Pricing Today and Tomorrow

With COVID-19 and the recession aggravating existing revenue pressures on many colleges, now is the time for campus leaders to develop sustainable strategies, argue Peter Stokes, Bijan Warner and Steve Hahn.

September 16, 2020
 
istock.com/Tero Vesalainen
 

There’s little question that higher education leaders have much on their minds at present: navigating the shifting dynamics of the public health crisis, bearing unanticipated cost burdens, tightening budgets, managing the student experience, rethinking education delivery models and communicating effectively about all of these matters among them.

In aggregate, these pressures are impacting cost, revenue and the value proposition in dramatic ways and are so unremittingly urgent that you can almost be forgiven for thinking that once we have a COVID-19 vaccine, we will finally be able to put these challenges behind us and return to normality.

That is, you can until you recall that higher education is still moving toward another crisis -- a demographic cliff -- just a little farther down the road.

This cascade of critical challenges is one reason why higher education’s recovery from 2020-21 is likely to look quite different from its recovery from the Great Recession of 2008-09. In the years ahead, it will prove all the more challenging for many colleges and universities to grow their way out of their lingering fiscal challenges. As a rising chorus of higher education leaders and commentators is observing, now may be the time for a great many institutions to set aside hope as the foundation of their strategies going forward and fundamentally reimagine their business models, or -- if you the prefer the language of the kitchen table to that of the corporate boardroom -- how they make ends meet.

Inasmuch as what we are and will be experiencing is a dual shock to both the supply and demand side of higher education, it is imperative that tuition-dependent institutions reconceive their business models to rightsize their operations and support a sustainable future.

Our view is that a sound pricing strategy -- one that is responsive to changes in demand, reflects differences in students’ ability and willingness to pay, and can sustainably support the cost of delivery -- is an important variable around which to organize the evolving business model.

Supply Side: Compounding Losses in Revenue

There’s little question that current revenue losses will be compounded through the 2021 fiscal year. Looking ahead to next semester, we can expect additional losses from room and board revenue as students are unable or unwilling to live on campus. Additionally, other auxiliary revenues will decline substantially, as institutions will be unable to host events. Furthermore, some institutions will have to continue to discount tuition for courses that are delivered remotely, opening themselves up to the risk that some students may be unwilling to pay more once in-person education resumes.

Institutions that miss net tuition revenue targets for 2020 and 2021 -- whether through underenrolling, overdiscounting or both -- will be burdened with these low-revenue cohorts until they graduate. When the fall 2021 entering cohort graduates in 2025, colleges and universities in many regions will find themselves standing at the precipice of the long-anticipated demographic decline. Absent significant adjustments to the business model, many institutions will simply be ill equipped to absorb the budget shortfalls that will result.

Demand Side: The Looming Crisis Arrives Ahead of Schedule

Higher education’s long-standing affordability crisis will be further challenged by the macroeconomic implications of the pandemic -- a fact that has been somewhat masked over the last few months by families’ natural desires to “get back to normal” and augmented by stimulus checks and expanded unemployment benefits that have only delayed the negative impact the public health crisis will have on their ability to pay. In fact, currently, the Congressional Budget Office predicts that the unemployment rate will remain above 8 percent through 2021, and it is not expected to return to pre-pandemic levels for at least a decade.

The implications of these shocks are clear, particularly on the demand side, where the coming decline will force most institutions to severely reduce their net price in order to meet enrollment goals, maintain faculty head count and protect their competitive positioning. Institutional leaders may attempt to achieve this by increasing tuition discounting through financial aid programs, reducing sticker prices or changing the pricing structure in ways that reduce what students pay out of pocket, or some combination of these.

Executed poorly, however, a certain strategy or combination of strategies could presage an existential crisis -- particularly if it is only calibrated to address immediate challenges. Indeed, New York University’s higher education soothsayer, Scott Galloway, has recently gone so far as to name names, identifying institutions as diverse as Bard, Dickinson, UMass Boston, the University of Indianapolis and more than 80 others as being among those likely to perish in the wake of COVID-19. Agree with Galloway or not, a sound pricing strategy will have to look beyond this fall and to the coming decade to be sustainable.

Preparing for a More Sustainable Strategy

If the current moment feels especially chaotic and threatening, it may have to do with the growing number of institutions that are breaking ranks and carving out experimental paths on pricing -- whether they do so from a position of relative security (as a number of elite universities have done) or from a position of relative vulnerability (as a number of tuition-dependent institutions have done).

No matter who is offering the price breaks, other institutions may view these COVID-19 price discounts as threatening their own pricing power in the competitive market. In such a moment, holding the line on price or following the innovators presents risks.

For those looking to develop a more intentional and long-term strategic approach to pricing rather than following one group or another’s response to the pressing problems of the moment, we recommend considering the following key questions:

  1. How much runway do you have to implement a new pricing strategy -- can you sustain multiple years of 5 percent year-over-year declines in revenue while you build for the future? What if it’s 10 percent?
  2. How well do you understand your current cost per credit hour -- can you focus near-term growth efforts on your relatively more cost-efficient programs or new, more cost-efficient programs?
  3. How well do you understand your current pricing strategy and the factors that drive prospective students’ ability and willingness to pay -- do you understand the evolving functional, emotional and social outcomes your prospective students are seeking?
  4. How transformation ready is your institution -- will your board and your faculty support a bold initiative that moves the institution from a familiar to an unfamiliar strategy?

Strategy involves choice, and effective strategy requires articulating both those things you are choosing to do as well as those things you are choosing not to do. The simple guiding questions highlighted here are designed to help you formulate a point of view on the choices confronting you, both with respect to competing in a market characterized by declining demand and with respect to the need to generate increased net revenue to address rising costs over the long term.

The complicated reality confronting many higher education leaders is that the COVID-19 crisis is unlikely to conclude with a return to normality. The decisions you make in the coming months will affect your revenue for years to come. Then many institutions will have to confront a precipitous demographic decline, while those in regions with more enviable demography will have to contend with the inevitable competitive encroachment.

Hope in the face of adversity is important, but it is insufficient as a foundation for strategy. Asking critical questions now will not only help your institution to weather the current storms, but also to rebuild a business model that is designed for the years ahead.

Bio

Peter Stokes is a managing director and Steve Hahn is a senior director at Huron Consulting Group. Bijan Warner is vice president of enrollment analytics at Whiteboard Higher Education.

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