If the public is questioning the value of higher education today and we use this formula:
Value = Price x Outcomes, we need to understand our cost structure to control price.
Since we’re not immune from inflation, the $30,000 cost to educate, house, and feed a student today will become over $40,000 in a decade. These numbers are closer to $50,000 to $67,000 for larger, more selective institutions.
Fewer families choose college today because of its perceived value and the belief that the outcomes may not be worth the price. Does the value justify the price now? Will it ten years from now?
For us to escape this structure, we need to really understand what’s driving it.
Enrollment
Let’s take enrollment. The cost to enroll a student has grown significantly post-COVID because more and pricier advertising is still yielding the same or smaller numbers. Should we revamp our sales strategy or our product?
This leads us directly to net tuition revenue, which is driven by a family’s perception of value in the marketplace. The lower your perceived value, the lower your net tuition revenue. This net price will continue to decrease over the next decade as the number of seats remains the same while the number of students filling those seats declines. These statistics are driven by demographic decline and the growing percentage of Americans choosing not to go to college. Pure economics are at play. When demand goes down prices decline until the company goes out of business. They can no longer survive based on the price customers are willing to pay for their product. We are already seeing this.
This dynamic will continue over the next decade. Even higher resourced institutions will play the discounting game, but they have larger endowments to fund their discount strategy.
Funded vs unfunded discounts
This brings me to another important metric — funded discounts vs unfunded discounts. When someone donates to an endowment, asking us to invest that money and use the earnings to support students with scholarships, that is a funded discount because an external source pays for it. The silent killer is the unfunded discount. Most small private institutions maxed out their funded discounts years ago. Now, they’re tapping into unfunded discounts as they lower prices to attract students. For many, this means added expense to their cost structure.
Extracurriculars and your cost structure
Once we get students on campus, we need to educate, house, feed, and provide them with mental and academic support. We also need to offer other amenities to attract students like athletics, clubs, and activities. For decades, institutions have competed by offering the best amenities, regardless of whether they could afford to pay for them.
For example, we continue to offer more sports because we know they attract students. Those students generally stay (retain) at higher levels. What we do not think about is the average cost per sport per athlete. Is there a difference between how much each sport costs on a per athlete basis? The answer is absolutely yes, and sometimes these differences can really surprise us. Like our academic programs, we need to monitor sports and whether students choose them. Without that oversight, we’re adding costs without adding revenue, thus building an inefficient cost structure.
It generally costs an average of $5,000 to enroll a new student. Then, we spend another $5,000 to $7,000 per year for each athlete. These funds plus the cost to educate, house and feed them cost $35,000 and must come out of an average net tuition, room & board of $30,000 per year. The math does not work, and the difference needs to be made up with fundraising. The reality is that for highly discounted institutions, this gap between cost and revenue is wider and increases each year. Fundraising cannot keep pace with the growth in this gap.
We need to apply the same logic to clubs and other support activities. Taking an honest look at how much each activity costs per student, and how that has changed over the last few years compared to enrollment can be a very sobering exercise.
Remember, all these costs will continue to increase in the future with inflation, and if your student headcount is not rising with them, your cost per student could skyrocket.
Campus, or no campus
Next, let’s talk about our building infrastructure. We have built up these massive footprints, and as our buildings have aged, we have not reinvested enough to maintain them. When cash is tight, maintenance is the first thing to get cut for the budget. To make matters worse, as enrollment declines, and we see a shift toward more online education, these buildings become less utilized than they once were. If we assume that a building is available 24 hours a day 365 days per year, most of us have less than 5% utilization on our buildings. Think summers, long holiday weeks, and weekends. Most of our classroom experience happens only during 30 weeks per year, Monday through Friday from 9 to 4. These buildings represent about 20-25% of our total cost. That comes to about $7,000 per student, and it will only increase over time.
