Published on 2016/07/15

The Impetus to Transform: Private Colleges Need to Develop New Business Models

The EvoLLLution | The Impetus to Transform: Private Colleges Need to Develop New Business Models
Adherence to the status quo is untenable over the long term for the vast majority of private colleges and universities—it’s time for these institutions to innovate, transform and develop new revenue streams.

As a starting point, it’s important to note that approximately 10 to 15 percent of private colleges don’t need to change their model. They’re secure in the way they operate. These institutions have diversified revenue streams, strong endowments providing them with relatively stable revenue streams, continuous research and grant income, engaged donors willing to financially support institutional priorities, and large applications pools because of a strong reputation that will endure regardless of any volatility in the market condition.

The rest of the private colleges may have one or two revenue streams, but are mainly tuition driven. A 100-student gap (or even 10 or 25!) in meeting enrollment goals means immediate budget challenges. As such, these institutions must look at their new or diversified business models to assess where opportunities exist.

A second reason why campuses must change their business models is the challenges of meeting the expectations of students. The infrastructure expected from students is significant and colleges have a growing need to meet those expectations. Unfortunately, tuition revenue increases are often not enough to support and enhance the needs of a contemporary institution. Students expect updated and efficient technology and technology tools/platforms, well maintained facilities, and diversified services in addition to high-quality learning with strong outcomes after graduation. To meet these expectations campuses need revenue beyond tuition to provide the experience students are seeking.

A third reason is campuses that are only dependent upon tuition no longer have the luxury of raising tuition 5 to 8 percent a year to add these additional services. Students’ mindsets are shifting to a more consumer-based approach. Now that education can be obtained through a variety of media, prospective students are become more and more price sensitive. Some campuses are going to price themselves out of their market if they keep raising tuition.

Finally, the growth in the number of students expected to enroll in higher education is predicted to grow marginally over the next decade. If we look back at the enrollment growth as a sector from the mid 90s through the first decade of the 2000s, we saw a steep increase in the number of students enrolling in higher education. As we look towards the next decade we see some markets where enrollment will shrink and other markets where growth will occur, but overall growth will be marginal compared to the 1980s and 90s.

Decades of Industry Shifts Necessitate These Changes

Many forecasters predicted in the mid 2000s—and some predicted in the late 1990s—that higher education institutions were heading towards financial challenges. Demographic projections changes, institutional debt accumulation and analysis of fixed costs embedded within the institution were all signs that as an industry we were building an unsustainable model unless we continued to raise tuition more than 5 percent per year. Few leaders believed these projections would impact their institution, as most institutions had a history of increasing enrollments leading to growth in revenue, reserves and balanced expenses. In effect, demand surpassed projections over a 20-year period so most relied on historic data (growth) rather than future forecasting (decreases, stagnation, or ability to pay in areas of growth) to understand the challenges that were ahead.

The biggest changes in the market have occurred in the last eight years. Over that time, in many regions of the country with the most number of colleges and universities, college population demographics decreased and the campuses were slow to  change (or still have not changed) their recruitment practices or considered in what areas they could diversify their revenues.

The second market change was the surge of the for-profit online institutions. While time is showing these institutions have peaked in their demand and ways they can serve students, they did disrupt the market. They became the leaders in online education and proved it had value. The market affirmed that the flexibility they provided was of interest to many. While many institutions dabbled in online programs, few privates seized this opportunity to diversify their revenue.

The demographics of students attending college are also shifting. There are fewer traditional students and more non-traditional students. Few privates have aligned practices to meet the expectations of the non-traditional population.

Also during this time, campuses grew costs but did not increase their net tuition revenue. In looking at overall revenues as a sector—just focusing on tuition—many institutions have not increased their net tuition revenue (stated price minus the scholarship/institutional grants awarded) in several years. This decrease or stagnation of funding had not occurred during the past 40-plus years in higher education and came as a shock to many.

Conditions have been changing for more then a decade and most colleges have been slow to respond to them, or simply believed these changes were not going to impact them.

Roadblocks to Transformation

The first challenge is institutional will. Campuses say they are nimble and desire change but when we look at the number of institutions who have made only marginal changes to diversify their revenue streams, there are thousands who fall into that category.

The second challenge is a lack of focus to implement a strategic plan that embeds real change or a funding model that prioritizes funds needed to implement new initiatives that will grow revenues.

The third challenge is that campuses are stuck in the “more” or “grow” mindset. Few campuses, especially privates, can be good at hundreds of things. Each campus has strengths. If those strengths align with market demand, the campus needs to focus on those core strengths and build upon them. Adding new academic programs with minimal market research or projected costs only adds more costs to an institution. Where campuses struggle is eliminating programs that are no longer relevant or redesigning programs that match with market demand. For example, the term geography is an outdated term and on many campuses an outdated program of study. Students today don’t think of geography as an opportunity to obtain knowledge of the earth’s physical environments and their interrelationship of social, economic, political, and cultural factors. Students today are seeking opportunities in Geo Information Systems or Mapping, Market Research Analysis, or Environmental Management. If you Google “Geography Major” hundreds of programs pop up—many with updated majors, like these listed—but several are still too grounded in theory, making them unattractive for prospective students. There are hundreds of people who could argue with me why having a geography department is of value, and I wouldn’t disagree. The real value of the department though is in keeping programs contemporary. Many schools are moving too slowly to update and bring future relevance to their programs. Rather than adding new programs, many campuses need to be updating and adapting programs (including changing major names to sound more contemporary) to meet market demand and career opportunities.

The Worst Is Yet to Come for Those Committed to the Status Quo

Many private institutions are waiting too long to make systemic changes that will carry their institution forward into the next decade and beyond. I think several privates will become so small that they will not survive.

Schools need a critical mass to remain vibrant and keep students engaged both in the classroom and out of the classroom. It can be done, but traditional students are seeking a diversity of engagement experience and services that prepare them to be career-ready upon graduation. Non-traditional students are seeking low-cost, extremely efficient and well organized programs of study. Non-traditional programs need to match their diverse availability with support resources to help students complete their courses and advance their careers or move them into a new career path. Few privates are redesigning their program offerings, pricing or services to meet the demands of this population.

My fear is that a few hundred private schools will fail to stay relevant and will close in the next twenty years while public and larger private schools consume their market share.

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