Sagging College Pricing Power, Crimson Tide edition

The 2010s in context and the University of Alabama

In part 1 of this series, we had looked into significant pre-COVID price weakness in an unexpected place: Rocky Mountain state schools.  The Rocky Mountain region enjoyed excellent economic times and positive student demographics in 2015-19 so this weakness took place against a favorable backdrop.  Before we dive into our next close-in look at southern public universities, let’s step back and look at the context of this finding.

College pricing in the 2010s – Equilibrium or Decay? 

After decades of rapid growth, college prices hit a ceiling during the Great Recession and subsequently, between 2008 and 2018, aligned with several measures of US Family Income.  When we measure college costs correctly, using the Average Net Cost metric, the tracking is clear. Colleges entered a new era, now constrained by their customers personal budgets.  

4-year colleges prices were constrained by the income of their prime customer base, families where the parents have at least one Bachelor’s:

Looking at all colleges, both 2- and 4-year programs, the average industry pricing tracks median income of all families at all educational levels.

Although statistical relationships hold for 2009-2018, the sagging college pricing power shown in 2017 and 2018 is notable.  These were good times for the labor market and American workers across income brackets, but the economic backdrop did not give colleges the rope to nudge up their prices.  Our earlier look at the Rocky Mountain public schools illustrated this deteriorating pricing power, even in the face of a very favorable backdrop – including stable regional demographics - contrary to what would have been expected.

So here’s the thesis: the Great Recession served as a “reset event” which fundamentally changed what students were willing to pay for college.  This reset established a new higher ed equilibrium, but the equilibrium wasn’t stable enough to survive the strong economy at the end of the decade. Students’ willingness to pay eroded even prior to the pandemic.  While we are currently at sea about what will happen next in 2021 and afterwards because of an unprecedented social, technological, medical and economic situation, the lead-up to COVID was markedly unfavorable to college economics.  The question is: did higher ed’s economic environment after the Great Recession mark a new equilibrium or initiate a slow, steady erosion of students’ perception of undergraduate education’s value?  Both positions are tenable — and not necessarily mutually exclusive.  This series on Sagging Pre-COVID pricing power is an attempt to delve into the situation in more detail and understand the pre-COVID business environment more clearly. 

Colleges react, search for growth

Colleges have been reacting to the 2010s’ novel, tepid business environment with all sorts of growth ideas, from new master’s programs to new campuses.  One popular idea is to poach students from outside the school’s home state.  We’ll label the types of public institutions that emphasize out-of-state recruitment as the “Importers.” 

In the next part of our series, we will look at a set of Southern schools, large public universities in Louisiana, Alabama, Mississippi, Arkansas and Tennessee, which focus on this goal and import significant out-of-state enrollments.  The South has some of the most entrepreneurial and adventurous management teams in US higher ed. The school most closely associated with the importing strategy, the University of Alabama, stumbled in the cycles before COVID.  Alabama’s experience illustrates that, no matter how dynamic and marketing-focussed a university is, the brute price competition prevalent before COVID was paramount.

Roll, Tide, R…oops

Alabama enrolled roughly 5,000 out-of-state students in recent entering classes, easily the most in the region.  This emphasis on out-of-state is reflected in Alabama’s very flexible financial aid practice — aid levels fluctuate significantly from cycle to cycle. Its entrepreneurial approach to enrollment leads to budget patterns similar to private schools. 

For whatever reason, Alabama made a decision to tighten its discounting in 2018. CTAS proprietary calculations estimate Alabama boosted its Out-of-State Average Net Cost by 10% in 2018 v 2017, an outsize increase, and one which presumably was a driver behind the declining 2018 entering class.

In the following year, 2019, the school shifted its practices and suddenly began admitting many more students. We cannot directly trace the reasoning behind the change in admissions standards but the sharp drop in its entering class the previous cycle strongly suggests that Alabama’s administration was determined to reverse 2018's enrollment fall. 

As it loosened its admissions in 2019, Alabama saw its yield fall to the 20% range (predictably?), quite a bit lower than its peers:

Based on the entering class size graph, loosened admissions standards did boost enrollment in 2019 but the further drop in the 2020 entering class may reveal this benefit to be transitory. 

As we’ve emphasized, undergrad education is a very price sensitive product. Alabama had thrived for a decade offering out-of-state prices far below other big flagship schools - it was a volume discount store. The moment it raised prices in 2018, volume went down, even though it continued to be a relatively cheap option for out-of-state students. 

Contrast Alabama with its rival, neighboring Auburn. Auburn also recruits aggressively out-of-state. (In 2019, for example, 45% of Auburn’s entering class came from outside states, vs 62% for the University of Alabama.) CTAS proprietary calculations estimate Auburn maintained strong pricing discipline in this period, barely raising out-of-state Average Net Costs. The result: stable entering classes and some wins in out-of-state recruitment...

and stable yield.

The strait-jacket

Colleges operate in a financial strait-jacket: any outsize price increases - even by a branded enrollment machine like the Tide - leads to an enrollment/admissions/yield unwind. Disciplined pricing and tight operating budgets are the only option.

For the next installment in the series, we will look at how other large publics in the South which are Importers responded to the tightening enrollment landscape.

Read this post and others at the CTAS site.