In 2003, Michael Silverstein and Neil Fiske published the book Trading Up: Why Consumers Want New Luxury Goods…And How Companies Create Them. As partners at The Boston Consulting Group, Silverstein, Fiske (now the CEO of Eddie Bauer Holdings, Inc.) and others worked to research the consumer purchasing trends in the United States and overseas. The phenomenon that they identified was the willingness of consumers to pay a premium for certain goods even in times of economic downturns. Identified as “trading up,” the researchers also identified that consumers often “trade down” in order to afford the items for which they “trade up.” In fact, they state that the effect of luxury brands in a market segment is to cause that category to polarize where the growth and profits move to the high and low ends of the spectrum while “companies caught in the middle struggle to succeed and survive.” The authors provide a historical perspective that the trend to trade up has been around for centuries and that economists from Adam Smith to Thorstein Veblen to John Kenneth Galbraith have observed the trend of consumers to buy goods that cost more than what most others can afford to pay.
Silverstein and Fiske believe that the trading up phenomenon is positive and is driven by middle class consumers who are aware of the price/value ratio of what they are purchasing. Furthermore, they state that so many middle class consumers are able to afford premium goods that the conventional wisdom of “higher price, lower volume” does not follow the trading up phenomenon. Instead, the middle class consumers have a stronger emotional attachment with their luxury purchases than with other goods. That emotional attachment is why they choose to ignore the mid-price product. Silverstein and Fiske believe that the consumers have no desire to purchase a product that offers “neither a price advantage nor a functional or emotional benefit.”
I have revisited Silverstein and Fiske’s book in reviewing the current economic situation as it relates to higher education. It is my belief that their theory of consumer behavior can be applied to higher education. For the most part, the elite schools in America are the luxury item. They can charge what they want and despite leading the country in pricing, their applications increase year after year while their enrollment is generally maintained at a steady level with little increment. Demand clearly exceeds supply, but for the most part, these schools have slowly increased enrollment, obviously much less than demand and less than how a traditional business in a competitive marketplace would respond to market demand. Fewer than 8 percent of all college students attended the 99 highest priced colleges in 2007-2008 (source: http://nces.ed.gov/ipedspas/index.asp where I queried the database for a list of colleges and their Fall 2007 enrollments with tuitions equal to or greater than $33,000 in 2007-2008. NCES is a database maintained by the Department of Education. Searching it can be frustrating to a beginner.) A lesser percentage of students attended the 30 or so schools referred to as the “medallion” schools.
On the other hand, according to the College Board’s 2008 report, Trends in College Pricing, over 56 percent of all college students in 2007-2008 attended an institution whose tuition was under $9,000. These colleges are generally not selective. Most of these schools are public institutions, but a few are private and a few are even for-profit. For the most part, their mission is to provide an affordable education to all. A recent article in the New York Times explores the potential impact of decades of rising college costs. The article cites the biennial report of the National Center for Public Policy and Higher Education stating, “…published college tuition and fees increased 439 percent from 1982 to 2007, adjusted for inflation, while median family income rose 147 percent.” Even more astounding is the net cost of college (tuition, room and board and fees less scholarships or grants) as a percentage of median family income. Last year, a four year public university was 28 percent of the median and a four year private university was 76 percent of the median. Sadly, the cost of a community college education as compared to the median family income of the lowest 20 percent rose from 40 percent in 1999-2000 to 49 percent last year. That’s not surprising when you look at the aggregate tuition increase versus the average family income.
Families and students have been borrowing money to finance these increases in tuition that have outstripped their wages and income and the current economic situation will certainly cause some of them to review those decisions, most likely impacting the fall of 2009 enrollments. Early this week, an article in the Greentree Gazette cited CNN as stating that the average graduate of a four year school leaves with $21,000 in debt after completing college. That looks like a large number given the current economic outlook. Given the “trading up” versus “trading down” phenomena, I am guessing that even more will “trade down” or possibly defer a college education if it is perceived as too expensive for the benefit.
The current economic pressures will impact most of higher education with a few exceptions. Because of a continued demand for the “best” education, the medallion schools will continue to see high levels of applications. My prediction is that the combination of tougher borrowing standards, lower home equity values, and higher unemployment will influence the decisions of college consumers to “trade down.” I don’t think that the schools whose tuitions range between $9,000 and $33,000 will be favorably impacted unless it is at the lower end of the tuition scale. I believe that many consumers who conclude that their ability to be admitted to a medallion school is slim to none will sharply analyze the benefit of paying higher tuition versus lower tuition and will “trade down.” The unknown part of the equation will be the impact of the economy on state budgets and the states’ contributions to higher education. Some states may choose to reduce funding which will force the state colleges and universities to either increase tuitions at rates that may make them unattractive or may choose to restrict admissions as the Florida system did in the fall of 2008. If the number of lower priced institutions is reduced, that could push some students out of the college attendance decision, at least temporarily.
If you have any thoughts about this, I would enjoy hearing from you.
