College tuition levels, rising at over three times the CPI for more than 15 years, may have met a wall of price resistance in certain market segments. A major challenge for institutions dependent upon tuition has been the difficulty of increasing net tuition revenue at the same growth rate as the retail tuition rate. Discounts are routinely offered in various forms, such as student aid, loans, and work-study. For 213 private institutions, a study found that
Net tuition revenue as a percent of the tuition sticker price for the top liberal arts institutions and universities has declined since 1990, bottoming out in 1996 and recovering a bit in 1997 to 70% and 73%
respectively. The remaining 177 institutions are still experiencing a decline in net revenues, nearing 60% of tuition sticker prices (Brenaman, 1999, pp. 23–24).
These results occurred during a remarkable economic period of low unemployment and low inflation. What should we expect in years when such favorable economic conditions for students and their parents no longer exist?
Discounted tuition is now becoming an applied science. The academy has borrowed a successful pricing technique from the private sector—yield management or revenue management. And with the Internet, its use appears to be growing. Born in the deregulated airline environment of the 1980s, revenue management attempts to segment the market and to price each segment in such a way that all capacity of a service is utilized, producing revenue at the maximum possible level. In airline parlance, each empty seat near takeoff time is a revenue opportunity. If the plane takes off with an empty seat, the revenue opportunity has been lost forever. Although reluctant to admit it, many colleges and universities do the same thing.27 As reported above, average tuition payments nationally average between one half to three fourths of published (retail) tuition.
The use of revenue management techniques by colleges and universities is likely to grow in the years ahead, as parents become ever more cost conscious. According to the popular press, there is some evidence already that parents who are Ivy League alumni are happy sending their children to less difficult and less expensive state colleges and universities. Their attitude: we have made it, but we see no reason why our kids have to work so hard or why we should pay so much!
25http://www.census.gov/population//socdemo/education/tablea-03.txt
26The Chronicle of Higher Education, Nov. 18,1999.
http://chronicle.com/daily/99/11/99111803n.htm.
27Revenue management as applied to college admissions is now an accepted area of scholarly research. For example, see Elinam and Dodin, 1995.
Revenue management sees its final evolutionary state in the form of auctions. On the Internet, a popular site is priceline.com, where one can bid on airline tickets, cars, hotel rooms, and a host of other big-ticket items.28 But there is a new player: eCollegebid.29 With this online service, the parents of a college-bound child can enter the child’s characteristics and the maximum tuition price they are willing to pay. The colleges participating in the eCollegebid consortium that are willing to accept the offered parental bid reply in the affirmative within two weeks after the bid is submitted. As of this writing, no college had joined the eCollegebid consortium. But even if this particular venture fails, its very existence may be evidence of things to come. And, at all but perhaps the most elite institutions, tuition growth at over three times the CPI is very likely a thing of the past.
THE REVOLUTION IN THE U.S. SERVICE SECTOR: CAN IT HAPPEN IN HIGHER EDUCATION?
Consolidation, Invention, Reinvention
Most service—sector industries in the United States have experienced considerable consolidation and reinvention in recent years. The reinvigorated sectors include health care, banking, retailing, and information processing services.30
In the case of consolidation, a key factor has been a desire to reduce costs. Cost reductions were accomplished by spreading information systems and other central fixed organizational costs across a larger revenue base, by increasing purchasing power with vendors, and by reducing staff through the amalgamation of redundant products, offices, and functions. Cost reductions have been driven by increased price competition in a low- inflationary environment and, in the case of health care, adverse government policies relating to financial support and cost recovery.
Invention of a service is driven by market opportunity. Federal Express and Amazon.com are two textbook examples. Reinvention is often required to maintain and grow market share as well as to reduce costs. Retailers becoming e-tailers is a recent example of reinvention. But coming late to the party may limit ultimate market share:
Barnesandnoble.com is struggling to catch up to the upstart, Amazon.com. which exists solely as an online venture. Are there lessons here for higher education?
