From The Yield, Winter 2014

Price elasticity is an economic term used to represent the responsiveness of demand to a change in price. Elastic indicates that demand changes when the price is changed, and conversely, inelasticity occurs when the price changes, yet demand remains constant. Although for some luxury goods, increased price could mean increased demand, people most often think of elastic in terms of demand decreasing as price is increased. This latter form of elasticity is of the most concern to independent school leaders, since many contemplate at what point rising tuition will restrict the market such that their enrollments cannot be sustained.

This is a legitimate concern for most independent schools. However, it must be understood from a multivariate perspective. To consider only the relationship between tuition and enrollment is far too simplistic for an informed understanding of a school’s tuition elasticity. A variety of factors impact elasticity of demand for independent school tuition, and these factors tend to vary from school to school.

AP x (PV-(AV + CV))=LE

To understand the elasticity of tuition one must first understand how the enrollment decision occurs. For independent schools that charge tuition, the likelihood for a family to enroll its child in that school is based on four variables: ability to pay, perceived value of the school, perceived value of the alternative school, and competing family values. The ability to pay (AP) is defined as the ability to pay the amount of tuition required by the school when factoring in school-based tuition assistance. The perceived value of the independent school (PV) is reflected by the family’s perception of the congruence between the school’s programs and what the family values. And likewise, the perceived value of the alternative school (AV) is the family’s perception of the value provided by the school that is considered an alternative to the independent school. The last variable, competing values (CV), refers to the other valued areas where the family chooses to spend its discretionary money—vacations, recreational vehicles, houses, etc.

Just as a family’s ability to pay impacts its initial enrollment, so it will be a factor in the elasticity equation. The greater the ability to pay, when including tuition assistance, the more inelastic tuition becomes. The very wealthy are not impacted as much by increases in tuition, just as the family receiving full tuition assistance is not. On the ability to pay factor, tuition will become more elastic for the partial-pay families and the full-pay families just beyond the full-pay limit.

The second factor in the elasticity of tuition is the Value Differential. For the family that perceives the independent school’s programs as being far superior to the alternative school, tuition will be much more inelastic. On the other hand, if the perception of the Value Differential is only slight, tuition will tend to be more elastic.

A third factor in this multivariate equation is parent motivation. Although parent motivation plays a significant role in the perception of the Value Differential, it is a factor that should be examined on its own when discussing tuition elasticity. The 2011 NAIS Parent Motivations Survey(1) identified five primary motivations for “high income” parents that influence their choice of school. Some of these motivations predispose parents to choose an independent schools and some do not. For parents predisposed to choose an independent school, such as those labeled “Success Driven” or “Character Building” parents, tuition tends to be more inelastic. For the parents that are labeled “Public School Proponents,” in the event that they have chosen an independent school, tuition will tend to be quite elastic for them.

Setting tuition should always be done in a thoughtful and informed manner and not simply based on a fixed percentage raise, or by immolating what other independent schools are doing. Careful consideration should be given to a variety of data, including demographic, financial, and attitudinal. Likewise, when a school is contemplating the elasticity of demand of its tuition, a careful analysis should be conducted of the community’s ability to pay, value differential, and primary motivations—all of these factors which can be measured. If tuition is set too low, much needed revenue will be left on the table, and if tuition is set too high it could impact enrollment and exclude some quality students from enrollment. The goal is obviously to establish the “just right” tuition, and this is done from careful analysis and consideration of each of the variables.