounts this fall. As of the May 1 deadline for many high-school seniors to commit for their freshman year of college, early reports suggest some non-top-tier schools fell 10% to 20% short of enrollment targets, said Mr. Scannell.

The jump in aid shows that many colleges are losing pricing power as more families focus on cost and value, with about 65% increasing their discount rate in the fall of 2012. Except for the most exclusive schools, private colleges increasingly are vulnerable to the stagnant wages of many families, deepening student debt, the uncertain job market, growing questions about the value of costly four-year degrees and unfavorable demographics.

About one of every eight U.S. undergraduates is enrolled at a private nonprofit college. Such schools provided 70% of all grant aid to undergraduate students in 2009, the most recent year for which data are available, Nacubo says.

The average discount rate at private colleges has climbed for seven years in a row, and the latest increase was smaller than the jump in 2011, said Natalie Pullaro Davis, the study's author. But colleges also are having a tougher time boosting their sticker prices. That makes it harder for colleges to generate enough new revenue to offset the impact of higher aid and their own rising costs.

Because of economic factors and political pressure on colleges to hold the line on tuition, "we have hit a tipping point on price," said John Nelson, managing director at Moody's Investors Service. Last year, the median sticker price at about 280 private colleges and universities tracked by the debt-rating firm rose 3.9%, the smallest increase in at least 12 years.

Tuition increases for the 2013-14 year at these schools are likely to be about the same or slightly smaller, Mr. Nelson said.

Meantime, at four-year public colleges and universities, tuition and fees for in-state students rose 4.8% in the 2012-13 academic year, the smallest increase since 2000-01, according to the College Board. Tuition at these schools for out-of-state students rose 4.2%.
The discount rate for public universities fell modestly in 2012, said Mr. Nelson of Moody's, after rising from 2007 to 2011.

Last fall, enrollment fell at 46% of the 383 private colleges in the new Nacubo survey as the pool of high-school seniors declined. John Walda, the group's president, said the financial squeeze from fewer students is forcing such colleges to find ways to boost revenue, control costs and seek a way to stand out from the crowd. Some of those that can't eventually will shrink, merge or fold, he predicted.
Bill Hall, president of Applied Policy Research Inc., said about 10 of the 20 undergraduate colleges he advises on pricing and aid strategies still are scrambling to fill seats for this fall's freshman class. Officials at some schools are asking accepted applicants who haven't said yes or no if "there are financial issues within reason where we can make an adjustment," he said.

Some private colleges are seeing just 20% of the students they accepted actually enrolling, down from about one-third of accepted students five years ago, Mr. Scannell said. . . .


Summing Up

College administrators understand the concept of variable costs compared to fixed costs. They apply it to tuition in an effort to fully utilize their capacity. Get "butts in the seats," in airline pricing jargon.

Thus, college admissions and pricing are similar to an airline flying half empty versus 100% full of paying passengers, even though all passengers don't pay the full price. Since the plane is flying anyway, those otherwise empty seats can be sold at rock bottom prices and it's still profitable for the airline to do so.

When the decision to fly the trip is made, the costs of fuel, pilots and support staff, takeoff and landing fees and so forth are all "sunk." The only thing left to determine is how many paying passengers will be on board and how much each passenger will pay to make the trip.

Colleges work the same way. It's all about "butts in the seat."

The message to students and their parents is simple --- bargain hard, and consider starting late in order to get the best deal possible.

That said, always focus on the "cash register" price rather than the phony list price of "regular" tuition that the college knows it won't collect anyway. You'll be glad you did.

That's my take.

Thanks. Bob.

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