Monday, July 08, 2013

Dog in the Window: Exploring Private Higher Education Pricing Strategies

In private sector higher education, pricing is often the most interesting area to explore. More often than not, institutions tend to take one of the two positions on pricing: Either they want to be top of the range, creating exclusivity with the pricing itself, or, for those who are less sure of themselves, undercutting others and creating 'affordable' options become the name of the game. Both options, in my view, have inherent limitations, and one needs smart strategies for pricing to be successful.

Those who price their offerings at top of the range enjoy the advantage of high margins, which allow them to afford better infrastructure and people, at least theoretically. In fact, this is, in many ways than not, a more sustainable strategy than trying to undercut the market and getting into a 'low-price trap' (more on this later). But, top of the range pricing also has inherent disadvantages. By pricing top of the range, the institution may miss out meritorious students who are simply not able to pay. This is indeed obvious to the institutions trying the strategy, even intentional, but its negative connotations may not be. An exclusionary institution is an easy target for a smart competitor, who can easily undercut it with not just price, but with performance. One of the most enduring mistakes in education marketing is to think that the price builds the brand: It does not, and only the students can. Besides, the institutions falling into the 'High Price Trap' forever keeps improving their facilities, as this becomes the only tangible justification for their high pricing: This eventually may make them unaffordable altogether, and as stuffy as an old boy's club. 

At the other end of the spectrum is the low price trap, which lots of institutions succumb to. Often, among private institutions, the fear of being called a 'profiteer' and the lure of undercutting a more established competitor lead them to set prices at a low level. Of course, this leads to lower service levels and staff, as education is indeed expensive: Because of the lower service levels, they always face pressures on pricing, and go down on a downward spiral. I have seen institutions in different countries giving away seats for higher donations, or charging all sorts of hidden fees, the most popular being examination fees, to the hapless students (once they have joined the course). But the effects of such a strategy are predictable: Student churn and failure, a toxic workplace and lower performance. This is indeed no way to build a brand.

My solution would usually be to charge an appropriate price, which, after factoring in all the costs of good tutoring, reasonable class size, adequate infrastructure, suitable customer education (read, Marketing), should allow a reasonable surplus to fund ongoing development of the institution. Even if the institution is publicly funded, it is prudent, in this day and age of accountability to the tax payer, to keep moving towards self-sustainability progressively. Now, indeed, the institution must back up this price point with suitable performance and delivery, because otherwise it would be put out of business by a nimble competitor, just as it would happen in the big bad world of business. There are a few ways the institutions can achieve a sustainable position in this regard.

First will be to keep looking for efficiencies rather than extravagance to justify the price (which many institutions do). Nothing matters more than good students and great performance, and heated swimming pools can make an institution attractive only upto a point. While the institution should start by charging an adequate price, it must be efficient, which means a number of things, including efficient use of technology, predicting and meeting student preferences adequately and engaging and listening to the students. There are a number of efficiency areas within the way education is done today, not least because the teaching technologies have not evolved much over time and because we seem to assume a rather benign, rather than active, role for the students in the teaching process. The students want to do more, and they should be empowered to do more, and this would only make the institution more responsive and efficient.

Second will be to evolve a means tested merit scholarship to admit really great students. Indeed, a lot of schools, particularly the ones in United States, do this really well. However, most others have to learn to do this properly, as most scholarship campaigns lack transparency, and are misdirected. The only reason one should give away a scholarship is to get a gifted student who can not otherwise afford the courses at an institution. While at the top end of institution ladder, this is common sense, as we look at mid-tier and private institutions, there is so much confusion about meritocracy. The institutions would let scholarship campaigns become a discount campaign to recruit more students, creating pressures on pricing and eventually pushing the institution into the same 'low price trap' that it sought to avoid.

Summing up, I believe the current problems in pricing in Private Higher Education arise from a mistaken view of how value is created in Higher Education. One school of thought is that this can be created through a 'premium', by charging a higher price than others through the creation of an exclusive environment. The other school simply believes that this is about capacity utilisation - as if education is like a service as accommodation - better the rates of utilisation, better the profit.

In a way, both schools of thoughts are deeply flawed. Competitive Advantage, or Value, isn't created by simply pricing higher, but ensuring that the students' RELATIVE willingness to pay (relative to one's competitors) over and above one's RELATIVE cost (relative to competitors' costs) is higher. This 'RELATIVE' advantage can only be created through efficiency and track record: Ensuring that the relative costs of delivery are lower and yet the student performance, not in one's own examinations but using external benchmarks, is higher, which can only be achieved through better students and better teaching.

Equally, the capacity utilisation model is problematic, because this destroys the 'willingness to pay' side of the equation, whatever the cost. The formula for success in education is 'Brains and Communities, not Bums and Seats'.

In the end, it is quite obvious: A successful Higher Education offering can only be built through unwavering focus on merit, and, obviously, on good education. One of the most important lessons I have learnt at the time I spent working in NIIT, which built a very successful education franchise across Asia, is that education business is all about efficiencies, details and student satisfaction. This holds true for Private Higher Education, though how to marry this culture of efficiency with academic freedom and creativity will be a debate worth having.      

1 comment:

Quinn said...

Awesome!

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