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The Return of Mercedes U
October 9, 2012 - 3:00am

A few years ago, I floated the idea of an upscale proprietary. (For convenience, I called it Mercedes U.) My argument was that for-profits have, until now, focused on the lower end of the market, where they have to compete with (subsidized) community colleges. Since they can’t compete on price at the low end, I suggested, better to try on the high end. (In California, at this point, they can compete simply by being open. But in the other 49 states, the argument still stands.) The only attempt I saw, Founders College, quickly ran aground on the shoals of Ayn Randian ideology and some pretty iffy management. Since then, nothing.

Now, for-profit Christian (?!) Grand Canyon University is taking another shot at the idea.  

The twist is that it’s using the profits from a national online graduate program to subsidize a smaller, more selective campus. Presumably, the idea will be that the prestige from the regular campus will gradually rub off on the larger online program. In other words, the campus becomes a loss leader that generates respect, and the online program uses that respect to make major money.

I’m not entirely sure how the Christian mission fits with that, but I’ll leave that aside for now. Can the loss-leader model work?

I suspect it can. It’s already how most community colleges work; the credit-bearing side of most community colleges operates at a loss, by design. The “continuing education” and business services side turns a profit, which is used to help offset those losses. Many traditional public four-year colleges use the same model.  

GCU started, reasonably enough, in Arizona, where the regulations are relatively lax and the private higher ed sector is small relative to population. Now it’s expanding to Massachusetts, a blue state with tighter regs and a much, much more robust private higher ed sector.  (Off the top of my head, I couldn’t come up with a single private college or university in Arizona, other than the University of Phoenix.  In Massachusetts, there’s Harvard, MIT, Northeastern, BU, BC, Wellesley, Williams, Amherst, Mount Holyoke, Smith, Hampshire, Holy Cross...)  Depending on the version of Christianity with which they identify, they may be able to define a sustainable market niche, but they’ll still have more of an uphill battle than in Arizona.

But to the extent that the physical campus is about visibility, that might not matter. GCU is being pretty savvy about it; they’re hiring a significant cluster of full-time faculty, pouring money into the physical plant and financial aid, and targeting students with higher SAT scores. (They’re also pursuing Division I athletics, apparently, which strikes me as a fool’s errand.  But that’s another post.) They’re moving in the Mercedes U direction, where you can charge more than the publics and still make a profit anyway.  If they’re smart, they’ll greatly beef up their tutoring and career advising services next.  Sell quality, and the prestige will follow.

The critical issue I identified for Mercedes U was patient capital. It needs funders who are willing to let prestige build over time, and who won’t insist on maximizing quarterly profits.  It looks like GCU has that, at least for now.  If it can keep its investors patient, it doesn’t get too caught up in sports, and it understands what “loss leaders” actually entail, I like their chances.

In the meantime, the market niche for a secular upscale proprietary remains wide open. I’m just sayin’...
 

 

 

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