An Economics Lesson for Independent Schools

Posted on April 14, 2016

Independent school tuitions have continued to rise at a higher rate than incomes over the past twenty years. This is not news to any of us, neither is the notion the price point of an independent school education is a factor in attracting families to the admission process in the first place. While many independent schools are beginning to understand the need to market their school more effectively, few understand the economics behind this need.

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For the past eight years, I’ve taught economics at Proctor Academy, a private co-educational boarding and day high school in Andover, New Hampshire. One of my favorite concepts to watch students learn is price elasticity of demand, especially as they begin to apply the principles to their own purchasing decisions.

Elasticity of demand is a measure of how much the quantity demanded changes with a change in price. Elastic demand is present when a price change affects a proportionately greater change in quantity demanded. For example generic t-shirts have a high price elasticity of demand; if the price were to increase significantly, there would be an even bigger decrease in the demand of that product. Inelastic demand is present when price changes affect a proportionately smaller change in quantity demand. For example heart surgery has inelastic demand; the price of surgery could increase significantly, but the demand will remain the same and is largely sheltered from price changes.

When my class explores the determinants of price elasticity of demand, we look at the following factors:

  1. Availability of substitute goods.
  2. Proportion of buyer’s income.
  3. Degree of necessity.
  4. Duration of price change.
  5. Strength of product brand.

Independent schools need to apply these principles of price elasticity of demand as they determine their admissions/marketing plans for the future. Specifically, schools must come to better understand the following three factors:

1.   Availability of substitute goods:

When there are many substitutes to your product, the demand for your product becomes more elastic and people will be more sensitive to price changes. When doing a competitive analysis for your school’s admissions, be sure you take into account substitutes not only for your entire product, but for pieces of your product. While few public schools would offer the same overall experience your school would provide, simply looking at the public school education would be doing an incomplete competitive analysis of substitute products. If a family is looking for academic support, private tutors are part of your school’s competition. If a family is looking for a study abroad program, programs like School Year Abroad must be a part of your competitive analysis. Substitutes come in many shapes and sizes, be sure you understand all of the substitutes available to your families.

2. Proportion of a buyer’s income:

Without a doubt, an independent school education is a significant purchase for a family. Depending on a family’s wealth, tuition bills are most likely one of the top three expenses a family will budget each year. The principles of price elasticity of demand tell us the greater proportion of one’s income a purchase is, the more elastic demand is for that product. In other words, families are sensitive to price changes when making decisions about independent schools, and perhaps more importantly, take significant time to make this buying decision. Your school must understand and appreciate the economic principles at work in this buying decision, and provide valuable content to families explaining the value of the purchase they are about to make over an extended period of time. Engaging families in the purchase of an independent school education is a long-run game, know this and play the game right.

3. Strength of product brand:

In addition to the other factors impacting a product’s price elasticity of demand is the strength of a particular brand name. We’ve all strolled the grocery store aisles and compared the generic brand with the name brand. We’ve looked at the price tag on each and contrary to rational human behavior, chosen the more expensive product because of a name brand. The same principles apply for your school: a product’s elasticity of demand becomes more inelastic (insensitive to price changes) when the brand is stronger. What is the strength of your brand? What are you doing to continually strengthen that brand? How are you communicating that brand to your potential customers? These actions have a real impact on how your family will respond to your tuition price increases each year.How is your school applying these principles? Are they are part of your marketing and admissions conversation? If not, they should be.

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