4 questions to help you assess your financial aid allocation strategy

Note: The Business Affairs Forum occasionally spotlights research from our sister forums in an effort to bring relevant issues to the attention of our members. In this piece, we profile insights generously shared by the Enrollment Management Forum.

Everyone loves a good bargain, especially J.C. Penney shoppers. Known for their steep discounts and abundant coupons, J.C. Penney was heavily entrenched in a high-low discount strategy, including ‘JCP Cash’ coupons by mail and email, offering clearance aisles in stores, and producing weekly circulars with additional deals. However, consumers became savvier and more demanding about discounts. From 2001-2011, J.C. Penney’s average discount at purchase increased from 33% to 60%.

In 2011, J.C. Penney’s new CEO shifted pricing strategy in a bid to give customers what (he assumed) they wanted: prices that were about 40% off “list.” The chain abandoned the “relatively fictitious” high sticker prices and did away with the complex discounts. This strategy backfired, and J.C Penney experienced declines in revenue, margins, and average customer spend per visit. Shoppers decided that a trip to J.C. Penney wasn’t worth it without the satisfaction of receiving a special deal.

Turns out students like discounts, too

Despite the differences in the products they are shopping for, consumers in higher education also value discounts. While this strategy is more common among private institutions, publics are also moving more towards a discount model in their pricing. Institutions use high-low pricing to tailor their net price to what different student segments are willing and able to pay. Savvy enrollment managers can optimize financial aid, so they set prices strategically and don’t lose out on some of the market.

In higher education, receiving a discount or scholarship is psychologically compelling—it makes students feel that they’re valued by the organization. Students (and parents) may associate higher price with higher quality. And whether they are called tuition discounts or scholarships, setting a high sticker price and charging a lower net price helps institutions better craft the class they want.

How much aid is enough?

The difficulty is in determining what size discount to offer. The curve below illustrates how institutions are trying to strike this balance to reach the maximum tuition revenue point in the middle. In this model, institutions want their discount rate to be as high as it needs to be (and no higher) in order to maximize net tuition revenue.

Financial Aid Graph

How much aid should I offer?

While institutions widely differ in how mature they are when it comes to financial aid optimization, EAB recommends using predictive modeling based on historical data to estimate the impact of small changes on the bottom line. Statistical modeling is the key to supporting data-driven allocation of scholarships for hitting enrollment goals. Understanding an institution’s past track record and using it to project what would happen after making changes to scholarship allocation is based on knowing the answers to the questions below.

Questions to Help Assess Financial Aid Allocation Strategy

Four Questions

 

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