Revenue Analysis

1. Revenue Analysis Tuition Pricing Strategy Patricia Burch Gerald Finch

2. Overview • Tuition price-setting • Applications of strategic pricing • Case studies

3. Tuition Pricing Tuition pricing has become an increasingly important tool for the advancement of institutional goals • Enrollment management • Market positioning • Revenue management

4. The Political Economy of Tuition Pricing Pricing Strategy

5. Tuition Price-Setting: The Unknowns Too often, tuition price-setting is based on insufficient information and back-of-the-envelope estimates • Price sensitivity is unknown • Revenue forecast is based on untested assumptions • Cost-benefit is unknown

6. Tuition Price-Setting: Tools of the Trade Analytic models have been developed to assess the effects of various pricing strategies • Effect on enrollments • Effect on class profile • Effect on net revenue

7. The Emergence of Strategic Pricing Strategic pricing is a market-based approach to price-setting in which economic incentives are used to achieve institutional goals.

8. Applications of Strategic Pricing Applications of strategic pricing include: • Managing class profile • Increasing capacity utilization • Maximizing net revenue

9. Pricing Strategy: Give desirable admits strong economic incentive to enroll Reduce list price for desirable admits without regard to their financial need Academic Achievement Class rank Average SAT/ACT Other Qualitative Skills and Attributes Skills (athletics, arts) Attributes (ethnicity, geographic origin) Applications of Strategic Pricing: Manage Class Profile To enhance the qualitative characteristics of the entering class Goal: As measured by:

10. Residential and classroom space Faculty and other instructional resources Pricing Strategy: Lower net price to a level that will attract additional enrollments and generate additional tuition and room-and-board revenue. Applications of Strategic Pricing:Maximize Capacity Utilization To generate income from currently unused capacity Goal: Unused Capacity:

11. Pricing Strategy: Discount list price just to the level required to maximize net revenue per student Net Revenue/Admit Maximum X Net Price List Price Applications of Strategic Pricing:Maximize Net Revenue To maximize net tuition revenue at any given list price Goal:

12. The Question How do we determine the net price at which an admitted applicant is likely to matriculate? Price Too High Price Too Low Some admits would enroll at a lower price Some matriculants would pay a higher price

13. Econometric Modeling of Matriculation Probabilities Econometric modeling enables colleges and universities to understand the relationship among price, enrollments, net revenues, and class profile

14. Applications of Econometric Modeling With econometric modeling, colleges and universities can: • Determine the effect of changes in net price on the matriculation probability of admitted applicants • Predict the effect of a change in net price on enrollments, net revenue, and class profile • Simulate the effects of alternative discounting strategies and scenarios

15. How Does Econometric Modeling Work? Estimating Matriculation Probabilities • Analyze three to five years of admissions data using multiple regression analysis • Use multiple regression analysis to identify the best predictors of matriculation, holding all other variables constant • Use the resulting probability model to predict the effect of price on enrollments, student quality, and net revenue

16. Limitations of Econometric Modeling • Econometric modeling cannot capture the influence of external factors, such as changes in the pricing strategy of competitors • The predicted behavior of current admits is extrapolated from historical data

17. Case Study #1 • Institution: A large private university • Objective: To maximize net revenue • Question : Will an across-the-board increase in net price (i.e., a reduction in the discount rate) adversely affect enrollments and/or net tuition revenue?

18. Predicted Effect of Net Price Increase A $1,000 reduction in the tuition discount awarded to admits

19. Case Study #2 • Institution: A large private university with three undergraduate colleges • Objective: To improve the academic ranking of the entering class in each college • Question: Will deeper tuition discounts enable us to attract more high-achieving admits?

20. Predicted Effect of Net Price Reduction A 20% increase in the tuition discount awarded to high-achieving admits (SAT  1400)

21. Case Study #3 • Institution: A medium-size private university • Objective: To increase capacity utilization and total revenue • Question: Do we gain more revenue and enrollments by: • Decreasing net price • Adopting a less selective admissions policy?

22. Predicted Effects of Alternative Admission and Pricing Scenarios

23. Caveats • Quality Costs High-achieving students tend to relatively insensitive to changes in net price — presumably because they have many alternatives • Institutional Context Matters The effects of price and other variables differ from one institution to another • Strategic Pricing Is Not a Panacea Strategic pricing cannot overcome the effects of poor management or misguided market positioning