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Bassett Blog 2009/05: Net Tuition Discounting
Sacred Cows & Unsupportable Assumptions
May 1, 2009
Patrick F. Bassett
NAIS President Patrick F. Bassett |
In the preface of the new NAIS book, Affordability & Demand: Financial Sustainability for Independent Schools, I wrote about the imperative to re-engineer the independent school financial model to achieve financial sustainability, in the face of twenty years of hyper-inflationary tuition increases and in the reality of reaching the price-break point in many markets. That admonishment has taken on larger dimensions given the global economic crisis and its implications for financial survivability for many schools.
One of our "brutal facts" is the reality that we in the independent school world have been like "the typical American" over the last twenty years, redefining luxuries as necessities, spending too much, saving too little, and borrowing breathlessly against the future. We are now entering a period of belt-tightening and reassessment of what is really important to fund, and what's not.
In the words of the Rahm Emmanuel, President Barack Obama's chief of staff, "You never want a serious crisis to go to waste." Dire conditions, in fact, give leaders a once-in-a-generation opportunity to take dramatic measures and effect lasting change that can secure the future of their schools for generations to come. For the last year, NAIS has been amassing resources to help schools develop strategies to do just that, and has populated our Financially Sustainable Schools landing page with scores of monographs, research reports, podcasts, videos, and strategic recommendations.
Taking on the Sacred Cows and Unsupportable Assumptions: Some of the most promising strategies will require a re-setting of frames of thinking (a leadership "growth mindset" in Carol Dweck's rubric) and challenging the “fixed mindset” assumptions we have always made: - Seeking not to be the price leader but the value leader in one's market.
- Increasing "productivity" and efficiency by expanding enrollment without adding staff and/or by freezing hiring as staff attrition (or in some cases, "rightsizing") reduces the size of staff beyond any proportionate reduction in enrollment. And admitting that class size in the 20s with a good teacher is just or good, or arguably better, than smaller classes.
- Adopting the Good to Great principle of "a culture of discipline," which — in the case of independent schools — would mean encouraging innovation by seeding new program development and at the same time sunsetting old programs towards the end of innovation without staff growth.
- Overcoming the "confirmation bias" of preferring what we have over what we might try in order to experiment with more creative suggestions for new sources of non-tuition revenue and for cost containment.
- Eschewing what I've been labeling opinion-rich decision making for data-rich decision making, to shine a light on the way out of the fog surrounding our present position.
- Spending more time and energy on developing the leadership team than on the individuals within it, since a commitment to fundamental change can't happen without a team advocating it. The lone voice in the wilderness (head or business manager or admission director or Board Finance Committee Chair) goes noticed perhaps but unheard. We'll need a team of aligned leaders to take on this challenge of financial sustainability.
- Hoping that natural attrition will produce the most competent staff to deliver fully the mission or worse yet, in "right-sizing" mode, relying on the public school, union-driven strategy ("last-hired, first-fired") or the business strategy ("first-hired" — i.e., most expensive, "first fired") rather than the disciplined strategy ("keep the all-stars though the cost may be higher").
- Reversing our long-held assumptions about the relationship between financial aid budgeting and enrollment.
Net Tuition Discounting: Net tuition discounting is simply the practice of using variable pricing to fill all the seats in the airplane in order to maximum the revenue from each "flight." (Have you noticed that there's never a single seat vacant in airplanes now?) Why is it that virtually all colleges and universities use net tuition discounting more aggressively and creatively than most independent schools? Because, for generations, they have had to fill more and more seats with fewer and fewer families capable of paying their skyrocketing tuitions, a situation that independent schools now find themselves increasingly in.
I've recently come to the conclusion that our long-held practice of believing that the financial aid budget is fixed and enrollment variable is exactly the opposite of what our practice should be: The financial aid budget should be the flexible variable and enrollment the fixed variable. Let's say it's late May, one's school is 20 students short of full-budget enrollment, the telephone in the admissions office has stopped ringing, and yet the school has a long list of qualified candidates it can't accept because it ran out of financial aid. Since that school thinks financial aid is fixed, it will have zero students at full tuitions rather than 20 students at half-tuition. The reversed model does exactly what NAIS schools have done in past recessions (and most are doing this time): spike financial aid in order to maintain full enrollment: i.e., the financial aid budget becomes the flexible variable (using financial aid as a strategic enrollment management tool) in order to meet the fixed enrollment goal: full enrollment.
