B R O O K E B U R N E TT E , B R I A N N A B O U B , FAY B E Y O N R O B I N S O N, J A M A L L T H O M P S O N

Pricing Higher Education

Higher Education

Post-Secondary EducationOccurs at Universities, Academies, Colleges,

seminaries, and institutes of technology All but community colleges are included

Why Higher Education?

Relevant to us as students Understand how our tuition is determined

Low concentration Over 7000 higher education institutions overall 2,774 4-year degree-granting institutions

$370.6bn in Annual Revenue Approximately $0.0 in profit

BACKGROUNDCOMPETITION

ORGANIZATIONMAJOR COMPANIES

Industry Structure

Background

Universities provide educational services to students, charge a price in the form of tuition, and produce human capital output

~1.4 million students earn a Bachelor’s Degree each year from a 4-year institution

~ 1.6 million people are employed by the higher education industry

Tuition Prices Have Been Steadily Rising

Competition

Highly competitive due to low concentration

Competition is hierarchical and not balanced Colleges can be

broken down into tiers based on endowments and prestige

Competition

Upper levels: barriers to entry in the form of access to funding

Lower levels: competitive pressures in the form of price discounting

More Resources

Improved Educational Quality

Attract Higher Quality Students

Raise Excellence/Prestige Relative to Competitors

How Colleges Compete

Government Funding

Government Funding

Organization: Example Inputs

Higher Education Institutions

ProfessorsHousing

FoodTextboo

ks Computers

Internally Supplied Externally Supplied

Major Companies

Low concentration, no major playersIBISworld lists top four:

Account for only 8.8% of total market share University of California State University of New York University of Pennsylvania Harvard University

University of California

4.8% market share.$29.7B in revenue in 2012.Tuition increased 7.6%/year on average.$6B in revenue came from it’s medical

centers.Public institution.10 campuses over California.

State University of New York

Public institution.64 campuses, and 465,000 students.52% attends community colleges.Comprised mostly of New York State

Residents.2.5% market share.

University of Pennsylvania

Private InstitutionLocated in Philadelphia, Pennsylvania.25,000 full/part-time students.4,000 academic staff.1 of 2 private universities with a vet school.Majority of income derives from its hospitals

and physician practices.

Harvard University

Private institution.Located in Cambridge, Massachusetts.Oldest university in the US.Roughly 20,000 enrolled students.$31B endowment.Endowment accounts for 35% of revenue.

Pricing Strategies

How Tuition is Determined

Sticker price or baseline tuition determined by calculations of: Projected enrollment Required resources (faculty, etc.) Available funding (state and federal, endowments) Grants and contracts

However, not every student pays the same price…

40%

11%11%

38%

Percent of Tuition Paid Out of Pocket By Cornell Students

0-25%26-50%51-75%76-100%

First Degree Price Discrimination

Charge each student the maximum amount they are willing to pay for education Capture as much of consumer surplus as possible

In pricing higher education, this is shown by financial aid offerings

FAFSA CSS Profile

Financial Aid Calculations

Example of Aid Package - Cornell

13.1

9.49.4

8.8

1.4

0.684 0.5940.524

Anuual Aid by Federal Aid Program (in Millions of Dol-lars)

Federal Aid ProgramFederal Education Tax BenefitsFederal Pell GrantSubsidized Stafford LoansUnsubsidized Stafford LoansFSEOGFederal Work StudyPost/911 GI Bill Veterans BenefitsPerkins Loan

$1,390

$3,685

$3,645

$4,247

$528 $1,422

$15,736

$1,852 Average Aid Per Recipient

Federal Education Tax BenefitsFederal Pell GrantSubsidized Stafford LoansUnsubsidized Stafford LoansFSEOGFederal Work StudyPost/911 GI Bill Veterans BenefitsPerkins Loan

Tuition “coupons”

How to attract students not eligible for financial aid (determined by need) “Merit” scholarships available Act as a “coupon” to attract customers – in this case

students – to “shop” somewhere they normally wouldn’t, or enroll in a college they otherwise may not have chosen

Often the only way for some colleges to sustain enrollment

Pricing High – Premium Pricing

Universities compare their prices to other similar institutions in the same state or surrounding states

Anticipate behavior of other universities – influences tuition prices

Tend to overestimate reputation and quality – price higher If one university does not price as high as another,

fear of being seen as lower-quality institution All price high!

