An earlier version of this Executive Briefing was published in 2012 pursuant to guidance we provided clients beginning in 2010. Since that time, external pressures on universities to lower the total cost of earning a degree have increased to what seems like an irreversible tipping point.
Six Percent Problem
In 2010, I recommended that our clients buck the tide of six percent year-on-year tuition increases. Instead of raising tuition and fees, or even holding the line, I suggested that they reduce the cost of attending, and that they seek the net revenue numbers they desired though increased margins brought about by increased retention, better content management and delivery systems, and launching new and needed programs while phasing out legacy programs for which there was no longer any demand. While recognizing that implementing changes to increase margins will take time, we suggested reduction targets ranging from thirty to fifty percent in the total cost of earning a degree. Upon reflection, a few institutions decided to move in this direction.
The only change I am making in today's recommendation is to elevate the importance of this goal.
If our projections are correct, most adult-centered, professional, and many other non-residence programs will be dominated by institutions that initiated a trend to maintain tuition in the lowest quartile of the cost distribution.
This recommendation, and its growing urgency, is based on multiple sources of downward pricing pressure arising as a reaction to current prices that are indefensible and projected rates of increase that are unsustainable. We need to do more than slow the rate at which higher education prices are increasing; we need to roll prices back. Today, we see downward pricing pressures from the White House and the Department of Education, from private foundations, from market-savvy entrepreneurs who sense a rare opportunity created by collapsing anti-market forces, by students facing financially damaging loan amounts, and by an increasingly dissatisfied and vocal public. This problem is only worsened by the "head in the sand" posture adopted by too many colleges as they post yet another 6% year-on-year price increase in a 2-3% GDP growth economy. A few of these institutions believe they have fooled the market by embedding some of the increases in fees.
Evidence of Success
Our evidence is limited to two universities over a short time frame. However, two institutions lowered their tuition dramatically in accordance with our general guidance. Prior to lowering tuition, both of these institutions were experiencing declining enrollments in response to increasing prices to the extent that they were seeing a net decrease in revenue and margin.
Initial post-reduction indications are that these institutions are realizing the increased enrollments and increased revenue that we predicted. These institutions had priced themselves into the zone of negative price elasticity, a dangerous situation that we observe developing in a large and growing number of institutions, especially independents and for-profits. I refer to this situation as dangerous because negative price elasticity can be described as a zone of reversed control. Once in this zone, options for getting out are limited and the institution becomes vulnerable to pricing strategies put in place by a clever competitor.
Elements of a Solution
Whether strategic or tactical, I recommend that any institution concerned about the growing risks of being overpriced in the market develop a fresh and comprehensive pricing strategy. This means dropping all assumptions and developing a vision that will carry forward into the foreseeable highly competitive market conditions.
Informing and developing this vision will take time - three to six months. In the meantime, smaller steps are available that will inform the overall strategy.
To be clear, the following suggestions belong in but do not define a comprehensive strategy to become competitive in tomorrow's markets. Some of the margin increasingchanges that I mention above involve structural changes. The suggestions outlined below can be implemented under current policy and practice.
Account for Revenue & Margin by Program
Establish revenue and margin targets for all programs. Manage each program independently.
Establishing revenue and margin targets for all programs does not mean that all programs need to be profitable. It does mean that, once set, each program needs to meet its targets, even if they are modest, neutral, or even negative.
For example, a strongly mission-driven program might operate under a negative 30% margin, thereby establishing how much the institution is willing to lose on the program. Once set, however, the program's leaders must work to achieve that level of loss if the program is to be retained.
As obvious as this recommendation might appear, many institutions cannot implement it without addressing limitations in their accounting models, decision-metrics, and software choices. Nonetheless, if I were to make a single recommendation, this would be it. I have thoughts on this topic that are out of scope in this Briefing.
