May 4, 2012

How Pricing Still Looms Large

Pricing for independent schools and colleges is a strategic issue.  We place pricing and the lack of access at the top of the list of strategic issues facing independent education. While have discussed this topic at conferences, in white papers, and through webinars, our sense is that this issue is actually accelerating and not solutions are not being offered at a rapid enough pace.  
There are three main points about pricing for independent schools that we want to make:
  1. Independent schools are going to hit a wall when it comes to price, if they have not already.
  2. This issue is looming large in the near future.
  3. And, we place this is the most pressing issue facing independent schools today.
What is our rationale to push this topic?  Let’s take a look at several important points.

The Toughest Marketing Trick in the Book
The hardest marketing trick to pull off is to increase value without increasing price. If you work at an independent school, you know the ongoing challenge with the value proposition. Parents pay more and more each year, expecting to see value increase as time wears on. The most common competitor for students as the public schools ‐‐ which are free ‐‐ and their value is obvious to most consumers.
The simple fact is this: we don’t see independent schools using creative or market‐driven strategies to increase value. In order for value to increase ‐‐ price inevitably seems to increase. In fact, with most of our independent schools, the first tactic they turn to when increasing value is an increase in price. This is a dead‐end series of events, eventually pricing schools out of the marketplace.

An Even Tougher Marketing Trick ‐‐ The Blue Ocean Strategy
If you have read Blue Ocean Strategy, you will understand this point clearly. The Blue Ocean Strategy is a simple yet powerful one: render your competition irrelevant by creating a new category or paradigm of products by decreasing cost structures, therefore decreasing price, and increasing the value proposition. What? Yes, that’s right ‐‐ increase value and decrease price. This doesn’t sound too much like an independent school, does it?

Ability to Pay Versus Willingness to Pay
Are independent schools facing an ability to pay or a willingness to pay issue?  The current financial aid system measures financial need ‐‐ or a family’s ability to pay ‐‐ based upon the results of the Student and School Service reports. The problem is, however, I’m not sure that independent schools are really facing affordability issues.
Actually, I think it is more of a willingness to afford a school than it is the capacity to afford an independent school the parents are facing. Most independent schools are competing with lifestyle ‐‐ two car payments, bigger homes, and family ‐‐ in trying to net prospective students. Take it from one who knows ‐‐ we sacrifice in our own home to have our kids at independent schools.

At the end of the day, I think it is more about willingness than about capacity to afford an independent school. It is about lifestyle and values as much as income. And, the current financial aid system and process does not take this into consideration.

A Parallel Industry: The Facts About Private Colleges
To visualize some of my points, let’s take a look at a parallel industry ‐‐ private colleges and universities ‐‐ to see how they have dealt with pricing over the years. They are more mature marketing organizations and have a jump start on dealing with these issues.
Did you know:
  1. Most private colleges are tuition driven, with about 80% or more of operating budget coming from tuition, just like most independent schools.
  2. They currently discount tuition through unfunded financial aid to every student around 41% ‐‐ on every student ‐‐ not just those students who receive aid. In most private colleges, every student receives institutional aid in the form of scholarships.
  3. They serve a slightly less affluent student and parent population than state public flagship universities.
  4. They spend about $2500 per student to recruit them, not counting financial aid.
And, just like independent schools, private undergraduate colleges compete in a highly competitive industry, where they are providing services that are very expensive, such as lodging, technology, dining, counseling, athletics, fine arts, and recreation.
And, by the way ‐‐ one way in which they are not like independent schools?  They get to spend federal and state financial aid in concert with their own institutional aid dollars ‐‐ something not available to independent schools.

What does this all mean?

It means many private colleges hit a wall where price outpaced the number of willing consumers in the 1980’s, causing a market correction in tuition strategies and an outpouring of unfunded institutional financial aid. Their pricing strategy is no longer a product based strategy ‐‐ charge how much it cost to provide service ‐‐ but a market‐based pricing strategy ‐‐ how much will people pay to acquire it.

A second correction occurred in the last decade as a high cost structures of private colleges could no longer be profitable, and they turned to lower cost, higher revenue programs for adult learners, graduate programs, and online learning.
The Point
What’s the point? Independent schools are involved in the same industry is private colleges, they are just about 20 years behind for independent colleges are today. And, we could use the private college pricing example as a case study. It is a high cost for high‐value exchange. Over time, the economics of the strategy has not served independent colleges well. There are documented cases of colleges that moved away from discounting by decreasing their tuition price in half. In some cases, it worked. In other cases, it did not.
Independent schools are going to need to find alternative revenue sources and other ways to decrease cost structures without increasing price. Currently, most of them are one trick financial ponies ‐‐ if enrollment does not pan out effectively, they will experience hardship in the budget. They need to think more like universities, with varying pricing models and alternative ways to increase funding sources without passing additional cost off to the families that are spending more than they can afford. And, they need to do this before it gets too late and they are priced out of the market.

Five Key Questions to Consider for Independent Schools
  1. A modest endowment coupled with high tuition dependency: is this really sustainable over time?
  2. Might one trick financial ponies without alternative sources of revenue become financial dinosaurs in the future?
  3. The demographic reality ‐‐ in an age of globalism, diversity, and lowering cost structures, just how many people in your given market can afford to send their child to school? Or, better yet, even want to?
  4. Financially leveraging and discounting may become a reality for all into the schools and the future, rather than just a handful of sophisticated schools.
  5. Can independent schools learn from private colleges universities by becoming more comprehensive in financial planning and create new revenue drivers to bolster their brand, and their bottom line?



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