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Pricing Strategy and Case Studies


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									             Revenue Analysis
             Tuition Pricing Strategy

Patricia Burch
Gerald Finch

      Tuition price-setting

      Applications of strategic pricing

      Case studies
Tuition Pricing

   Tuition pricing has become an
     increasingly important tool for the
     advancement of institutional goals

      Enrollment management

      Market positioning

      Revenue management
The Political Economy of Tuition Pricing
                                    President and Board
                                   Ranking and visibility
                                   Public relations

           CFO                          Pricing                  Academic Affairs
    Net revenue                                                Class profile
    Capacity utilization
                                       Strategy                 Selectivity

                                Enrollment Management
                               Recruitment targets
                               Yield
                               Retention
Tuition Price-Setting: The Unknowns

    Too often, tuition price-setting is
      based on insufficient information
      and back-of-the-envelope estimates
       Price sensitivity is unknown
       Revenue forecast is based on
        untested assumptions
       Cost-benefit is unknown
Tuition Price-Setting: Tools of the Trade

    Analytic models have been developed
      to assess the effects of various
      pricing strategies

       Effect on enrollments

       Effect on class profile

       Effect on net revenue
The Emergence of Strategic Pricing

    Strategic pricing is a market-based
      approach to price-setting in which
      economic incentives are used to
      achieve institutional goals.
Applications of Strategic Pricing

    Applications of strategic pricing

       Managing class profile

       Increasing capacity utilization

       Maximizing net revenue
Applications of Strategic Pricing:
Manage Class Profile

 Goal: To enhance the qualitative
           characteristics of the entering class
  As measured by:                     Pricing Strategy:
     Academic Achievement
          Class rank
                                         Give desirable admits
                                          strong economic
          Average SAT/ACT
                                          incentive to enroll
     Other Qualitative Skills
      and Attributes                     Reduce list price for
          Skills (athletics, arts)       desirable admits without
          Attributes (ethnicity,         regard to their financial
           geographic origin)             need
Applications of Strategic Pricing:
Maximize Capacity Utilization

          To generate income from currently
          unused capacity
  Unused Capacity:            Pricing Strategy:
     Residential and
                                 Lower net price to a
      classroom space
                                  level that will attract
     Faculty and other           additional
      instructional               enrollments and
      resources                   generate additional
                                  tuition and room-
                                  and-board revenue.
Applications of Strategic Pricing:
Maximize Net Revenue

  Goal: To maximize net tuition revenue at any
              given list price

Net Revenue/Admit
                                         Pricing Strategy:

                            Maximum         Discount list price
                     X                       just to the level
                                             required to
                                             maximize net
                            List Price       revenue per student
The Question
   How do we determine the net price at
     which an admitted applicant is
     likely to matriculate?

  Price Too High               Price Too Low

 Some admits would            Some matriculants
  enroll at a lower           would pay a higher
        price                       price
Econometric Modeling of Matriculation

    Econometric modeling enables
      colleges and universities to
      understand the relationship among
      price, enrollments, net revenues,
      and class profile
Applications of Econometric Modeling

    With econometric modeling, colleges and
      universities can:
       Determine the effect of changes in net
        price on the matriculation probability of
        admitted applicants
       Predict the effect of a change in net
        price on enrollments, net revenue, and
        class profile
       Simulate the effects of alternative
        discounting strategies and scenarios
How Does Econometric Modeling Work?
  Estimating Matriculation Probabilities
     Analyze three to five years of admissions
      data using multiple regression analysis
     Use multiple regression analysis to identify
      the best predictors of matriculation,
      holding all other variables constant
     Use the resulting probability model to
      predict the effect of price on enrollments,
      student quality, and net revenue
Limitations of Econometric Modeling

      Econometric modeling cannot
       capture the influence of external
       factors, such as changes in the
       pricing strategy of competitors

      The predicted behavior of current
       admits is extrapolated from
       historical data
Case Study #1

      Institution: A large private university

      Objective: To maximize net revenue

      Question : Will an across-the-board
                  increase in net price (i.e., a
                  reduction in the discount
                  rate) adversely affect
                  enrollments and/or net
                  tuition revenue?
Predicted Effect of Net Price Increase

    A $1,000 reduction in the tuition
      discount awarded to admits
                            Change in     Steady-
                            Net Tuition   State     Steady-
  Number of                 Revenue       Change    State
  Matriculants Change in    per           in        Change in
  Affected by Number of     Entering      Enroll    Net Tuition
  Change       Matriculants Class         ments     Revenue

      916           22            $743      84           $2.8
                              thousand                 million
Case Study #2

      Institution: A large private university
                    with three undergraduate
      Objective: To improve the academic
                  ranking of the entering
                  class in each college
      Question: Will deeper tuition
                 discounts enable us to
                 attract more high-achieving
Predicted Effect of Net Price Reduction

     A 20% increase in the tuition discount
       awarded to high-achieving admits (SAT
        1400)
                Number of                     Change in     Change in
                Matriculants   Change in      Average SAT   Net Tuition
                Affected by    Number of      of Entering   Revenue per
                Change         Matriculants   Class         Class
  Arts and                                                    $342
                        201        13             1
  Sciences                                                    thousand
  Business               76        5              0
  Engineering            70        2              0
  Total                 347        20
Case Study #3

      Institution: A medium-size private
      Objective: To increase capacity
                  utilization and total
      Question: Do we gain more revenue
                 and enrollments by:
                     Decreasing net price
                     Adopting a less selective
                      admissions policy?
Predicted Effects of Alternative Admission
and Pricing Scenarios

                           More        Less        Smaller    Larger
                           Selective   Selective   Discount   Discount

  Admit Rate       55.3        53.1        58.0       55.3       55.3

                  1305        1319        1298        1300       1305
  Net Tuition
  Revenue        $49.0        $45.0       $53.4      $46.6      $52.6
                 2,971        2,788       3,147      2,633      3,123

      Quality Costs
       High-achieving students tend to relatively insensitive
         to changes in net price — presumably because
         they have many alternatives

      Institutional Context Matters
       The effects of price and other variables differ from
         one institution to another

      Strategic Pricing Is Not a Panacea
       Strategic pricing cannot overcome the effects of poor
          management or misguided market positioning

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