Higher Education Industry

By: Daniel Minahan, Yashvardhan Rathore, Emily D'Agostino

Higher Education

Colleges and Universities in the U.S.

Why Higher Education?• Relevant to everyone in this room• A major public policy issue• Consumers as inputs

Industry Structure

BackgroundServices include higher education level courses

Financing and RevenuesCharitable Donations• Dedication to equal opportunity under the belief that

education is a human capital investment

• Appreciation of the externalities of an educated citizenry

• Alum's sense of obligation to repay past subsidies

• Desire to bathe in the reflected glory of an improving alma mater

Tuition Revenues• Supported by more conventional personal consumption

and investment incentives

Who Attends?

Industry at a Glance

Demand Determinants• Demographics• Tuition Costs• Household Income• Financial Aid/Government Assistance -About 70% of Industry Revenue

• High School Completion Rates• Unemployment Rates

CompetitionCompetition in this industry is medium and the trend is increasing

o Financial Aido Reputation

Based on Age, Size, and Selectivityo Capital Expenditures

Not directly related to teachingo Courses They Offero Strategic Alliances with other educational

institutions

Market Share Concentration: Low• 4 largest institutes account for less than 10%

of industry revenue• 2,189 public or not-for-profit four-year

colleges in the U.S. during the 2008-2009 academic year

• Can be high in specific geographic areas• Private colleges can represent a

disproportionately large proportion of industry revenue in comparison to their enrollment

Barriers to EntryBarriers to industry in this industry are high and

are steady• Land and Infrastructure Costs• Attracting and Retaining Good Staff• Gaining Accreditation for Courses• Government Funding and Financial Aid

Industry Life Cycle: Mature

Life Cycle Reasons• The growth rate of the industry is roughly in

line with the overall economy• The size of the industry's market is relatively

static• The number of college campuses has

remained flat during the past 5 years

Regulation & PolicyThe level of regulation is heavy and the trend is

steady• State Regulation• Federal Regulation• Taxation

Pricing Strategies

Pricing Strategies.Operators in the higher education industry have

two goals when setting tuition prices:

1. Increase revenue2. Improve student quality

Key Revenue Markets1. Student Enrollment2. Research Funding3. Public Fiscal Support4. Private Giving

Student enrollment (tuition charged)is only one of the 4 sources of revenue

Salient Features of the Industry Affecting Price1. Lack of a common measurable economic

objective2. Government as an intermediary and a

regulatory body3. Firms using consumers as inputs4. Not - for - profit nature of the firms“ colleges and universities will raise all the

money they can and spend all the money they raise” - howard Bowen

Economic Value of Higher Education• It's difficult to put a value on the education

recieved• People investing in higher education don't

know what they're buying- won't and can't know what they bought until it is far too late to do anything about

• Quality of the service provided by higher education institutes cannot be fully assessed even long time after its consumption

Reputation and Prestige - Assets that allow institutions of higher

education to convey non price information to its customers

- Reputation is built on tangible information that can be obtained quickly

eg. job placement rate for an institute- Prestige is more abstract. harder to build.

source is more intangible. measurement relevant to others. zero sum game

Strategic Classification1.Prestigious and Prestige seeking ( P & PS)• Focus on maintaining and building prestige.• " to be the best in whatever we do"• Their goals are defined less by what they

currently do or what their customers need and more by what other prestigious organization do

Strategic classification2.Reputation seeking institutes

These institutions have not accumulated a high level of prestige. neither they are investing in acquiring it. they are innovative. they are focused on meeting identifiable demands of the customers.

ExamplesP = Yale university/ Cornell University

PS= washington university in st. louis

R = university of south dakota

First Degree Price Discrimination.• Higher education a great example for first

degree price discrimination• Detailed information of about the customer is

obtained• Instead of charging one uniform price that

maybe half of prospective students can afford, many universities choose instead to give students with financial hardships certain aid while charging other students the full cost of tuition.

Challenge Facing the SchoolsThe role of the student is twofold: - vehicle for investment in prestige and for

revenue generation. - Institutions may place more value on a

student’s potential contribution to prestige than his direct contribution to revenue. they challenge is to balance these two objectives.

Pricing the Cost of College

Why Do University Tuition Costs Differ?Numerous Factors Include:

1. Actual cost of classes2. Program Prestiege3. Cost of upkeeping campus4. Quality of institution

Arguably the main factor that affects tuition prices would be the perceived prestige of an educational institution

Improving EfficiencyMethods Used to Improve Pricing Efficiencies:

1. Market Analysis2. Utilizing Results from Past Data3. Research Future Costs

Public Education Restrictions• Public universities

have a ceiling to adhere by when selecting tuition prices.

• Federal and state funding will more often than not be reduced if tuition increases over a certain amount.

The Low-Subsidy Problem• Average published tuition in public universities across

all classifications is about 25 percent of the comparable posted tuition for private universities

• Public universities must compete with private universities while facing the issues of:

Relatively small endowments Declining levels of state subsidies Increasing costs of educating students

The Low-Subsidy Problem• Government expenditures

as a percent of expenditures have increased.

• Public universities still require more funds than this increasing level of subsidies can provide.

The Low-Subsidy ProblemTwo Separate Solutions Suggested to Solve

Problem

1. Adopt aggressive tuition setting policies to generate more revenue from students.

2. Set uniform price for all prospective students to please policy makers and retain higher subsidies

Public University Tuition

The Flawed Solution• Rapidly increasing tuition rates leads to:

Increasing reliance on tuition for funding Causes those who set the budget to further lower

subsidies as public universities show continued ability to fund institution with tuition

Further alienates those students who cannot afford increased tuition and cannot receive financial aid.

The Unfortunate Truth• As attractive as uniform pricing may be, this

sacrifices much of the consumer surplus gained by first degree price discrimination.

• The response time by policy makers to stop subsidy cuts is far too great for public universities to take a chance on not increasing tuition.

Financial Aid Policy & StrategyCASE STUDY:

Georgia HOPE scholarship provides students with a B average (or higher) in high school:• Full costs of attending an in-state institutionOR• An equivalent level of funding to out of state

institutions.

Financial Aid Policy & StrategyTwo Different Outcomes:

1. Private schools increased tuition and reduced institutional aid.

2. Public schools, under pressure from policy makers, kept tuition the same and only increased room and board.

Results of the Outcome• Private institutions saw the most benefit from

reduced in-house financial aid and increased revenues.

• Public universities tried to recoup more money through room and board, but barely made out better from the grants.

Recommendations

Points for Colleges and Universities to Focus On• Experienced professors• Ability to take advantage of government

subsidies and other grants• Ability to respond to students' needs• Having a good reputation• Ability to raise revenue from additional

sources• Effective cost controls

Prestige MaximizationStriving for Status and Relative Rankings

o Managers motivated by maintaining or improving the quality of the educational services they supply

o Striving for academic excellence relative to other institutions

o Increases the value of the university

Questions?