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Higher Education Industry

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. Background.

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Higher Education Industry

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  1. Higher Education Industry By: Daniel Minahan, Yashvardhan Rathore, Emily D'Agostino

  2. Higher Education Colleges and Universities in the U.S.

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

  4. Industry Structure

  5. Background Services include higher education level courses

  6. Financing and Revenues Charitable 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

  7. Who Attends?

  8. Industry at a Glance

  9. Demand Determinants • Demographics • Tuition Costs • Household Income • Financial Aid/Government Assistance -About 70% of Industry Revenue • High School Completion Rates • Unemployment Rates

  10. Competition Competition in this industry is medium and the trend is increasing • Financial Aid • Reputation • Based on Age, Size, and Selectivity • Capital Expenditures • Not directly related to teaching • Courses They Offer • Strategic Alliances with other educational institutions

  11. 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

  12. Barriers to Entry Barriers 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

  13. Industry Life Cycle: Mature

  14. 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

  15. Regulation & Policy The level of regulation is heavy and the trend is steady • State Regulation • Federal Regulation • Taxation

  16. Pricing Strategies

  17. Pricing Strategies. Operators in the higher education industry have two goals when setting tuition prices: 1. Increase revenue 2. Improve student quality

  18. Key Revenue Markets 1. Student Enrollment 2. Research Funding 3. Public Fiscal Support 4. Private Giving Student enrollment (tuition charged)is only one of the 4 sources of revenue

  19. Salient Features of the Industry Affecting Price • Lack of a common measurable economic objective • Government as an intermediary and a regulatory body • Firms using consumers as inputs • 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

  20. 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

  21. 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

  22. Strategic Classification 1.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

  23. Strategic classification 2.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.

  24. Examples P = Yale university/ Cornell University PS= washington university in st. louis R = university of south dakota

  25. 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.

  26. Challenge Facing the Schools The 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.

  27. Pricing the Cost of College

  28. Why Do University Tuition Costs Differ? Numerous Factors Include: • Actual cost of classes • Program Prestiege • Cost of upkeeping campus • Quality of institution Arguably the main factor that affects tuition prices would be the perceived prestige of an educational institution

  29. Improving Efficiency Methods Used to Improve Pricing Efficiencies: • Market Analysis • Utilizing Results from Past Data • Research Future Costs

  30. 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.

  31. 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

  32. 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.

  33. The Low-Subsidy Problem Two Separate Solutions Suggested to Solve Problem • Adopt aggressive tuition setting policies to generate more revenue from students. • Set uniform price for all prospective students to please policy makers and retain higher subsidies

  34. Public University Tuition

  35. 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.

  36. 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.

  37. Financial Aid Policy & Strategy CASE STUDY: Georgia HOPE scholarship provides students with a B average (or higher) in high school: • Full costs of attending an in-state institution OR • An equivalent level of funding to out of state institutions.

  38. Financial Aid Policy & Strategy Two Different Outcomes: • Private schools increased tuition and reduced institutional aid. • Public schools, under pressure from policy makers, kept tuition the same and only increased room and board.

  39. 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.

  40. Recommendations

  41. 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

  42. Prestige Maximization Striving for Status and Relative Rankings • Managers motivated by maintaining or improving the quality of the educational services they supply • Striving for academic excellence relative to other institutions • Increases the value of the university

  43. Questions?

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