One of the reasons I find it challenging to teach marketing strategy is that the theories don’t always seem to work in real life.
I teach that companies need to build profits, for example, but Amazon contradicts the point. Snapchat doesn’t even have revenue to speak of and is apparently worth billions.
I tell students that it is difficult to attack established markets but Emirates is quickly becoming the dominant global airline.
I frequently drop back to Michael Porter’s core lesson: in a competitive market you have to be different or cheap but mid-tier U.S. universities thrive by charging the same price as Harvard.
Eventually, however, things make sense; the fundamental laws kick in.
The latest example is U.S. colleges.
The Wall Street Journal is reporting today that many schools are seeing slumping revenues as student numbers decline. The problem is particularly acute at institutions that don’t have a strong brand.
This isn’t a surprise. Colleges in the U.S. have long relied on price increases to fund programs. This has driven up tuition significantly, forcing students to take out bigger loans.
The system works fine as long as there is more demand than supply. When students are scrambling to get in pricing doesn’t drive the situation.
Everything changes, however, when demand softens, as is currently the case. Students get to choose between institutions. And then schools have to choose whether to be cheap or different.
This isn’t a big issue for schools like Harvard and Yale. They are differentiated providers with enormously strong brands. The current tuition at Harvard is $38,891 (not including housing, meals and such) and it is a deal.
It is a big issue for smaller schools. The University of Dayton, for example, is a fine institution but it doesn’t have a brand like Harvard. The school charges $35,800 for tuition, about the same price. This is not sustainable.
There are two ways to play the value game. The first and easiest is to provide discounts. Schools often do this today by awarding merit and financial aid scholarships.
The problem is that enormous discounts distort pricing; the official prices become meaningless. At the University of Dayton, for example, apparently 70% of students receive at least a 33% discount on tuition in some form. This is remarkable. Big discounts also create price confusion. This works well for schools trying to differentiate but it is a problem for schools trying to compete on value.
Which school is cheaper? It isn’t clear until students sort out all the financial aid.
The second way to build value is to reduce list prices. This is not easy; a reduction in tuition has an immediate revenue hit and an increase in students will not quickly offset the hit. As a result, it requires a more efficient model. For many schools, however, this is the proper course.
Some will argue that reducing tuition will reduce quality perceptions. Price does indicate quality, but only to an extent. Few think University of Dayton is comparable to Harvard despite the similar prices.
One note: cutting tuition and eliminating all financial aid and scholarships is not a good idea. J.C. Penney recently illustrated what happens when a firm cuts all discounts.
Many U.S. colleges need to rethink their basic model. The current approach of promising top quality, consistently raising tuitions by 5% a year and then boosting financial aid and scholarships won’t work for everyone in the years ahead.