Finding the right pricing formula that attracts the desired number of students while boosting net tuition revenue is a complex calculation. The 2011 NACUBO Tuition Discounting Study indicates that many institutions' equations are not hitting the intended mark.
By Natalie Pullaro
Tuition discounting strategies continue to be popular at nearly all types of higher education institutions. Since the early 1990s, colleges and universities have reduced the price of tuition, via institutional grants, to attract and retain students who cannot or will not pay the full sticker price to attend the particular institution. NACUBO's 2011 Tuition Discounting Study—which reports discount data for fall 2010 and preliminary estimates for fall 2011—indicates that coming up with the right numbers for enrollment targets, tuition price, and discount percentage remains an elusive exercise.
The average tuition discount rate-defined as institutional grant dollars as a share of tuition and fee revenue-for freshmen has been on the rise since the recession. In 2010, the discount rate for freshmen was 42 percent and is projected to grow to 42.8 percent in 2011. Similarly, the total undergraduate discount rate rose by the same rate as that of freshmen, from 36.4 percent to an estimated 37.2 percent in 2011. (See Figure 1 for this data.)
Increasing or decreasing the discount rate, coupled with changing tuition and fees, can affect the institution's net tuition revenue. The relationship also influences the potential student's behavior, as families can reach a price-sensitivity point at which cost can be the determining factor in the enrollment decision. For example, even though the average discount rate is increasing from 2010 to 2011, the widespread drop in enrollment (see Figure 2) experienced by private colleges and universities calls into question whether the discounting strategies are still working.
Consequently, although the average discount rate is ticking upward, 37.4 percent of institutions are maintaining or even reducing their rates. This holding the line on institutional grants may reflect a desire to slow the pace that took place during the recession, when grants shot up to as high as 39 to 42 percent from the earlier half of the decade, during which they remained stable in the 37 to 38 percent range. It is possible that institutions that raised tuition and held discount rates steady may have avoided even weaker growth in net tuition revenue than the 3 percent reported in the 2011 TDS as the average change in net tuition revenue. Conversely, it could also be the case that institutions that raised tuition and maintained the discount rate discouraged enrollment of price-sensitive students, resulting in weaker revenue from smaller enrollments.
An institution in the Plains region reports: "[We] used a packaging matrix to direct appropriate aid to students based on academic profile and need. Our strategies were successful in reducing the discount rate, but did not result in increased net tuition revenue, due to lower enrollments." Another institution's experience demonstrates the unpredictable shift in enrollment: "We imposed caps on institutional aid in an effort to reduce the discount rate. This tactic would have been successful had yield rates from prior years repeated themselves. Instead, we received a record-high yield of 'top tier' students (with the highest aid awards) and a record-low yield of 'bottom tier' students (with the lowest aid awards). The result was an unintended increase in the discount rate."
Following is an analysis of the projected 2011 Tuition Discounting Study data, showing that the equation for achieving optimum net tuition revenue results is anything but constant.
Slowly Seeing Revenue Recover
The average change in net tuition revenue experienced at independent institutions has seen its share of volatility in recent years. In 2010, private nonprofit institutions were able to achieve prerecession averages in net tuition revenue; and, with that number reaching 5.4 percent (see Figure 3), institutions could finally breathe a sigh of relief from the intense losses experienced in 2008 and the very small amount of growth seen in 2009.
Although this is good news for private institutions, projected data for 2011 indicate that prerecession revenues may be short-lived. At only 3 percent, the average change in net tuition revenue gives caution to many institutions as they deal with several challenges-including enrollment, the discount rate, and tuition pricing-at a time when students and parents are more sensitive to rising college costs.
Institutions report a number of single or combinations of methods used with an eye toward generating more tuition revenue, including the following:
- Increase institutional aid. One CFO reports a planned increase in the discount rate as a way to grow net tuition revenue: "For FY11, we budgeted an increase to our financial aid pool and expanded the number of students eligible for financial aid. Our enrollment for the year was greater than we anticipated, which in turn increased our net revenue over what was originally planned." With average net tuition revenue back on track in 2010, this CFO's institution was able to fund some budget items that had been frozen during the recession. "We initially froze salaries for FY11," he says, "but with the increase in revenue, we were able to apply FY12 pay increases at an earlier start date."
- Achieve projected enrollment. Of course, net tuition revenue goals can't usually be met without first reaching the expected student enrollment target. A representative of a small institution in the Southeast comments, "Our intent was to produce a modest rise in net tuition revenue through a small increase in tuition rate and small decrease in the discount rate. Lower than projected enrollment has kept us from being very successful, however. Gross revenue is up a little, but so is the discount rate."
