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Is there even more colleges can learn from JC Penney’s real price plan? I think so

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In a recent blog post I discussed JC Penney and it’s effort to introduce “real pricing” by eliminating discounting and sales.  My analysis drew heavily from an excellent article written by Jonathan Salem Baskin that appeared in Forbes in January of 2013. My post was pretty suspicious about the possibilities for higher education to learn anything positive from JC Penney’s failed venture. A reader of last week’s blog post would likely arrive at the conclusion that my thoughts about the JC Penney mess suggests real pricing in higher education is impossible.

Notwithstanding the JC Penney debacle, I am not completely dismissive of a new pricing structure in higher education. In fact, there is a part of me that would like to believe that a new pricing structure is possible in higher education.

I know what you are thinking…hope springs eternal. (Right, that is what you were thinking? Or, perhaps, hope is not a strategy?).

Let me explain a little further. There was a very interesting portion of Baskin’s article that I did not reference last week. In this portion of his article, he offers two very important critiques and then describes a couple of missed opportunities for JC Penney (all of which I am paraphrasing).

Critique

  • They didn’t take time to explain the pricing plan
  • The pricing plan appeared to be simply a marketing ploy

Missed opportunities

  • They could have established new rules for buyers that could point to as proof of its claims.
  • They could have created new financing and lay-away policies that communicated value.
  • They could have recruited employees to offer a new customer experience based on the new price strategy.
  • They could have leveraged social networks to do a more effective job of tracking and discussing real price.

Baskin maintains that JC Penney did not see the real price promise as an opportunity to change operationally and chose a marketing strategy over transformation.

I think this sentiment could probably be applied to most higher education pricing schemes, which often appear to be gimmicky and ill-explained. In fact, there is little evidence of fundamental change within an organization when price is frozen or cut.

However, there could be.

What if a college was serious about reducing their price and then perhaps providing predictable price increases tied to specific experiences in the subsequent years?

Could it work?

I don’t know, but here are some thoughts about how it might work.

Step 1—Come clean about how the college will reduce its price. Confess that college pricing is largely arbitrary and unsophisticated; it’s more an effort to see what everyone else does and then don’t do anything too crazy in comparison. Confess that reducing the price of the college will be largely a function of reducing the huge amount of unfunded financial aid offered to students annually. Confess that much of the unfunded financial aid offered to students is in the form of merit- and talent-based scholarships and that it’s critical to reduce the amount of unfunded aid offered in order to arrive at a fair price. If reducing the price results in cuts to the faculty or services or facilities explain the circumstances very clearly and describe the potential impact on the student experience. If cutting price will not adversely impact the experience, SHOUT IT FROM THE MOUNTAINTOP, and explain how price relates to your business model.

Step 2—Be candid about your business model. Revenue for most colleges comes either from new students (growth in enrollment) or the annual increases to the comprehensive fee. Increases in revenue go to pay people and bills and fix things and are critical for the sustainability of a college. Colleges really do need to pay people, bills and fix things. For many colleges, particularly those that enjoy full enrollment, most of the growth in revenues annually comes from the increased comprehensive since much of the overall increase is given back to first-year students in the form of financial aid (and, remember that financial aid is largely unfunded). The increased revenue from annual increase comes largely from continuing students. Colleges that are serious about reducing price will be candid that they need a predictable stream of new revenues annually to pay people, bill and fix things and as a result they must increase the cost on annual basis and this cost will largely be on currently enrolled students (as it is already).

Step 3—Clearly describe how the college arrived at the “fair price” for the first year. A college interested in a fair price with predictable increases would most likely have to freeze or reduce its base price at some level and then justify why and how. They would also have to rely less on non-need-based aid to lure students to their institution. This step involves the fun part…a little transparency. This is the part where a college would need to disclose what amount of price they actually net with their current model and then justify charging more to get to their fair price. Fair price is very different from real cost since no college ever covers its real cost. Fair price is going to be somewhat subjective, but in order to establish a fair base price for the first year a college will need to pretty clear in describing what occurs in the first-year and why they can change $35,000, $40,000 or $50,000 for the experience. If a college can arrive at a fair price for the first year and slowly net more revenue annually on the fair price their revenues can grow, too.

Step 4—Clearly describe how much price and cost will increase and what experiences make the increase worth it. The term cost is introduced her because as the price increases in subsequent years the cost to the students will increase, too. Financial aid would not increase except in the case of very unusual circumstances (this is where that whole predictable revenue comes in).  Colleges that pursue and fair price with predictable increases model will need to be far more direct in explaining what a student gets when the price increases annually. And, for many, they will need to change operationally to deliver on a net set of meaningful experiences.

Examples of this are included below:

What if a college told everyone that the comprehensive fee would increase by $2,000 in the sophomore year—increasing total price to attend by an additional $2,000?

And, they went on to say, here’s what you get:

  • You will declare a major;
  • You will choose a mentor/advisor in the major you’ve chose and this advisor/mentor is going to meet with at least three times each term to discuss your progress toward your academic and personal goals;
  • You will be assigned a career counselor who is familiar with the career field you’d like to pursue.

Could what is described above change operational behavior and be adequately valued at $2,000?

What if a college told everyone that the comprehensive fee would increase by an additional $2,000 in the junior year—increasing total price by an additional $2,000?

And, they went on to say, here’s what you get:

  • You are well into your major with full-time faculty teaching your courses;
  • You are really getting to know your advisor and mentor and this year you will begin discussing you senior capstone project;
  • You are very likely to take advantage of one our high-impact and life-changing experiences like study abroad, and internship or research;
  • You will be meeting or communicating regularly with your assigned career counselor to discuss like after college;
  • You will be living is premium apartment-style housing

What if a college told everyone that the comprehensive fee would increase by an additional $2,000 in the senior year—increasing total price by an additional $2,000?

Could what is described above change operational behavior and be adequately valued at $2,000?

And, they went on to say, here’s what you get:

  • You will complete a capstone project in an area about which you are passionate and during this project you will work one-on-one with you advisor;
  • You will work one-on-one with your assigned career counselor to explore graduate school or career options;
  • You will be able to take a one-credit personal finance course to prepare you for life beyond college;
  • You will be inducted into the alumni career network;

Could what is described above change operational behavior and be adequately valued at $2,000?

  • What if colleges offered a predictable price increase annually that was tied to specific (hopefully meaningful) experiences?
  • Is it possible for a college to establish a “base price” for the first year and increase costs based on experiences for the subsequent years?
  • Could colleges be successful in meeting enrollment and revenue targets with this kind of a model?
  • Would the steps described above help a college avoid the mistakes and oversights JC Penney made in conceptualizing price?

I don’t know the answers to these questions and I am sure there are many flaws, but it’s worth discussing.

I should note that one reader of last week’s blog remind me that I need to pay close attention to Concordia College in Saint Paul, Minnesota, which received some attention this fall for their efforts related to price. You can read more about that here. Maybe they will prove JC Penney wrong? But, let’s keep in mind that one year of success is like one quarter of success. Success of a pricing strategy must have longevity and must consider the steps described above.

Let me know your thoughts about fair price and predictable increases.

W. Kent Barnds @bowtieadmission

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