Key Components for a Competitive
Pricing Strategy

In this difficult economy, higher education has seen a rapid rise in demand for need-based aid and a decline in the ability of many student applicants and their families to pay the costs of college tuition. Institutions have been responding to the economic pressure in a variety of ways -- sharp tuition increases, tuition freezes, repackaging financial aid. Two prestigious schools that had adopted no-loan policies have recently canceled them (Williams and Dartmouth), finding them no longer financially tenable. Middlebury College recently opted to limit future tuition increases to 1% above inflation.

In this economy, your pricing decisions need to be informed and deliberate. Kathy Kurz, vice president of Scannell & Kurz, Inc., outlines the key components to consider as you frame your pricing strategy in this market.

Make Sure You're Comparing Yourself to the Right Competitors

"The first mistake we often see institutions make is comparing themselves to the wrong set of competitors."
Kathy Kurz, Scannell & Kurz, Inc.

Most likely you have a set of peer and aspirant institutions that you compare yourself to in terms of student/faculty ratio and other metrics. But is this the right group for comparing sticker price and tuition discounts? Kurz suggests that to identify your actual competitor group, you need to know:

  • Who you are losing students to
  • Who you are winning students from

The National Student Clearinghouse can provide comprehensive data on what institutions your applicants are selecting over yours. But this data won't show you which institutions applicants declined in favor of yours. Kurz recommends looking for who you overlap with in terms of where students send their SAT/ACT scores or their FAFSA. "Compare yourself to those institutions, and use these data to determine who your actual competitors are."

"Use your data. Don't make these decisions by anecdote."
Kathy Kurz, Scannell & Kurz, Inc.

Look at More than Just Sticker Price

In benchmarking yourself against competing institutions, you need to look at:

  • Sticker price
  • Discount rates
  • Publicly available measures of prestige and quality

"Much as we dislike relying on them," Kurz remarks, "US News & World Report and other ranking systems are publicly available measures of quality that are closely correlated to the sticker price an institution can charge." This is because the public does watch these measures. Kurz notes that institutions that have the largest challenges with declining demand are often those who have a high price in their competitor set but are ranked only in the middle of that set in the prestige measures. Conversely, institutions that are underpriced relative to their public prestige see demand grow, and have less need for discounting.

Review IPEDS, US News & World Report, and other publically available sources to mine information on your competitors and determine how well your pricing and discount rates are aligned with public perception of your prestige and quality. "Make sure you understand what your current position is among your primary competitors."

Look at Ability to Pay

Third, make sure you are noting the trends in your own applicant pool. In 2009 many institutions saw higher percentages of applicants asking for need-based aid -- an indication that ability to pay in their applicant pool was declining. "Take this into consideration in deciding whether to raise price the following year." Look to your own data files to know how many applicants applied for aid and what their average need was.

Also look for external measures of ability to pay in your applicant pool. Note trends in the economy in your primary draw area. You need to know whether and by how much ability to pay is changing.

Look at Willingness to Pay

"It may be that the socioeconomic profile of your applicant pool is unchanged and you have the same percentage of students in your pool who are low-need or no-need," Kurz warns, "but where in the past you may have enrolled 20% of your students as full pay, now yield rate on those low-need students has declined significantly." This trend indicates a decline in willingness to pay. Kurz notes that in this economy, families are very concerned about the level of investment they need to make in higher education. More students are opting for a second or third-choice institution for financial reasons. It is also becoming more socially acceptable to send students to a two-year institution as a step toward a four-year degree. You need to factor into your decision not only whether your applicants are able to pay but also how willing they are to pay.

Common Mistake # 1: Pricing Up at the Wrong Time

It is not uncommon for an institution to approach the pricing decision by raising price in a bid to align itself with a higher-cost, more prestigious set of institutions. The theory is that the public will correlate the higher price with higher value. Kurz warns that she has seldom seen this move work effectively. "The problem with this theory is that there is more publicly available information on quality measures, on what students do after graduation, on the profile of the student body, etc."

"The plan to reposition by raising price will backfire if you don't have the stats to back that up."
Kathy Kurz, Scannell & Kurz, Inc.

Common Mistake # 2: Across-the-Board Tuition Freeze

Another move to avoid is freezing tuition if you realize that ability to pay and willingness to pay in your applicant pool are both declining. Kurz cautions that because returning students are not as price sensitive as new students, an across-the-board tuition freeze to respond to what you have observed about your freshman class will result in leaving net tuition dollars on the table for your other three classes. "Even if ability to pay and willingness to pay are declining, the answer may not be and probably is not freezing tuition," Kurz advises. "Instead of going up 5 or 6 percent, you might want to go up only 2 or 3 percent. But the decline doesn't necessarily mean you shouldn't go up at all."