The Slippery Slope of Price Competition
One of the most important pieces of research ever produced by a certain business school in Cambridge, Mass., is “The Basis of Competition.” In short, it demonstrates that without product innovation, products and services slide down a “value” curve that eventually commoditizes the industry.
A good example of this model is the flat screen television industry.
When flat screen televisions first hit the market, the industry competed on product. Consumers made decisions on product features such as size, pixels per square inch, LCD versus plasma, etc.
Over time, the product features of flat screen televisions became more common, and as a result, the basis of competition moved to reliability or brand. Then products features begin to appear more common, consumers go with brands they trust (Sony, Samsung, etc.).
Once all of the brands began looking ubiquitous, because of brand saturation and new brand entrants, consumers look for convenience. In the television context, consumers could easily access one of many established brands, or new brands such as LG or Vizio, via easy-to-use distributors such as Amazon, Best Buy, etc.
And, the last stage of the basis of competition is price. I want a new high-quality television, in an easy and convenient way, at the lowest price. Let’s pick up a new Vizio 42-inch television at Costco as we get our three pounds of peanut butter and four cartons of orange juice.
Product, reliability, convenience and price are the four stages from which goods and services compete for customers and, as equally important, represent the downward slide of the market’s willingness to pay a premium price.
As we roll into July and August I have spent quite a bit of time connecting with higher education colleagues, reading updates on the enrollment landscape, and listening in on the dialogue of our industry. I come from – and work within – a world of good, solid private colleges and universities. Not the top 25, or even the top 50, but my network and existence bounces among very good schools, with very good faculties, with very successful alumni.
This summer, the tensions within our work seem tighter and the environment feels more desperate. There are many more enrollment jobs vacant and many institutions are struggling to find their way in a competitive environment.
Although we have been through competitive patches before, the talking point, and the data point, that is most troubling to me is “discount rate.” When I hear institutions taking 50 cents on the dollar, and oftentimes less, I can’t help but think that we as an industry are accelerating to a price-based environment and no one will be successful if that happens.
I completely understand the need and obligation to provide access to families and students when the ability to pay is difficult. Moreover, the research bears out that over the past five years, tuition and income levels (in real dollars) have been a point higher and lower than CPI, respectively.
However, we are pushing our organizations to a point of no return by putting too much emphasis on discounting, and not enough emphasis on creating unique benefits. The willingness to pay is where our industry is in trouble, and we need to stop the bleeding. Moreover, in today’s hyper-competitive world, we have an opportunity to better prepare our students with additional programs and experiences that are aligned with the challenges of the 21st century. When one out of three recent graduates do not feel college prepared them well for employment (McKinsey & Company, Voice of the Graduate, May 2013), there are plenty of opportunities to innovate and improve outcomes.
Colleges and universities have an abundance of intellectual capital; intellectual resources and assets that most companies would love to have in their R&D divisions. Mathematicians, technologists, engineers, designers, marketers, anthropologists -- and the list goes on and on. However, for some reason our collective academic culture does not encourage collaboration across the organization, and from what I hear from some colleagues, it can even be confrontational. Yes, the needs of students, the needs of faulty, and the needs of the administration and staff can create competing priorities. However, for most private institutions, and some public institutions, there is only one need that matters, and that is the need to survive long-term.
We know that two of the top criteria for college selection are academic program quality and career placement. We also know that there is a huge knowledge gap between what the labor market needs and what high-quality private colleges are offering in terms of curriculums. Maybe this is a good place to start the collaborative dialogue.
I am writing this for two reasons: I don’t want to see good colleagues continue to lose their jobs, and I don’t want to see good institutions lose their ability to ever come back.
If a discount rate is north of 50 percent (and it is at many places), sustainable change can happen only via a product transformation, and no single department, division or person can do it alone. Many argue that higher education is not a business, and in many aspects I agree. However, we are very much a market-driven (with subsidy) industry, and consumers will decide who wins, loses, thrives -- or ends up in the real-estate business.
How we choose to differentiate our institutions is our choice, but the more we choose price as the primary way to differentiate, we all become less able to focus on quality due to revenue pressure and that further accelerates our collective commoditization. Moreover, given the amount of ‘price wars’ we have going on, the premise that previous institutional aid models predict future buyer behavior becomes less accurate. All things being equal, over time, the strategic use of price elasticity to drive demand will run out.
The needs of students and families have changed, just like their ability and willingness to pay. There are plenty of opportunities to add unique value to education, and more importantly, further prepare a young person for the new normal.
It is absolutely time to change how we organize, strategize and operate. Active inertia is not an option, and innovation on product is what will slow -- and hopefully stop -- the slide down the curve to price.
Ian Mortimer is vice president for enrollment management at Champlain College.
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