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Weathering a Year of Increased Student Price Sensitivity

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NACUBO recently released a tuition discounting study; among the findings:

  • The average discount rate for full-time freshmen increased from 39% in fall 2007 to 42% in fall 2008
  • The average aid award covered 53.5% of the institution's "sticker price"

Other recent studies document sharp rises in both the number of students applying for financial aid, and the size of their need.
Jon Boeckenstedt, associate vice president of enrollment management at DePaul University, and Joseph Russo, director of student financial strategies at the University of Notre Dame, offer advice on assessing price sensitivity as you look to weather the next year.

What No One Should Be Doing

Boeckenstedt advises against one common scenario in which a cabinet member asks enrollment management to begin with expenditure assumptions and then determine how much tuition must increase to meet the expenditures. Now more than ever, Boeckenstedt suggests, universities must assess what their market is willing to pay for the services they are offering. You may be charging too much (and straining your financial aid resources to take up the slack), or you may be charging too little. You need to know. You also need to distinguish between price sensitivity for different schools (for example, your business school versus your school of education) and for different classes (it may be advisable to consider distinct fee increases for freshmen versus returning students).

Identify what you can reasonably charge and then decide what you can do with that revenue. Don't start with how much you need to spend.

Jon Boeckenstedt, DePaul U

If you are approached by your president with this request (calculate how much tuition we need according to how much we want to spend), you need to be prepared to discuss the tradeoffs. In raising tuition, you risk having to either spend more in financial aid or draw more heavily from the lower end of your applicant pool, because those students with lower test scores and GPAs for whom you are their top choice are likely to be have a higher willingness to pay than students with higher scores for whom your institution is one of their middle choices. So in raising tuition you risk changing the shape of your class. You can make this case using predictive modeling based on your historical data.

Boeckenstedt advises pursuing comprehensive and aggressive price sensitivity studies, defining and differentiating market segments and then analyzing your historical data in order to test your assumptions about apparent price sensitivities. Look for demand curves based on:

  • In-state vs out-of-state (or distance from campus, which may be more relevant in states with more area)
  • Income
  • Academic programs
  • Male versus female
  • Ability to pay
  • Academic ability

You need to find the right patterns. Do recurrent regression analyses and cluster variables together by ability to pay. What does price sensitivity look like for out-of-state males in engineering versus in-state females in the social sciences? "The art and science of this," Boeckenstedt notes, "is splitting into enough groups that you can measure elasticity while ensuring the groups are large enough to have statistical significance."

Responding to Changing Patterns in Price Sensitivity

We need to understand that as we are going forward, we can't look at last year and assume that it necessarily indicates anything about next year. We are used to incremental changes. In this economy, that leaves a whole lot of room for disastrous decisions around setting price.

Jon Boeckenstedt, DePaul U

Reminding us that the willingness of middle-income students to strive for a "brand name" education and pay a premium for it is shifting significantly, Boeckenstedt suggests several key items enrollment managers need to be investigating this year, in order to avoid falling back on assumptions that may no longer hold:

  • "Unless you are truly a national institution, you need to pay more attention to what's happening in your region than to what's happening in the national economy."
  • "Understand what impact external influences such as your state government are going to have on your ability to enroll the student body you are looking for."

By way of example, Boeckenstedt notes how institutions in Illinois are watching very closely to see the extent to which the state is going to fund or not fund a monetary assistance program given to low- and middle-income students for attending college. Last year, the state nearly cut half the funding to the program, only to step back at the last minute; the state's decision this year could have a far-reaching impact on the shape of the entering class.

Boeckenstedt recommends establishing a relationship with your institution's government relations office. This is not a traditional partnership for enrollment managers to seek out, but in the current economic climate, it could be critical. "You need these people to keep you actively informed," Boeckenstedt suggests.

Check Price Sensitivity for Your Upperclassmen, Too

"As you try to address the needs of the entering class," Joseph Russo warns, "remember that retention of your other classes is just as important to your operating budget."

If you're down 50 freshmen, that's a problem for your operating budget. If you're down 50 upperclassmen, that's an equal problem.

Joseph Russo, U of Notre Dame

While it is true that your sophomores and juniors have already made a commitment to pursuing education at your university and may be therefore less price sensitive than your entering class, it is crucial not to take their persistence for granted. As their families face foreclosures and other economic hardships, students beyond the freshman class are also at risk if the financial pressures on their education become too severe.

Boeckenstedt advises reviewing the following data for your other classes to inform decisions:

  • Academic progress -- credits earned; GPA
  • Financial need -- whether you're meeting it, to what extent
  • Components of the aid package -- how skewed toward loan or self-help or work
  • The extent to which you can shift balance of package away from work, which is likely to drive GPA and graduation rate higher, as students are freed to focus more on their academic studies
  • How close the student is to graduation (it would be prudent to allocate financial aid first to those upperclassmen who are within a semester or two of degree completion)

Use these data to inform decisions about where to reallocate and award in order to help your upperclassmen persist and stay focused on their academic success. As you review ability to pay measures for your upperclassmen, you will ultimately need to arrive at a price in financial aid -- it will take $X in financial aid in order to raise the graduation rate X points per year -- and then make a judgment call about whether this is your best use of aid dollars.

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About the Authors

Daniel Fusch, Director of Publications & Research

Daniel provides strategic direction and content for AI’s electronic publication Higher Ed Impact, including market research and interviews with leading subject matter experts on critical issues. Since the publication’s launch in 2009, Daniel has written more than 200 articles on strategic issues ranging from student recruitment and retention to development and capital planning. If you have a question or a comment about this article, feel free to contact Daniel at daniel@academicimpressions.com.