How Effective Is Chivas Regal Pricing In Higher Education?Noah Askin | Assistant Professor of Organizational Behaviour, INSEAD Business School
Chivas Regal was a middling scotch whiskey brand struggling to make sales, so they doubled their price and, according to legend, doubled their sales. It’s a story that has made its rounds in the corporate world and it’s starting to get traction in the higher education space as well. Noah Askin and Matthew Bothner recently explored the prevalence and effectiveness of the Chivas Regal pricing strategy in American higher eduction, and in this interview Askin reflects on their findings and shares some thoughts on the limitations and potential for pricing to impact demand and prestige growth in the competitive postsecondary marketplace.
The EvoLLLution (Evo): What would push an institution to reinvent their pricing strategy rather than focusing on adapting offerings or services?
Noah Askin (NA): What we’re suggesting is not necessarily that schools are reinventing their pricing strategy but that that this is one of several tools in their toolkit that they use to compete for rankings. They look at adapting their pricing strategy just as they’re also looking to improve amenities, services, buildings and all of their offerings.
The more important piece here is that these schools are using their price as a signal. I think characterizing this as “reinventing” their pricing would be inaccurate because this is something that’s been going on for a long time amongst schools and is being used in other markets as well. The Chivas Regal pricing strategy is just another tool that schools are using to climb the rankings, and one that might be effective in the short run. In the paper we demonstrate that this is maybe not all that effective, but if a school is looking to regain lost rankings or lost status, this is one of the quickest fixes they can implement.
Evo: You found that a price boost can lead to a short-term positive benefit for institutions, but that it’s not sustainable or significant. How must universities follow up the implementation of their Chivas Regal pricing to maximize the potential benefit?
NA: This is more conjecture than anything, but in order to maximize potential benefit institutions really would have to be pulling the levers that both attract students and help improve status and rankings. While raising the price may lead to a short gain of one or two ranks over the following few years, it doesn’t really get you anywhere unless you’re actually changing and improving the offerings as well.
This comes down to whether the school is getting new and better faculty, building new amenities, offering new programs. The sorts of things that require longer-term investments. That’s really going to be what’s necessary in order to maintain any kind of minimal momentum gained from a Chivas Regal pricing strategy.
Evo: How unique is this pricing strategy to the American higher education marketplace as compared to the British, the French or Canadian marketplaces?
NA: I honestly don’t really know the answer because our research did not touch universities outside the United States. That said, if I were to take a guess, because of the particular centrality of the rankings in the U.S. higher education—especially at the undergraduate level—I think it would be more common in the US. The way US News is deeply entrenched in American higher education as a market mediator through its institutional rankings is not necessarily reflected as much in any other markets. I suspect that the use of this pricing strategy would be not nearly as extreme in other markets. The explicit rating of status is unique to American higher education.
Evo: You noted in a recent article that most of the institutions that implemented a price hike strategy were in the middle band of institutions—below 50th overall but still in the top tier. How unenviable is it for an institution to be in this middle band compared to being either at the top of the rankings or so niched that rankings are irrelevant?
NA: By the way that the rankings are constructed, there’s just generally more churn in this group than at the very top. What you see year over year are much bigger changes taking place when you’re in this middle band. Because of that, it can seem fickle to latch onto the rankings because they do bounce around. Some of that is by design and some of that is because these schools are actually fairly similar to one another in terms of how they look on paper.
Now they all have their own idiosyncrasies and personalities, and that’s something to play up more especially when you’re in this band of schools that are constantly competing over ranks. There is certainly the risk of bouncing around a lot more once you find yourself there.
Amongst the top 50, there is movement especially over a little longer time horizon but from year to year the movement is actually quite minimal. We found one school in the top 50 ranks that had a substantial status drop over the entire time period that we looked at in our data. Significant movement is just a less common occurrence.
Evo: What are the key factors an institution must have in place for the Chivas Regal strategy to be effective in boosting their prestige and rankings?
NA: There has to be some credibility for the Chivas Regal strategy to be effective. A school that’s way down in the rankings would find it difficult to get any traction from changing price in this way. There’s a certain amount of importance, or legitimacy, to being considered in the core of the market that’s necessary for this approach to work.
We also found in the paper that having peer institutions that are also pricing relatively higher actually allows schools a little bit of flexibility to play around with their tuition levels. There needs to be flexibility both from where you are in the rankings distribution and from how the other schools that are around you are pricing as well.
Evo: When institutions are using these kinds of pricing models to boost demand, how fair is it to say that higher education has become fully commoditized?
NA: I don’t necessarily think that U.S. higher education has become fully commoditized. Obviously when you see things taking place like institutions using prices as a signal of status, it certainly lends itself to being able to make the commoditization assertion a little bit more substantively. But I hesitate to go that far. Certainly, higher education still provides a major leg up in terms of career prospects and lifetime earnings for the vast majority of people.
That pricing can be used in this way can be concerning, but I would not say higher education is becoming commoditized completely.
Evo: Is there anything you’d like to add about the capacity for pricing strategy to help an institution differentiate itself and what is a highly competitive market place?
NA: I think that it’s an interesting game, for a lack of a better word, because schools are now required to discuss net price. Tuition is a public declaration of perceived value that schools are putting out there into the world. It’s a really interesting game; you don’t want to go too high because that triggers outrage and creates a lot of negative publicity, but at the same time it is just a sticker price number that is being put out there and, at some schools, most people aren’t actually going to be paying that. There’s this weird give-and-take between what the tuition you see actually represents and what it means substantially for students.
Pricing strategies represent a bizarre cat-and-mouse game being played between perception, reality and actual cost. What we’re seeing is schools are recognizing this and using tuition as a signal, which creates its own host of additional issues and concerns.
This interview has been edited for length and clarity. To read the report in more detail, please click here.