In this example, I'd argue what would be even better would be to accept or recruit an additional 40 students at half-tuition so that enrollment exceeds the budget projection by 20 students while meeting the budget dollar goal, with the additional benefit of increasing "productivity" since staff have not been added. Increasingly, merit aid to attract new populations (middle school gifted scholars or leaders into an expanded secondary school, for example) and aid targeted at the most vulnerable segment of our population, the $75,000–125,000 families of the upper middle class, are tools schools will use to fill all the seats once no more full-pay customers are calling to make their reservations.
So, tell us, is your school taking on the sacred cows in this crisis? How’s it working?
Additional Resources - Mark Mitchell Financial Aid (SSS) Blog on "What Happens to Financial Aid During a Recession?": http://sss.nais.org/pages/Blog.html
- Scoot Looney’s "Pricing Tuition" chapter in Affordability and Demand. Excerpt:
 Accounting for financial aid as "real money" makes perfect sense if a school has reached enrollment capacity, with full-paying students occupying spots on the school's waiting list. In that situation, those students who receive financial aid cost the school potential revenue. However, if a school's enrollment has not reached capacity, there is no potential or real revenue lost by enrolling students who need financial aid. Quite the contrary — because financial aid families pay some portion of the tuition, those families actually generate a good deal of revenue. As a matter of fact, without this revenue from families on financial aid, many schools would find themselves in dire financial straits. As counterintuitive as it may be, the most fiscally responsible thing for many schools to do might be to increase financial aid. |
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Reader Responses
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1. On 05/08/2009 Patrick F. Bassett (bassett@nais.org) replied: |
Thanks, Janice, for the reactions and the very astute questions. Here’s how it’s working in schools that are successful with the strategy:
- No school should make net tuition revenue discounting based on a “timing strategy” for current or prospective parents. That would, as you suggest, create chaos.
- Many schools would target additional financial aid for upper grade students, rather than for beginning of the cycle students.
- Many schools would target populations that they are not now getting, and publicize that to current parents: We are seeking to add to the diversity of the school (Hispanic students, academic stars or extracurricular stars coming into the upper grades, etc.)
- Lots of schools have long financial aid waiting lists, so it’s simply a matter of taking more off of that list for those schools—and that has nothing to do with offering differential amounts to current or prospective parents who are full-pay and don’t qualify for financial aid.
- Long-term strategic planning used to mean 10 years; then it was 3 – 5 years; and in financial emergencies, it’s 12 months. I’m not recommending ignoring the financial equilibrium over time, just advocating more flexibility on an ad hoc basis. I couldn’t agree more that one needs a longer framework model for financial sustainability and equilibrium over time, but that there are more levers to pull than we’ve considered historically. We’ve long said class size, student and class load for teachers, staff size, etc. should all be on the table. So multiple models would make sense, at least to us.
Cheers.
PFB
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Patrick F. Bassett, President, National Association of Independent Schools (DC)
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2. On 05/08/2009 Janice M. Bunch (jbunch@calvertonschool.org) replied: |
Maybe someone can email me if they come up with the solution? Thanks for your answers--I appreciate the response! Have a good weekend--
Sincerely,
Janice
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Janice M. Bunch, Director of Finance/CFO, The Calverton School (MD)
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3. On 05/08/2009 Janice M. Bunch (jbunch@calvertonschool.org) replied: |
Hi Pat,
I was reading your article about flexible financial aid. I understand the airline story about the empty seats, but can you explain to me how having flexible financial aid impacts the budget long term, not to mention the morale of the parents?
We had a more flexible financial aid policy years ago (in order to fill seats) and what we found is that parents talk to other parents about the aid they get. It was difficult to explain the "fair and non-discriminatory" methodology when Mr. X paid 15,000 for tuition and Mr Y paid 10,000 only because Mr. Y waited until September to enroll. Mr X becomes disgruntled about paying for Mr. Y's discount because his house (or whatever comparison that can be made to their living style, ie car/boat/house/etc) is smaller than Mr. Y's and yet Mr X is paying more for tuition! They even get to the point of comparing grades.... When Mr X leaves the school, you'll need to replace him with another discounted student further reducing your revenue. This model seems okay for a one time airplane ride, but for parents paying 1-12 years for a service, it seems like it could have a serious impact on the budget. I imagine the airlines have negative feedback, but chances are their customers won't be comparing prices with everyone on the plane.
Another drawback that we experienced is that more parents waited until later in the year to enroll so they could make deals with us. They knew they if they waited long enough, that we would take their offer. And if for some reason, we didn't, they would get very angry. I don't see why any parent would enroll in March when they can pay less in July/Aug.
I know that this is the new idea is being touted by everyone to solve the budgetary problems facing us, but I see it being problematic for the long term stability of the school and I think these pitfalls need to be part of the discussion with this solution.
Sincerely,
Janice
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Janice M. Bunch, Director of Finance/CFO, The Calverton School (MD)
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