We believe that the Internet (and its related technologies) will drive the consolidation, invention, and reinvention of many institutions of higher education. The press releases offered at the opening of the paper give credence to this viewpoint. However, it is likely that the process will be neither easy nor straightforward. Take the problem of brick-and- mortar investment, known as physical plant. Similar to hospitals, educational institutions have a major investment in physical plant that may make it difficult to consolidate with
28http://tickets.priceline.com/
29http://ecollegebid.org/
30 An excellent synopsis of reinvention of U.S. services industries can be found in Intelligent Enterprise, James Brian Quinn, The Free Press, New York, 1992.
others. The major restructuring of hospitals has, to date, been largely operational and financial. The number of hospitals has declined by just 11% since 1980 while the daily census of patients has declined by 35% (U.S. Bureau of Census, 1998).31 Universities are likely to face similar barriers to physically consolidating their operations.
While health care is often cited as a harbinger of possible change in higher education, major consolidations have occurred in other service industries, such as banking. Since 1980, the number of commercial banks in the U.S. has declined by 37% and similar decreases have occurred in the number of savings institutions. The number of commercial bank offices, including branches, has increased, however, by 30% as the fewer independent organizations continued to expand their outlets (U.S. Bureau of Census, 1998).32
The location of colleges is far from optimal. Our colleges and universities, like many hospitals, banks, and other service organizations, are still located in geographic areas that often reflect the limitations of 19th century transportation and communications, rather than the advances of the 21st century. The implications of TEE, with its large up-front costs, low marginal costs, and reduced dependence on physical distance for delivery, are not hard to imagine. A university in another time zone could become a competitor in the local market or a collaborator—via a type of electronic consolidation.
But consolidations have not yet taken place in higher education. There has even been a continued small increase almost every year in the number of campuses providing at least four years of education (U.S. Bureau of Census, 1998) .33 Peter Drucker (Boston Globe, 1999, May, p. 23) has argued that, “Universities won’t survive. The future is outside the traditional classroom.” Prof. David Collis of Yale University stated in 1998 that, “The primary observation is that colleges and universities must recognize and accept that it will be more difficult to compete in the higher education business in the future. While acceptance will not by itself solve any problems, plans that realistically reflect the future have a better chance of succeeding than those that merely project the past.” (Collis, 1998, p. 57) More recently, Collis stated that his earlier comments were overly cautious, and the changes he suggested will happen much sooner than he ever believed possible (Collis, 1999).
TEE offers the opportunity for colleges and universities to join together to achieve many cost and educational benefits of joint programs and collaboration. Whereas telemedicine is not yet pervasive enough to wipe out the effects of physical location of brick-and-mortar hospitals, telelearning via the Internet may be able to do just that for brick-and-mortar universities. The resulting collaborations may yield savings while preserving the many benefits of retaining our campuses. The incentives are likely to increase for partnerships among educational institutions and for alliances with for-profit suppliers of services. As Collis (1999, p. 20) recently stated, “The need for universities to enter alliances also highlights a second strategic necessity that I believe has become even more important than last year—speed.” University presidents should be looking at entering such relationships and then “be ready to seize opportunities as they arise.”
31Table No. 200 Hospitals-Summary Characteristics: 1980 to 1996. Source: American Hospital Association, Chicago, IL Hospital Statistics, Annual.
32Table No. 804. Banking Offices, by Type of Bank: 1980 to 1997.
33Table No. 306. Higher Education—Summary: 1970 to 1996.
The Importance of Institutional Mission
The consolidations taking place in many industries to save money do not necessarily reduce companies’ ability to carry out their mission. As colleges and universities sort out their choices in the era of TEE, they may well look to their institutional mission to help in these decisions.
In Managing the Non-profit Organization, Drucker (1990, p. 45) tells us of the importance of mission. “We hear a great deal these days about leadership, and it’s high time we did. But, actually, mission comes first. Nonprofit institutions exist for the sake of their mission. They exist to make a difference in society and in the life of the individual...
And yet, mission needs to be thought through, needs to be changed.”
If technology can be a transforming force for higher education, we should assume that some institutions would use it to achieve a comparative advantage, particularly to improve their ranking in the competitive market for students, faculty, and financial resources. The public institutions may have some advantage as state governments see technology as a way to increase the educational opportunities for their citizens while also replacing their future campus expansions in bricks and blackboards with bits and screens.
We already find the largest distance learning programs in the U.S. primarily at public institutions, although some private institutions have been leaders in innovative forms of content development and delivery.