Prelude to a Pricing Paradigm Shift
Ryan Craig’s opinion piece in Inside Higher Ed last week queried why tuition for online programs hasn’t tumbled given the benefits of technology and scale amassed by some of the largest online institutions. He cites several sources, including the BMO 2019 Education Industry report and a 2017 survey by WCET, noting that the average per credit, in-state cost for an online bachelor’s program is 14% higher than on-ground and that 54% of institutions are charging online students more than those on-ground.
Craig states that regardless of which survey you find most credible, few institutions are charging less for online students. He ponders why this hasn’t happened, stating that some colleges and universities are operating subscale online programs which precludes the benefits of cutting tuition. Others spend as much as $5,000-plus in marketing costs to attract and convert a person to an online student.
Pondering what could happen if a market disrupter cuts online tuition cost, Craig writes about the mobile telephony market in India where 10 companies competed for most of the market. A new company, Jio, entered the market with a dramatically different pricing schedule. Six months later, the company had 100 million customers. Only three of those 10 companies have survived.
“Could there be a Jio of higher education?” Mr. Craig asks. He notes that the marginal cost of online higher education is much lower than people think and could get lower if certain functions, including teaching, were outsourced. He states that like the Jio example, revolutionary pricing would attract many virally without requiring millions more for marketing. Institutions could also subsidize lower tuition by developing relationships with employers yielding better career prospects for graduates.
Craig concludes that the Jio of higher education is unlikely to be a traditional higher institution, citing Trace Urdan of Tyton Partners who says that it “may be impossible due to the constraints that exist within the context of a public university.” As a leader of a large online university that has pursued tuition affordability as part of its mission and whose tuition favorably compares to many public institutions, I think it’s worthwhile considering the constraints. The first is economic. If a university has 100,000 online students and considers reducing its tuition by 20%, most of that reduction impacts its operating cash flow because of the low marginal cost to operate online programs at that size. Perhaps a university could reduce the tuition for newly-admitted students only to minimize the impact of the cut, but that move is unlikely to be well-received by existing students. Unless that reduction makes it the lowest priced online option, some students not receiving the new rate are likely to leave. Another constraint that is likely blocking massive pricing cuts is the most favored nation’s clause that many corporations or the government has in tuition pricing agreements. A lower price for new students has to be passed through to all entities with these contractual agreements or expectations.
Craig implies that the Jio of higher education could capture substantial market share like Jio did. I believe that a substantial portion of the higher education market is not as price-sensitive as consumers buying mobile phones in India. Some would argue that lower tuition equals lower quality. Craig rebuts that argument by noting that by combining lower tuition with better employment outcomes, a lower-cost provider would immediately attract talented students. While there are existing online programs with great employment outcomes, I cannot think of a large online university (over 50,000 students) that touts its overall employment outcomes or that believes they could scale substantially without a dramatic increase in marketing expenses if they doubled their online enrollments. Chasing the better employment outcomes on a 50,000+ scale is a task that Craig admits might not be possible for existing colleges with large online enrollments.
I previously tweeted that Craig might be able to achieve his goal when tuition discounting becomes rampant within online programs. Given market complexities, I think a well-marketed tuition discounting scheme might succeed quicker than building the product from the bottom-up like Jio.