How Vodka, Bed, Bath, and Beyond, and Rocky IV Explain Private College Pricing

Thirteen years ago, Ursinus College in Pennsylvania increased its tuition by nearly 18 percent. The next admissions cycle it received 200 more applications and the student body grew by 35 percent in four years. Similar moves occurred throughout the country with varying degrees of brazenness (the University of Richmond said raising its price would stop “leaving money on the table” by being cheaper). The message from consumers was clear—price hikes were not scary because greater expense equated with higher quality. But these individuals weren’t discerning customers—they were the people who favor top shelf vodka over the identical rail product—Absolut suckers.

Jacking prices to lure more applicants is not a long-term success strategy, though. There’s a finite supply of rich people with money to throw around, and the evaporation of familial assets during the great recession meant the pool was shrinking. And so we’ve ended up in the Bed, Bath, and Beyond world of college pricing. Just as you’d be foolish for buying something at the popular home goods store without having one of the ubiquitous $5 or 20 percent off coupons, so too are many students now attending private nonprofit colleges where basically everybody is getting a discount. It’s the old adage “only suckers pay retail” brought to postsecondary education.

As Inside Higher Ed reported on Monday, two private liberal arts colleges are trying to break out of the Bed, Bath, and Beyond model by cutting out the coupon and slashing the price accordingly. Both Ohio-based Ashland University and Converse College in South Carolina trumpeted proposals that claimed to cut tuition by over $10,000. Of course, as Ry Rivard notes, these cuts only appear to be so on paper. Instead “the colleges have reduced their sticker prices to about what most students are paying already, given all the scholarships and aid that colleges give to lure students to high-priced colleges.” The college basically cut out the middle step charade of having to argue for the coupon. It’s like finally grabbing that $6.99 cupcake corer for $1.99 but being told you can’t use any coupons.

Detractors of the policy noted in the Inside Higher Ed article that there’s a corporate analogy for this new strategy as well—the failed strategy of Ron Johnson at J.C. Penney. A former Apple executive, Johnson proposed to stop offering continuous sales for customers at the department store and instead just offer prices that were about 40 percent lower than the previous listed price, but would not be discounted. The strategy, however, backfired stupendously. Sales at J.C. Penney cratered in the end of 2012 (one commentator even called it “the worst quarter in retail history”) and Johnson was out by April of 2013. It turns out people liked getting discounts and the old store style.

Colleges certainly operate in a very different marketplace than the store where you grab a sweater and pair of pants. Universities have an additional advantage in that most families purchasing their goods will only do it a handful of times at most, so there’s less room for ingrained price expectations. And consumers are at a distinct disadvantage, since just touring a college cannot tell you anything about its value the way that picking up an article of clothing does.

But whether this strategy of making bare the unnecessarily inflated prices consumers were paying anyway will only work on two conditions. First, colleges have to be willing to save themselves from themselves. Part of what drives the discounting game is that trying to throw some so-called merit aid at people who do not need the assistance is seen as a way to lure in students that will either boost the academic profile or cut a check for most of the sticker price (see the excellent ProPublica piece on aid games this week for more). This plays right into the sophisticated modeling of enrollment management, which many institutions employ as a way to keep the proper balance of enrollment and revenue, which mean there are a host of vendors and ingrained interests against going to the simpler model.

Families also need to change their own inclinations. If they have truly become more price conscious and are willing to accept that the $30,000 item really only does cost $16,500 with no changes, then maybe the strategy works. But if they are like the J.C. Penney customer used to those price breaks, then the colleges could be in trouble.

That isn’t to say many of these institutions aren’t already in tenuous shape. Many are getting squeezed on multiple fronts. They need to keep enrollment up because they are highly dependent upon tuition and have little to no endowment funds to provide a cushion against budget shocks. But what’s the value proposition of an expensive liberal arts college with no brand name recognition to families that are worried about college costs? So instead, many have entered a world where the price they list has no meaningful connection to what anyone is actually paying. But rather than bringing stability, pricing games can lead to their own tuition discounting spiral, where the average coupon keeps growing with tuition.  The result is a situation where miscalculations in enrollment or the type of class enrolled can quickly spell financial disaster.

In that light, it’s not surprising to see some colleges try to do away with the discount. From a more cynical take, it could very well be the last ditch attempt to break the very mold they rode to applicant growth in the past. (It’s basically like hoping for the end of Rocky IV.) But colleges, like companies, have their own ingrained cultures that are hard to alter. And consumers have their own accustomed norms too.  We’ll have to wait and see whether both will be able to change."