Consumer Deals Coming to College Pricing

The end of higher education as we know it is no myth. Say you have three children and they’ll come of college age about two years apart. That’s a lot of money. But what if the college were to make you a deal? Buy one college education at full price, get the next college education for half off; and finally get the third four-year degree free. Or purchase two full-pay college degrees for the kids and, if they stay and graduate, you get a cash-back reward of $2,500.

This and similar deals are not farfetched. As The the Wall Street Journal recently reported, some private liberal arts colleges are experimenting with just such arrangements. The Journal cited Alma College in Alma, Mich., for its innovative pricing.  “We’re 127 years old, but doing business the same way as we always have isn’t going to work for the next 127 years,” Alma President Jeff Abernathy said.

Traditionally, colleges package a tuition/financial aid offer, which includes the sticker price less institutional aid, grants and loans.  Colleges engage in a system of price discrimination by extracting the greatest revenue possible from each student, priced individually. Some students pay relatively low net prices and others pay much higher net prices, depending on the student’s academic attractiveness, family income, and so on.  It’s a highly complex pricing system that would make the intricate market for wholesale electrical power seem like child’s play.  Complex, but also quaint, weird, and highly localized. Compared to most industries, the tradition-bound higher education market is antiquated in terms of providing consumers with easily understood information on pricing versus value.

But the higher education industry is starting to mirror other industries. Take ski resorts, which traditionally charged customers hundreds if not thousands of dollars for a season pass. Then, about 10 years ago, a local ski area called Bogus Basin near Boise, Idaho, struggling with unpredictable snow and an unsteady customer base, decided to slash season passes to $199. But customers had to act quickly, because the sale price was limited to just a few weeks prior to the start of the ski season. Thousands of locals responded to the price cut, and Bogus solved its cash flow problem in one bold powder dump. The seemingly radical notion — that consumers do in fact respond vigorously to prices — caught fire and spread to other resorts.

Similarly, the higher education industry could borrow from an impending revolution in golf course pricing. Ryan Moore, the PGA touring pro, recently launched a new golf club management company in Washington state, consisting of a handful of older Tacoma area courses that were struggling to stay afloat due to inflexible prices, weak demand, and stiff competition.

Sound familiar? Moore’s big idea was to offer customers three monthly pricing packages, ranging from around $49 per month to $99 per month.  Moore found a way for the pricing to better match customer demand.  Now resembling the business model of a health club, golfers agree to pay the monthly fee for a year or two. As a result, rounds have picked up, course restaurants and bars are busy, and steadier cash flow has replaced periods of slack demand and fair weather golfers.

Like golf courses and ski resorts, higher education pricing is steeped in tradition — tradition that will inevitably lead to extinction unless colleges and universities find more economical ways to meet customer needs.  Higher education is ripe for innovations in pricing, facing familiar conditions of under-used capacity and inconsistent cash flow. What’s more, these problems are is likely to worsen as the growth of high school graduates is expected to slow over the next several years.

Without a pricing revolution, many higher education institutions will fail sooner rather than later. When colleges are willing to shed vestiges of the past and adopt pricing schemes that better meet the needs of families and students, the happy result will be steadier business, more predictable enrollments, higher graduation rates, and more satisfied customers.

Peter Sacks

Peter Sacks

Peter Sacks is an author, economist, essayist and social critic.

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