US News Top 20 Colleges

College Ranking Name Total Avg Cost of Degree

1 Harvard $343,0042 Princeton $374,6203 Yale $502,7484 Columbia $226,2005 University of Chicago $267,275

6Massachusetts Institute of Technology $341,769

7 Stanford University $345,4408 Duke University $287,8509 University of Pennsylvania $264,80210 California Institute of Technology $618,68111 Dartmouth $292,75412 Northwestern $178,71613 Johns Hopkins $269,246

14Washington University in St. Louis $353,575

15 Brown University $202,21716 Cornell University $151,21117 Rice University $228,04318 University of Notre Dame $161,78019 Vanderbilt University $289,50620 Emory University $210,192

US News Bottom 20 Colleges

College Ranking Name

Total Avg Cost of Degree

199 University of South Dakota $61,550

199University of North Carolina - Charlotte $55,416

199 University of Montana $61,198199 South Dakota State University $59,243199 Louisiana Tech University $47,553199 East Carolina University $71,499189 Widener University $115,823189 Western Michigan University $60,130

189University of North Carolina - Greensboro $66,673

189 University of Nevada - Reno $108,292189 University of Colorado - Denver $113,536189 Northern Illinois University $54,683189 New Mexico State University $59,601189 Montana State University $64,831189 Ashland University189 Andrews University184 University of Houston $64,548184 University of Alabama - Hunstville $69,891184 North Dakota State University $65,464184 Bowling Green State University $58,640

Top 5 Bottom 5

University Acceptance Rate

Harvard 6.30%

Princeton 8.50%

Yale 7.70%

Columbia 7.00%

University of Chicago 16.30%

University Acceptance Rate

University of South Dakota 88.90%

University of North Carolina - Charlotte 69.60%

University of Montana 81.80%

South Dakota State University 92.30%

Louisiana Tech University 62.10%

But…how selective are they?

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0

5000

10000

15000

20000

25000

30000

35000

40000

45000

R² = 0.311695890421333

Acceptance Rates vs. Tuition of Public Universities, 2012

Acceptance Rates (%)

Tuit

ion

($/y

ear)

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00%0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

R² = 0.144167726211306

Acceptance Rates vs. Tuition of Private Universities, 2012

Acceptance Rates (%)

Tuit

ion

($/y

ear)

More Resources

Improved Educational Quality

Attract Higher Quality Students

Raise Excellence/Prestige Relative to Competitors

How Colleges Compete

20 30 40 50 60 70 80 90 100 1100

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

R² = 0.0914156950929547

Tuition vs. Graduation Rates, Private Not-For-Profit Universities

Graduation Rates (%)

Tuti

tion

($/

year

)

30 40 50 60 70 80 90 1000

5000

10000

15000

20000

25000

30000

35000

40000

45000

R² = 0.495276725448645

Tuition vs. Graduation Rates, Public Universities

Graduation Rates (%)

Tuit

ion

($/y

ear)

0 100000 200000 300000 400000 500000 600000 700000 800000 900000 10000000

20

40

60

80

100

120

Endowments per Full-Time Equivalent vs. Graduation Rates

Endowment/FTE ($)

Gra

duat

ion

Rat

es (

%)

Competitive Pricing

Tacit collusion: Circumstance where two companies agree upon a certain strategy without putting it in writing or spelling out the strategy explicitly

Universities compare their prices to other similar institutions in the same state or surrounding states

Note: This is legal!