Stanford may have a distinctive particle physics course that justifies five years of development and seven figures in development cost. Does it follow that an English or Math course in the typical independent college is or should be distinctive in the same ways? In most cases, the smart move is to develop, outsource, or buy standard course content on a lean model. If you develop in-house, the benchmarks begin at 45 days and $3,500 per course, all-in, and do not go too much higher than that for courses that are not equipment-intensive. If you are ready in terms of infrastructure, this may be a good time to migrate toward a scalable content management system that lowers maintenance costs and, in time, produces a substantial program development dividend. While scalable content represents the future and its economies of scale are high, I recommend a measured approach. In the early phases, migrating to durable learning objects can consume available resources, leaving little for substantive output.
Manage Class Size
Class size accounts for the greatest variance in most margin models. This single variable's high coefficient of leverage is responsible for the "accounting rules only" models that drive classroom size as high as possible. This is unwise in the opposite direction.
We have considerable data on outcomes, operations costs, retention, and student and faculty satisfaction suggesting that an optimum class sizes exists for specific programs and types of students.
Get it wrong and metrics for learning, operational hassles, and margins suffer. Ironically, and counter-intuitively to the accounting mindset, moving off target in either direction reduces program margin. Even though optimum class size is based on variables such as program, faculty and students capabilities, and learning platform and pedagogy, I feel obligated to provide some numbers. All I can say is that the convergence of our data sets rarely suggests an optimum class size below 12 students and never suggests one above 24-28 students.
Not all blending results in financial benefits. My comments about blending are limited to a form that contributes to revenue, margin, and academic quality. Generally, this form is referred to as fully blended programming. This form blends every required course in a degree or certificate program. Programs that offer some courses online and others in residence do not capture most of the financial, operational, or academic benefits of blending.
The evidence that blended programs can produce learning outcomes that are superior to either fully online or fully in residence is plentiful and growing.
Given this evidence [of impact on quality], and given the economies of scale and scope and the increased geographical reach possible with blended programs, there are few if any good reasons to offer any courses fully on-ground. This is true even for institutions that do not wish to develop an online presence in the market. This guidance extends to fully online programs as well. Examine the zip code distributions of your fully online students; if the majority of them fall within twice the radius of your expected on-ground service reach, you will be better off - financially and academically - blending all courses in those programs.
Even within fully blended programming, different forms of blending produce different margins and have different effects on a program's geographical reach. In most cases, the best choice is to blend in a 15/30/10/30/15 (numbers represent percent of total weeks, classes, or workshops) or similar model in which the first, middle, and last classes are in residence (or distributed to remote sites) punctuated by typically longer periods of online collaboration. To be successful, specific instructional elements and curricular goals must be embedded into each of the five segments. For example, the first in-residence segment may focus on meeting and greeting, establishing course objectives and expectations, creating learning teams, and building relationship-oriented task commitments. The middle in-residence period may be devoted to assessing mid-course progress and making course corrections. The last in-residence period is typically devoted to a round robin of reports from horizontal learning teams.
Evaluate the Current Potential for New & Old Programs
You evaluate compensation and operations agreements annually. Do you apply the same standard to evaluating emerging needs for new programs? Are all existing programs still needed? Given the number of new programs each year that did not exist in the previous year, you may be falling behind if you are not adding and phasing out programs each year. I mention this under a discussion of ways to reduce prices because new programs create additional revenue and opportunities for new pricing.
Consider Market-based Pricing
If you are pricing by categories sch as graduate and undergraduate, modulated by a nominal competitive pricing analysis, you are not pricing based on value to the student, and you are probably not pricing based on amortized production and maintenance costs as well as delivery costs. This topic requires a separate and deeper discussion but revenue and margin can sometimes be increased significantly by pricing to the market.
Focus on de facto Rather than Nominal Competition
Like market-based pricing, this topic really requires a separate and deeper discussion. What I offer here is the observation that many institutions make the mistake of anchoring themselves to the prices of programs that are not true competitors.
To be a true competitor, the other school's program must be positioned such that it enrolls students who might otherwise have enrolled in your program, and vice versa.
To get an actionable sense of the pricing market, identify all institutions that offer the same program (e.g., MBA) , then eliminate programs that do not occupy a similar position in the market. To be a true competitor, a program must have similar admissions requirements, delivery methods, time-to-degree, features, location, and branding in the market. If you are not branded with Stanford or MIT, their tuition and fees are irrelevant to you, however much one or two of your instructors might like to believe otherwise.