- Set tuition and discounts. One research institution reflects on the hard economic times that are still facing students and families: "We implemented a nominal tuition increase, to balance the university's financial requirements with the affordability to our families. Secondly, due to the economic pressures on our students and families that are being seen throughout the higher education industry, we increased our budgeted institutional aid discount rate. These strategies were successful in increasing the net tuition revenue in FY11."
Elusive Enrollment Numbers
The drop in net tuition revenue in 2011 can be partially attributed to changes in student enrollment. This year's study found that 44.9 percent of participants experienced a loss or maintained total undergraduate enrollment (see Figure 4). When looking at the first-time, full-time freshman population, 53.2 percent of institutions experienced a loss in this specific type of undergraduate enrollment. Although losses were experienced by each NACUBO constituent group, small institutions (those enrolling 4,000 students or fewer) represented nearly 80 percent of the institutions that reported enrollment maintenance or loss for both their total undergraduate enrollment and that of first-time, full-time freshmen.
Colleges and universities are wise to pay attention to the drop in enrollment of first-time, full-time freshmen. This cohort is a key factor in an institution's plans for future enrollment growth, as these students have the potential to provide a source of tuition and fee revenue across several years.
Interestingly, institutions that lost enrollment were more likely to have substantial declines, while schools that gained students were more likely to have increases that were fairly small. For example, institutions that reported declining enrollment were likely to have losses in the range of 5 to 10 percent of their freshman population. On the other hand, schools that gained students were more likely to see gains of only 0.1 percent to 5 percent. Leaders from a small college with fewer than 3,000 full-time equivalents (FTEs) explain their recent experience, "We raised tuition while attempting to lower our discount, hoping that our academic investments would be enough to attract students who would be willing to pay more for our offerings. This strategy failed, leading to our smaller entering class."
Mixing It Up
Increasing net tuition revenue was accomplished by several different strategies at participating institutions. Some campuses added graduate programs, online courses, and other high-demand programming. Several colleges and universities looked at how they packaged their financial aid. One institution reported moving from a federal methodology for determining a student's financial need to an institutionally developed methodology for determining such need. This flexibility in awarding institutional grants allowed the institution to control its eligibility requirements for need-based aid.
Other actions that yielded enrollment success-and in some cases increases in net tuition revenue-were focused on recruitment efforts and communication. One CFO from a comprehensive/doctoral institution says, "We revised our student search strategy and increased early communication regarding scholarship eligibility. We expanded both Web-based and print communications." Another participant from a small institution on the East Coast reports, "[The] admissions [department] expanded travel and outreach to high-capacity markets to increase the number of applicants able to pay all or a greater share of the cost of attendance." Another method that some institutions employed was to recruit internationally. One institution with an international student population mentions a targeted decrease in the international student discount rate, which generated additional net tuition revenue.
Improving retention rates of full-time freshmen as well as the larger undergraduate population is also a way to increase net tuition revenue.
The complete 2011 Tuition Discounting Study (available at www.nacubo.org) includes much more rich analysis. You'll find charts and tables sorted by criteria such as NACUBO constituent group, Carnegie classification, endowment level, geographic region, religiously affiliated colleges, and women's colleges. For details about obtaining and using the study, see the sidebar, "Data to Play With."
Here is some of the data included in the study results:
- Changes in freshman and total undergraduate enrollment.
- The tuition discount rate for freshmen and all undergraduates.
- Freshman discounting by acceptance rate and yield rate.
- Percentage of institutions that increased or decreased the discount rate.
- Change in net tuition revenue.
- Percentage of freshmen and undergraduates receiving institutional grants.
- Average institutional grant as a percentage of tuition and fees.
- Percentage of institutional grants funded by the endowment.
- Percentage of grant dollars awarded that met students' financial need.
James L. Doti, president of Chapman University, Orange, California, noted in "Tuition Ambitions," a December 2011 Business Officer article: "By analyzing NACUBO's annual study, leaders of independent institutions can weigh the various factors that determine tuition and fees-and use tuition discounting, in the form of endowment grants, athletic scholarships, and tuition waivers, as strategic marketing and admissions methods."
While this remains true, the 2011 study—as well as the article that follows, "A Proper Pricing Formula"—indicates that students' enrollment decisions may be based on other factors besides the discount. As a result, particular pricing strategies do not guarantee that outcomes, or students, will arrive according to plan.
NATALIE PULLARO is manager, research and policy analysis, at NACUBO.