Brown Yale Dartmouth Penn Harvard Princeton Cornell Columbia$32,000

$34,000

$36,000

$38,000

$40,000

$42,000

$44,000

Ivy League Tuitions

Institution

"Sti

cker

" Tu

itio

n Pr

icin

g

Public School Pricing

Receive funding from state governments

Two-tier pricing system (in-state and out-of-state)

Diversity of prices between schools

Each state often has one main “flagship” school

Discrimination Based on Residency

Third Degree Price Discrimination – Tuition rates vary for different consumer segments depending on in-state or out-of-state status.

Some colleges offer students a discounted rate if the student is a resident of the respective state.

Public Four-Year In-State Public Four-Year Out-of-State $0

$5,000

$10,000

$15,000

$20,000

$25,000

Average Tuition and Fees for Full-Time Undergrad-uate Students (2012-13)

Student Based on Residency

Tota

l Tui

tion

and

Fee

s

NYS Resident Non-NYS Resident0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

CALS Tuition and Student Fees Based on Residency

Student Based on Residency

Tuit

ion

Plus

Stu

dent

Fee

s ($

)

Two-Part Tariffs

The practice of selling one product or service as a mandatory addition to the purchase of an additional product or service

Examples: Mandatory student fees Mandatory campus residency

“Fees”

Brown Yale Dartmouth Penn Harvard Princeton Cornell Columbia$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

Tuition and Fees for Ivy League Institutions

FeesTuition

Institution

Cost

Freshman Residency Requirement

In addition to tuition, some institutions require students to live on campus during their Freshman year or longer.

Easte

rn Ill

inois

Univer

sity

Arizo

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e Univ

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Mississ

ippi S

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William

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Milwalk

ee U

niver

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Emer

son C

olleg

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Wester

n Car

olina

Univ

ersit

y

Saint

Louis

Univer

sity

Salsi

bury

Univer

sity

Stan

ford U

niver

sity

05000

100001500020000250003000035000400004500050000

College/University Expenses

Room and BoardTuition

Institution

Tota

l Cos

t ($

)

Easte

rn Ill

inois

Univer

sity

Arizo

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e Univ

ersit

y

Mississ

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tate U

niver

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William

s Coll

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Milwalk

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niver

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Emer

son C

olleg

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Wester

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Univ

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Saint

Louis

Univer

sity

Salsi

bury

Univer

sity

Stan

ford U

niver

sity

0%10%20%30%40%50%60%70%80%90%

100%

Percent of Expenses to Room and Board

TuitionRoom and Board

Institution

Perc

enta

ge o

f R

oom

and

Boa

rd P

lus

Tuit

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Confusion Pricing – Stanford University Example

• Stanford University Freshmen have the option to live in any of the 10 dormitories or any 3 of the apartments or suites

• After this is done, students then need to choose a meal plan, healthcare coverage, gym memberships, transportation options, etc.

• Allows Stanford University to get close to 1st degree price discrimination

Meal Plans

Health Coverage

INVESTMENTPRICING STRATEGIES

Reccommendations

Demand For College-Educated Workers

Return on Investment

Future Pricing Strategies

Costs rising for both public and private universities, while simultaneously losing funding

Capture even more profit: Credit-hour pricing Upper-level vs. lower-level pricing Department or program-based pricing

Credit-Hour Pricing

Currently, each student is charged the same full-time tuition rate (before financial aid is applied) Students taking 12 credits charged the same base

rate as students taking 18 credits

Can capture more profits if charge per credit-hour Higher tuition for students who choose to take more

credits

Upper vs. Lower-level Pricing

Upper-level classes require senior professors, often have much lower enrollment Cost of teaching them is higher, yet colleges currently

charge the same price for upper-level as lower-level, large lecture-style classes

Decision to charge more for these classes would mostly affect upperclassmen Less price-sensitive than first- or second-year students

because they have already invested more in their education

Department or Program Pricing

Certain programs are in higher demand or are more prestigious Higher demand for these programs

Charge more for high-demand programs than for low-demand programs Higher demand less price sensitive