Right-Pricing Higher Education... for Everyone's Sake

In the late 1970s the sticker price of college education became detached from the indices it had generally tracked up until then.  The ‘80s were a go-go time that, in retrospect, somewhere between 99% and 100% of Americans would say resembled nothing so much as the beginning of a Ponzi Scheme.

Let’s toast to that!

Chivas Regal is a very good blended Scotch whiskey that has been around about as long as most of the American Ivy League colleges. The Seagram family took Chivas corporate and masterfully marketed – branded and priced – the spirit.  Chivas was viewed as special: exclusive, expensive, and prestigious.  Seagrams discovered that, along with image management, they could increase its price and increase sales.  During the 1980s over 1.2 million cases of their most popular 12-year-old bottles were sold in the United States annually.  What an era!  What a beverage!  (US sales stand at approximately 450,000 cases these days.)

Drawing on thirty-five years of experience as a college administrator, I recall the phrase “Chivas Regal Effect” entering the lexicon in the 1980s when I worked at the University of Pennsylvania.  Back before the Federal government busted the so-called Overlap Group (the Ivies and MIT) for collusion and price-fixing, we in the admissions office would compare prices and financial aid offers with our core overlap group (AKA “competitors”) in hopes that we could minimize the role the cost would play in college choice.  But there was another result; one that I honestly believe at the time was unintended.  Penn’s president Martin Meyerson said it best: "We were building up a kind of notion about colleges and universities that the higher the price, the better they were."  (Stanford’s finance vice president Bill Massy was blunter: "The theory was, basically, we will increase tuition as much as the market will bear.”)

We all know the rest of the story.  Up to now that is. 

Massy, meet Bennett

College rankings gained prominence, money was easy to come by, the Massy Theorem took hold, and with no end in sight many colleges invested in quality high-overhead infrastructure and programing… as the economy iced-down the Bennett Hypothesis (“increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase”) gained ascendency as the cocktail party gave way to the tea party, and even a portion of the State of the Union Address was a softball warning about cost that most of highered felt they, sadly and reluctantly, had to ignore.

College tuition has outpaced general inflation by ten times since the ‘80s and its trajectory has not even been blunted by the Great Recession:

 

Behind the scenes “doing less with less”

Barring the most resource-rich college brands (ironically), research has shown that family willingness and ability to pay is declining.  Families will try harder to meet the bill if their child is talented enough to be admitted to an Ivy League school but they are also looking at “financial aid safety” colleges in greater numbers.  More research indicates that the number of students turning down their top-choice pricey school in favor of a more affordable option is sharply on the rise.

Seeking a middle way, some highered advocates have begun looking at the dilemma differently.  Rather than focus on top line price – and the amount of financial aid “discount” that colleges “spend” – why not look at 1) what your families can pay, 2) what it costs to run your college, 3) revenue from all non-tuition sources, and 4) add #1 and #3 and subtract #2 and charge as close to THAT as possible.  Might, so goes the reasoning, a customer base committed to your product but stung by financial uncertainty, might these families be willing to pay less for less?  Let someone else pay for those electron microscopes!  First Edition Audubons, not on my dime!

A Radical Departure: the Concordia “Right Pricing” Experiment

This morning Concordia University in Minnesota announced a $10,000 price DROP: “In resetting our tuition to a price last seen a decade ago, we are responding to the concerns of students and families who feel our nation’s colleges have become unaffordable,” said Rev. Tom Ries, president of Concordia. “We hope that other private colleges and universities will soon be able to follow our lead.”

Operating from a position of relative strength and a keen sense of market sentiment, Concordia is branding the price cut as a “reset,” a disciplined, no smoke-and-mirrors anti-Chivas moment that has “the phone ringing off the hook” in their admissions office and has already garnered a mixture of “RIP, we hardly knew Ye,” to quixotic admiration in the highered community.

I think Concordia intends to be in the human capital business to stay, and I’m betting on their math.  For the sake of higher education and future generations of college students.