Right-Sizing Your Institution: Balancing Class Size with Net Tuition Revenue

If there are more students enrolled, how can an institution have fewer dollars for operation and investment? Understanding how price inelasticity in an admit pool can drive up a discount rate without significant increases to class size is critical to setting enrollment and net tuition revenue targets. Making sense of market share and prospective student pool—within the context of increased competition, discounting, and changing demographics—can help an institution to set realistic enrollment goals. However, understanding a prospective student pool’s price elasticity is also vital to determining the right size for the institution.

Put simply, when decreases in cost or increases to grant aid offered to students do not successfully increase enrollment to offset the institutional expenditure, the admit pool may be inelastic. In response to an inelastic population, if grant aid is slightly reduced, a campus should anticipate some decrease in enrollment. However, in spite of fewer students being enrolled, an increase in net tuition revenue will be realized. More specifically, with an inelastic admit pool, although increasing gift aid will likely gain a few students, net tuition revenue will be eroded. That is, the tuition revenue generated by the additional students will not make up for the extra dollars spent on those students who would have probably enrolled with a lower award.

Conversely, when an admit pool is elastic, additional scholarships (or lower cost) will generate more students and increase net tuition revenue. Essentially, more aid will increase the number of students who enroll at a high enough yield to “pay” for the additional institutional gift aid that is spent. In the case of an elastic admit pool, a higher discount rate will actually result in greater net tuition revenue because of the additional enrollment generated by the increased gift aid.

Enrollment declines are making class size and net tuition revenue more important than ever

The importance of protecting net tuition revenue has never been more urgent. The National Student Clearinghouse Research Center, Current Term Enrollment-Fall 2017 study shows enrollment decreases across all sectors. Declines range by more than 7 percent among for-profit institutions to a -0.2 percent decrease among four-year public institutions. Overall, enrollment dipped by just under 1 percent for all institutions, and there is little sign of a future uptick. In addition, even the historically more stable four-year public sector is becoming increasingly reliant on students to meet the cost of doing business. In 2018, over half of state institutions used tuition dollars to account for more than 50 percent of their total revenue to counter shifts in state support.

Using an econometric model to analyze an admit pool for variables that impact student enrollment is one way to approach setting enrollment goals. When applied correctly, this tool can test changes to grant aid or cost through statistical simulations to project enrollment and revenue changes. A data-driven modelling process can assist the institution to determine the elasticity of a population as well as the right size for the institution to both protect revenue and optimally enroll students.

In the absence of an econometric model, at a minimum, a campus should carefully analyze enrollment patterns. By grouping students who have similar characteristics, campus researchers can examine differences in awarding strategies between those who enrolled and those who did not. If enrollment yield is similar between students with higher gift aid and those who were offered less, additional money will likely not improve enrollment in this group without reducing net tuition revenue. If the enrolled student group average award offer when compared to the non-enrolled student average award offer is significantly more, it might be assumed that increases to grant aid will enroll more students and result in higher net tuition revenue.

When faced with an inelastic population, and a desire for enrollment growth, diverting a portion of scholarship funds to enhance marketing efforts designed to increase the admit pool may be the best use of campus resources.  If on the other hand, increased institutional aid has recently increased yield and the campus has determined the admit pool to be elastic, perhaps it makes sense to scale back some expenditures to increase institutional gifts further. Campus initiatives that support accurate data reporting coupled with careful analysis by enrollment professionals and institutional researchers can increase the probability of success. Well-constructed enrollment goals coupled with careful tracking of projected outcomes during the admissions cycle will maximize internal resources and reduce the probability of unanticipated results.

Schedule a consultation to discuss your best enrollment strategies

How can you best balance class size and net revenue? Our consultants have helped numerous institutions analyze and address that challenge. Ask for a consultation to discuss what your best options are for achieving your goals for enrollment and net revenue.

I also encourage you to attend our Strategic Enrollment Planning Executive Forum. This event for senior enrollment leaders provides a hand-on event for exploring the most critical issues in enrollment management. The two-day agenda will go through key topics and culminate in the preliminary steps for creating a strategic enrollment plan. It is a great venue for exploring topics such as class size and net tuition revenue.