A Proper Pricing Formula
With traditional pricing methodologies no longer effective, Webster University developed a strategic approach focused on the value of the institution's core strengths.
By Greg Gunderson
For the past 20 years, higher education has been comfortable increasing its tuition cost at a rate greater than inflation, using the argument that the value of a college education—in terms of earning power—offsets our consumers' investments. But this argument is losing steam in light of a confluence of three significant tensions: an extended national recession, reduced national and state support for loans and grants, and a growing national debate on the costs of higher education.
As is true of its peer institutions, Webster University, St. Louis, must examine changes in its pricing in light of the environment in which we operate. As documented in the accompanying article, "Enrollment Calculus," private not-for-profit institutions have attempted to meet this objective by increasing tuition discounting, sometimes with less-than-encouraging results.
For example, in 2010, Webster University experienced a dilemma when the growth in tuition discounting nearly eliminated the increase in total undergraduate tuition revenue that had resulted from higher tuition rates. While the higher discounts did result in enrollment growth, higher entrance exam scores, and greater student body diversity, it did not generate the intended net tuition revenue growth. Since then, Webster has undertaken a series of initiatives designed to respond to these challenges to the traditional tuition discounting model.
The Longer Perspective
As Webster University began preparing for academic year (AY) 2012–13, we undertook our first three-year strategic revenue planning exercise, cognizant that old pricing methodologies were no longer effective. Dan Hitchell, associate vice president for resource planning and budget, notes, "That shift, in itself, reflects a key concept we identified that is necessary in setting pricing: Pricing is a strategic, not tactical, issue that requires a longer planning horizon."
With that in mind, the strategic planning unit organized a team that included representation from budget, enrollment management, and academic affairs areas. The goal: to develop an environmental scan and an internal analysis of the prior five years' financial and enrollment data. Key to this exercise was the joint leadership of the provost and the CFO, reflecting the importance placed on integrating our strategic academic objectives into our pricing decisions.
Just as important, we discovered this approach provided a platform for engaging our board of trustees' finance committee in a series of strategic budget conversations, rather than conducting the traditional "reactive" budget meeting.
After undertaking this longer strategic examination, we identified several key trends:
- Federal focus on pricing transparency. As we examined speeches by President Obama and new efforts by the U.S. Department of Education to increase pricing transparency by sharing net price data, we recognized that higher education institutions' ability to continue to discount behind a velvet curtain of secrecy is becoming more limited.
- Macroeconomic pressures. The current economic downturn appears to be generating several more years of a soft recovery, offering limited growth in employment and continued pressure on housing values. Consequently, consumers of higher education have fewer financial reserves and lower earnings with which to fund their higher education needs.
- Sophistication of incoming students. Parents and potential students have undergone a transformation as well. In reviewing the student application process with front-line staff, we recognized that students today view tuition discounts as a rebate rather than a scholarship. With that mind-set, they are willing to try to negotiate discounts and carefully weigh tuition costs before determining where they will attend school. Paul Carney, vice president for enrollment management and student affairs, describes it this way: "Students are more aware now than ever that the interplay of tuition, scholarships, and financial aid is not fixed but is instead negotiable."
As a result of our environmental analysis, it became clear that higher education is facing a wave of change in which the old model of tuition and discounting growth was not likely to serve as a viable solution going forward. Our next step was to set some ground rules for this new situation.
Pricing Rules and Reasoning
We created a framework for our overall pricing, including changes both in tuition rates and discounting. This provided a systematic process for examining available options. Our rules included the following:
- Recognize that pricing is a marathon, not a sprint. By linking pricing to an annual budget process, higher education institutions generally limited price and discount debate to a one-year window. This results in decision making that is reactive rather than proactive. Further, it creates an environment in which price is set last, as a way to balance the budget. With the conversion to a three-year planning window for tuition pricing and scholarships, Webster University moved to setting pricing in a broader context: enrollment is based on price, and expenditure budgets are the result—not the driving force—in pricing.
- Position discounting to leverage institutional strengths. Historically, tuition discounting at Webster University was focused on a generic profile designed to attract students fitting an overall academic and need profile. While this approach provided a clear-cut standard and focused on overall targets, it did not look to leverage our strengths. "Webster's seven international campuses provide it with the global reach and educational opportunities that are unmatched by any other institution, and this sets Webster apart from peers," explains Neil George, Webster University chancellor. Further, our extended network of metropolitan and military campuses serves our nation's military educational needs, but little effort had been extended to attract the children of military families to the university. A more deliberate scholarship approach targeted on our strategic strengths offers the chance to compete in areas in which we are naturally strong.
- Avoid cannibalizing the existing base. Any time scholarship offerings are extended, one must evaluate how that discount affects the existing base of students. Offering, for example, a scholarship to legacy students may increase overall enrollment, but if the yield of new students does not offset the impact of this new discount across the existing student base, it results in one step forward and two steps back—and less net tuition revenue at the end of day.
Establishing New Strategies
Over the course of the last half of 2011, Webster University developed a new pricing approach designed to reverse the effects of the national trend of higher tuition and even higher related discounting. Key concepts included:
- Proud to Serve Scholarship for military dependents. This new program is open to qualified full-time, first-time freshmen and new transfer students who are dependents of active military or of veterans who have been honorably discharged. The annual scholarships (up to $3,000 for undergraduate education) are guaranteed to all military dependents who meet the criteria. This scholarship is offered in addition to any traditional GI Bill higher education benefit and any other scholarships and awards. It is designed to attract students from across the nation to Webster, expanding our potential recruiting class. Carney explains, "Given that Webster is recognized nationally as a military-friendly school by G.I. Jobs magazine, and our decades-long role as a provider of graduate-level education at military bases across the United States, we have a real audience in military families as their educator of choice."
- Lower tuition rates. Webster University has charted a new direction for setting lower tuition rate increases than those of its regional peers. For example, we will keep tuition rates for military programs at AY12 rates, that is, a 0 percent increase. As a strategy, this effort is founded in the belief that tuition rate growth will need to fall at or below the rate of inflation, as our consumers are no longer responsive to unchecked tuition rate growth.
- Expanding enrollment. New discounting programs are targeted to generate new enrollment growth. For example, Webster has enhanced access by other universities to its seven international campuses via Webster International Network Schools. "WINS provides partner schools with the opportunity to have their students study abroad and receive accredited courses at an English-speaking school, including the capacity to incorporate international experiences for their faculty," says Julian Schuster, Webster's provost and senior vice president. "As a result, our partners achieve all the benefits of a robust international experience with none of the risks or up-front investments."
For AY12 and going forward, we're enhancing this program with free airfare for participating students and revenue-generating capacity for the partner school. Further, Webster has begun a program of providing fixed pricing to partners so that the complete price is known at the point a student commits to the program, rather than set at the last possible moment. While this creates risks related to foreign currency shifts, those risks can be hedged and minimized. These changes target "opportunity" enrollment, or enrollment Webster would normally not have in the typical course of those students' education.
So, while the sea is choppy and the solutions relied upon in the past do not appear to be effective going forward, Webster University is confident that a focus on the fundamentals of pricing and scholarships provides a way to financial stability. By focusing on and leveraging core strategic strengths, Webster University has crafted a series of pricing and discounting initiatives that have the greatest chance of generating enrollment growth that creates new net tuition revenue.
This new approach turns on its head the reactive pricing process, in which operating-expense increases drive price changes. Instead, Webster University looks to set price based on environmental constraints in order to maximize net tuition revenue while achieving enrollment growth.
GREG GUNDERSON is vice president and chief financial officer, Webster University, St. Louis.