As a sector, we have become “house rich” and “cash poor”. What’s worse is most of these costs are relatively fixed, so if enrollment declines, the cost per student goes up and there is little we can do about it. When you have empty classrooms and empty dorm rooms, you still need to heat the buildings.
We should also ask ourselves whether all academic experiences in the future will continue to require physical presence, or will we see more institutions offering other options, thus driving down their need for physical space? If we were building a new institution today, would we choose the same footprint?
It is difficult to downsize our campus footprint because many of our buildings are not easily repurposed. Also, the buildings that need the most work may be in the center of campus.
Should we examine our campus footprint to understand how to use that space more efficiently? Or do we shrink our campus footprint to generate the cash to reinvest in new initiatives? There are institutions acquiring more physical assets and undergoing major capital projects involving existing buildings. These strategies as well as others concerned with selling or leasing under-utilized buildings deserve careful examination.
Cash is king
This gets us to another place that I think is important. Many institutions do not budget depreciation. We believe it is not a cash-related item and we only care about cash. Cash should be the focus; however, many things cause cash to go out the door, and we may or may not budget for them either. For example, principal payments on our debt along with a normal cadence of repairs and replacements are capitalized, both requiring cash. These should be in the budget. If we maintain our buildings properly, the amount of depreciation should closely approximate these cash expenditures. In fact, depreciation is meant to be a proxy for these items.
This is one of the hidden threats we see on many of our campuses right now. When we are struggling and do not have revenue coming in to support our full mission, we choose not to reinvest in our physical facilities. Performing the bare minimum repairs may save cash flow now but can become immensely expensive in the long run. I hear many campus leadership teams lament over the poor condition of their facilities or the need to shift residence halls or classrooms suddenly because of an HVAC malfunction or a roof leak.
All these facts call us back to the beginning to determine what student demand will look like in a decade.
When it costs $30,000 per student and only 40% or $12,000 of that cost relates to instruction, many questions come to mind. I wonder; have we lost sight of our core mission?
Is education a commodity?
As I talk with many people in their 30s and 40s, I keep hearing that education will become a commodity in a decade.
What they are saying is that the market will have no regard as to who produced the product. The wide availability of commodities typically leads to smaller profit margins and diminishes the importance of factors (such as brand names) other than price.
I know that many of us, including me, cannot believe this in its entirety, but we cannot ignore that this will happen to some extent, and in many ways is already starting. We are seeing early signs of this with a shift toward lower price public institutions and many online learning resources are nibbling at the edges of our business model. For example, my LinkedIn learning membership allows me to learn fairly high-level skills at my own pace, for very little cost. There are also many businesses that provide free continuing education in order to build relationships with potential customers. I can look at my own industry, accounting, and see that these market trends have devastated the larger providers of continuing professional education. Higher education is a major target. These larger online providers have already tapped into external investments from the for-profit sector. Now, they’re trying to disrupt our market by providing online learning and selling it back to us.
Larger employers are creating their own learning experiences. They’re also advertising positions that do not require degrees. I don’t believe the college experience will be entirely online a decade from now, but it may be for many.
What do our customers say?
To help our institutions survive, we must listen to what our customers say they value as outcomes, rather than what we believe the outcomes should be. For example, we have seen a shift in our response to career outcomes. I can recall discussing career outcomes with institutions just five years ago. Many responded with “It is not our responsibility to help students get jobs; it is our responsibility to teach them.” I rarely hear that sentiment anymore, but many institutions struggle to define those outcomes, how they differ from other institutions, and more importantly, how they find the money to create those outcomes.
At the same time, we need to continue to grapple with price. Remember, families are questioning the value of education today and value = price x outcomes.
How can we increase the outcomes we provide today while at the same time, maintaining or decreasing the price? This implies we are fighting against inflation. Institutions that can talk about this important question today and really examine the drivers of their cost structure against the values that families seek will succeed, taking market share away from the ones who can’t or won’t think outside of our current lens.