Sunday, June 4, 2017

The Role of Customer Power in Higher Education

The Role of Customer Power in Higher Education

Michael Porter’s The Five Forces That Shape Strategy provides a useful framework for assessing a market environment, especially in private institutions.  It was intriguing to re-read the article through the lens of a different type of industry – specifically, higher education. It is evident that the force of buyer/student power plays a unique role in this industry.

First, there are factors in higher education that alter students’ ability to affect price. Michael Porter asserts, “Buyers are powerful if they have negotiating leverage relative to industry participants…using their clout primarily to pressure price reductions.” Buyers, or prospective students, may have little “clout” due to the dramatic increase in college attendance. According to Paul Campos, “Enrollment in undergraduate, graduate, and professional programs has increased almost 50 percent since 1995.”[1] With this influx in demand, suppliers (the universities) have little incentive to decrease tuition.

Another factor affecting buyer power is tuition funding. Students can directly pay the full sticker price, or utilize scholarships, grants, loans, or other subsidies. One study claimed that aid might have contributed to increased tuition: colleges could raise prices knowing that federal aid would account for the difference.[2] This shifted the “burden” of trying to lower price to aid programs instead of academic institutions.

For many industries, it might not necessarily be an issue that buyers have limited power. In fact, a company might actively work to reduce customers’ influence on price. But, in terms of high education, it is vital to empower buyers due to the debt crisis. In 2016, the average student graduated owing $37, 172 in school loans.[3] If a university values serving students and providing them opportunities to succeed, grow, and make a difference, then the burden of price needs to be alleviated.

In summary, customer influence may be limited in higher education due to aid programs and high demand. However, universities are in the unique situation where they may actually want to increase the force of buyer power, or determine how to make price less of an issue for students. This should be a key consideration when an academic institution develops a strategy.



[1] Campos, Paul. “The Real Reason College Tuition Costs So Much.” The New York Times April 4, 2015. <https://www.nytimes.com/2015/04/05/opinion/sunday/the-real-reason-college-tuition-costs-so-much.html>
[2] Wexler, Ellen. “Why is College Tuition So High?” Inside Higher Ed February 9, 2016. <https://www.insidehighered.com/news/2016/02/09/study-increased-student-aid-not-faculty-salaries-drives-tuition>
[3] Friendman, Zack. “Student Loan Debt: A $1.3 Trillion Crisis.” Forbes February 21, 2017. https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#2a02faa15dab

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