What is your pricing strategy? Five approaches to consider

Last week, Kim Clark at U.S. News and World Report, contacted Noel-Levitz for some background on the article, Here Come $60,000-A-Year Colleges: Many elite colleges are about to break the $60,000 price barrier. My colleague Scott Bodfish and I provided some context and insights based on our research and experience in the field. The article makes some very good points and it got me thinking about how colleges set price. Historically, there have been five broad approaches.

• Cost-based pricing: This approach sets cost solely in the context of internal fiscal needs and tends to ignore the realities of the external marketplace. It can work effectively for institutions with strong demand.

• Competitive pricing: This approach sets prices in the context of your competition. In addition to analyzing your competition, you should also research the perceptions prospective students and their families have about your educational value. They may not see you and your competition as equally valuable.

• Non-incremental price increase: This obvious way to raise net operating revenue can be especially useful if your institution’s price is as at the low end of your competitors, or if you have a substantial number of low- and no-need students.

• Tuition reduction: Enrollment growth usually drives this decision, and it can also significantly alter your market position and lower your discount rate.

• Differential pricing: This strategy is typically employed by adding additional fees (e.g., lab fees, computer fees) to more costly educational programs, or through true variation in tuition by program or student level.

Generally, schools use some combination of these strategies based on their market position and fiscal circumstances. One thing that is clear: colleges are becoming far more sophisticated in their approach to pricing. We see this at Noel-Levitz as a growing number of institutions are partnering with us on price sensitivity studies and econometric modeling to manage net cost of attendance for various student groups (what used to be referred to as financial aid leveraging).

I think the real key for colleges is to have a pricing strategy. Too many institutions still employ cost-based pricing, letting their own internal needs drive their pricing decisions. So as you engage in these conversations on your own campus (and we are at that time of year for the 2011-12 academic year), I encourage you to ask your colleagues a simple question, “What is our pricing strategy,” before diving into the financial models and forecasts that invariably dominate the process on most campuses.