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Tuition Discount Trends Indicate Need for Pricing Research

by Carole Arwidson
May 2017

This post was originally published on thelawlorgroup.com.

Strategic brand management in today’s higher ed landscape necessitates understanding the impact of price on the value proposition and the role tuition discounting plays in an institution’s quest for net tuition revenue.

In an online article, the global solutions chairman of Millward Brown (a multinational market research firm focused on advertising effectiveness, strategic communication, media, and brand equity research) wrote that “perceptions of price are inextricably woven in among the myriad of brand associations, both rational and emotional, that are created and reinforced at every consumer touchpoint. A brand’s price, whether it is high or low, is as much a part of a brand’s identity as the brand name. To price a brand appropriately and to effectively build relevant and motivating associations around that price is to harness the power of one of the most important factors in the decision-making process for consumers.”

Price matters.

Indeed, it is the affordability issue that weighs the heaviest on college presidents. While many presidents have decried the current pricing model (high price/high discount) as unsustainable, it’s a roller coaster they can’t easily get off of: fewer college-bound students and missed enrollment goals at tuition-dependent institutions mean raising prices to cover operating expenses. But those tuition increases then put some institutions of out reach for many families, resulting in colleges and universities offering deep discounts (often unfunded) to attract and enroll students, further undermining efforts to generate revenue.

It’s widely acknowledged that discount rates continue to climb within the private sector: “[T]he 411 private nonprofit institutions that participated in the 2016 NACUBO Tuition Discounting Study averaged an estimated 49.1 percent institutional tuition discount rate for first-time, full-time students in 2016-17—the highest in the history of the survey. This means that for every dollar in gross tuition revenue from those freshmen, institutions used nearly half for grant-based financial aid. Among all undergraduates, the estimated institutional tuition discount rate was similarly record-setting at 44.2 percent.”

The NACUBO study pointed to other factors that are putting financial pressure on some schools: “Net tuition revenue from first-time, full-time students grew by an estimated average of 0.4 percent this academic year, down from 1.5 percent in 2015-16 and 2.1 percent the year before. Meanwhile, 39.1 percent of respondents reported declining enrollments in both their first-year class and total student body, up from 37.5 percent last year.”

Private college presidents are concerned.

It would be no surprise if college presidents are kept up at night thinking about how families’ ability and willingness to pay what colleges are charging impacts the discount rate. As reported in the 2016 Independent College Presidents Survey, a LAWLOR and RHB collaboration, for most respondents to the survey, families’ ability to pay is the top external force posing the greatest challenge to their institution. Sixty-three percent of presidents cite families’ ability to pay among their top three external challenges, while 47% cite families’ willingness to pay.

Also shown in that study, while increasing revenues is viewed as the top marketing-related challenge (60% rated it as “very challenging”), heightening visibility/improving awareness (50%), addressing affordability (49%), and creating distinction (49%) are close behind.

All of this indicates that college presidents are right to worry about their institution’s fiscal foundations, especially since a new study indicates diminishing returns of tuition discounting. As reported in Inside Higher Ed, the study “looks at the practice and effects of tuition discounting over 10 years at a group of 448 small liberal arts colleges across the country” and “six out of 10 institutions had tuition discount rates that put them at risk for losing net revenue per full-time equivalent for every new student they enroll.”

Yet in our Presidents study, 54% of respondents said they had increased their discount rates with the strategic intent of increasing enrollment (57% had increased merit aid, 56% need-based aid, and 50% tuition).

Of course, tuition discounting isn’t necessarily a silver bullet in the quest to increase revenues. When asked about their institutions’ net revenue over the past three years, 26% of the respondents to our Presidents survey said theirs had declined, and 27% said they remained flat. And as Jeff Selingo wrote in his recent article “Higher education’s Macy’s problem,” “Continuing to discount a product more and more every year eventually leads to the death spiral that many retailers find themselves in right now.”

Americans do see the importance of earning a college degree, and research demonstrates the long-term value of doing so. But the reality is that the cost of earning that degree is hitting a ceiling for more and more families. While an overwhelming majority of the public believes a college education is necessary to get ahead, a “value gap” has opened up because far fewer people believe going to college no matter what the price will be worth the financial investment.

All of this points to the need for price sensitivity research.

Price sensitivity research can help institutions examine the role the published tuition price and the discount rate play in the overall assessment of their value propositions. It can also provide a measurement of the strength of their brand equity vis-à-vis their competitors. This empirical evidence about competitive positioning, optimal pricing, and institutional perceptions can inform decision making around strategies for generating and sustaining interest and driving selection.

Concerns around the critical matter of pricing are unlikely to abate for college presidents anytime soon. And those who seek to understand what their price, value proposition, and brand mean in a price-sensitive and financially aware marketplace will be much better positioned to strategically address this important element of the marketing mix.


This post was originally published on thelawlorgroup.com.

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