Rise or decrease in revenue upon increase in tuition is dependent on demand. In the recent past, a number of public and private colleges have experimented the effect of reducing tuition fee on financial performance of the institutions. Such efforts are informed by the rising price of college education that has led to criticism of the education system as broken.
Experts warn that lowering tuition fee may not work for everyone. Consequently, a number of colleges opt to increase tuition fee with the hope of raising revenue (Lapovsky, 2016). Nobody State University’s decision to increase tuition places it in a predicament of uncertainty. The findings of a survey cited in Lapovsky (2016) showed that 67% of families used price to narrow down their list of colleges; while 55% eliminated a school without any research beyond its published price. The implication if that demand becomes elastic, thereby decreasing revenue generated. Nevertheless, NSU revenue depends on the changes in demand following the increase in tuition fee, and can be rise or fall accordingly.
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"Raise or Lower Tuition: Implications on Revenue Generation".
The rise in revenue following increase in tuition fee depends on demand being inelastic. Under the circumstance, the percentage change in tuition fee exceeds the percentage change in the quantity of tuition demanded. The ratio of the percentage change in demand over the percentage change in price (elasticity) is less than one when demand is inelastic. This implies demand does not change with price increase, and the increase in price causes an increase in revenue.
One can argue that most institutions bank on such economic dynamics where inelastic demand ensures high revenue generation. However, the approach may be unsustainable because it may work only in the short-term as consumers search for substitutes that are fairly priced. In addition, the scenario is unlikely to occur given the negativity with which parents approach high tuition fee, implying NSU may face challenges attracting freshmen to keep the demand where it is at the moment.
A fall in revenue will occur when the percentage change in quantity of tuition demanded is less than the percentage change in tuition fee increase, an outcome of negative elasticity. Under the circumstances, the demand becomes elastic because it is responsive to changes in price (Lapovsky, 2016). Elasticity when demand is elastic is greater than one there is a positive correlation between revenue and change in quantity. Therefore, when demand is elastic, the quantity demanded decreases upon increase in price, implying revenue generated also decreases. This is the most likely scenario for NSU given the trends in demand and pricing of tuition in institutions of higher learning.
For revenue to remain the same, demand upon increase in tuition must be unitary elastic. Under the circumstances, elasticity is equal to one, implying the percentage change in demand and the percentage change in price are equal. In this case, an increase in price does not affect revenue under a unitary elastic demand. However, such scenarios are rare given the elastic relationship between price and demand. The two obey the law of demand where changes in one cause a shift in another, implying that NSU revenue was likely to change.
Based on the analysis of the relationship between increase in price and its effects on demand, it is evident that NSU will increase revenue if more students enroll for tuition after increase in fee. On the other hand, low enrolment would cause a decrease in revenue. The university revenue would only remain the same if the percentage change in demand for tuition equal that in increase in tuition fee. Under unique circumstances, NSU would increase its revenue generation from increased enrolment because the demand for its service is inelastic. This may be attributed to NSU offering tuition on courses with no substitutes; hence, consumers would have no choice but to pay the premium price for the service.
Analysis of elasticity of demand shows that a negative elasticity implies a decrease in revenue due to low demand. Lapovsky (2016) observed that most consumers are sensitive about pricing of tuition. Therefore, if NSU maintains the decision to increase tuition, it should concentrate on ensuring the demand does not fall by offering premium courses with no substitutes and aggressively marketing them. Nevertheless, persistent higher tuition prices are likely to make the demand for NSU courses elastic. Students and parents will have time to make adjustments and opt for other cheaper courses at the expense of NSU’s, making elasticity of demand for its tuition higher in the long-run. According to Lapovsky (2016), the last two decades have seen drastic increases in tuition, but net tuition, which is the total sum less all scholarships and grants given to students, declined over the period. In addition, institutions of higher learning were observed to fall short of their enrolment targets, which further reduced their net tuition revenue. In light of the evidence, innovative approaches are imperative to ensure NSU pricing strategy resonates with consumers who are developing apathy towards published high tuition prices.
However, the president of NSU should consider exploring alternative measures. Lapovsky (2016) observed that lowering tuition fee has some advantages, even though the strategy does not work for all. The strategy resonates with the viable market of price conscious consumers who make decisions based on published price and adverse publicity on high levels of tuition. Lowering prices can still improve revenue generation because it has the potential to increase demand, especially if the courses offered serve as substitutes to those priced highly by competitors. In the law of demand, a good or service with many close substitutes tends to have an elastic demand, therefore, it can be anticipated that the demand for NSU courses will increase substantially with the lowering of tuition fee. The elasticity under the circumstances would be more than one, implying there will be a significant increase in revenue.
- Lapovsky, L. (2016, Dec 29). Why colleges continue to increase tuition when many should lower it. Forbes. Retrieved from https://www.forbes.com/sites/lucielapovsky/2016/12/29/why-colleges-continue-to-increase-tuition-when-many-should-lower-it/#5608e4d07eb3
