Tuition Elasticity of the Demand for Higher Education among Current Students: A Pricing Model

Article excerpt

Establishing tuition rates at institutions of higher learning is always of fundamental strategic importance to college administrators who are suffering adverse financial effects from reduced allocations from external sources and increased educational and facility costs [2]. Innovative reactions to these environmental conditions are needed to avoid institutional decline [1]. Colleges have responded by becoming more sophisticated in their use of tuition pricing as a positioning device. They have considered the effects of students' ability to pay, institutional student aid, and expenditure plans on enrollment rates [23]. However, no researcher has developed a tuition pricing model based on students' willingness to pay. Such a model would assist college decision makers in establishing tuition rates.

All tuition pricing models should include cost and revenue inputs so that administrators can evaluate prices based on projected net earnings.(1) Cost reductions and revenue enhancements are needed to remain solvent. Both options should be investigated as opportunities for increasing net earnings from the current student population. In this article we focus on the revenue enhancement option.

Increasing the tuition rate is one among many revenue enhancing options. However, this tactic raises the question of how current students will respond to a higher tuition rate if there is not an equal increase in their financial aid. Although several studies have been conducted on student responses to tuition increases [2, 3, 6, 8, 9, 17, 21, 26], according to St. John, "institutional enrollment planning models generally have not had the opportunity to use recent research on student price response" [23, p. 166]. When tuition is increased, three of the possible scenarios for the current student population are: (1) high retention and a major tuition revenue increase; (2) moderate retention and a net increase in tuition revenues; or (3) low retention and a severe tuition revenue decrease. Besides tuition price, student aid and competitors' tuition rates affect current students' financial considerations [13]. College administrators should estimate the effects on net earnings resulting from price increases so they can select the tuition rate to avoid scenario three. They are faced with a classic pricing problem that depends upon current students' tuition price elasticity of demand for education.(2)

In this article we propose a pricing model, based upon current students, that institutions of higher learning can use in determining an appropriate tuition rate. Although the model makes several simplifying assumptions, it is useful in predicting the retention rate of current students at increasing tuition rates. A computer-based model that quantifies the relationship between tuition elasticity and projected net earnings is applied to determine an appropriate tuition rate for a small, private, liberal arts college. The model should be useful as an additional determinant in the selection process of an appropriate tuition at other small colleges that can identify a small set of competitors.


Price determination is a difficult decision; one that should establish a tuition that retains current students, attracts new students, and provides adequate revenues to cover costs. Except for schools with very high or very low images, relative tuition increases typically reduce college enrollments [20, 25]. To date, little work has been done to evaluate demand at various tuition rates [22].

Jackson and Weathersby [9] evaluated seven "price sensitivity of demand" studies that followed Ostheimer's [17] pioneering work of estimating higher education demand among potential enrollees. Results showed that cost to the student is a significant variable with a negative impact, but the magnitude of the price effect was found to be very small. Other review articles [8, 26] and individual studies [3, 6, 21] confirm this finding. …