Don't just cut costs, increase revenues too

21 Jun 2020

I’ve been thinking a lot about what the Fall semester will look like. Cards on the table: I think anything other than a fully-remote semester is courting disaster. Opening risks deaths, lawsuits from the surrounding community (who get no formalized voice in the matter), and a costly mid-semester transition-to-remote if there’s an outbreak. But I don’t want to beat that drum too hard here. Instead, I want to think a little about what a fully-remote Fall semester should look like, and why.

Scott Galloway sketches out the value proposition of a college as

Certification + Education + Experience/Tuition

I think this is a reasonable breakdown. So what changes when we go online? The certification stays constant—diplomas don’t suddenly read “Middlebury, but with an online semester”. (Will employers mentally discount degrees from institutions that went online? Maybe, but I doubt it. Too much to keep track of.) The education maybe gets a bit worse, though there are investments that can keep the quality from taking a total nosedive (and it’s not clear how good socially-distanced education with mask-wearing professors will be).

No, the big delta in in-person vs fully-remote is, as Scott argues, the experience/tuition ratio. Holding tuition constant for a fully-remote experience just isn’t realistic. Maybe some folks will do it, but we’ll lose a lot of students.

We’re in a world where the only product we can safely and reliably deliver is an online education. Holding price constant, the lack of in-person experiences makes the value proposition a lot worse. The solution is obvious: reduce the price, bring up the value proposition. If we stop here, we can see the conclusion many administrators have pointed to: a fully-remote semester will create a big revenue deficit, potentially requiring draconian cuts to avoid financial collapse.

But this conclusion comes from focusing (excessively, I think) on the “costs” part of “profits = revenues – costs”. At the current in-person price, the price elasticity of demand for our online product is greater than one – that’s what we’re saying with the logic above. As anyone who’s taken econ 101 will tell you, when PED>1 we should cut prices to increase total revenues. Administrators seem to recognize this insofar as they bake the tuition discounts into their scenarios.

Maybe I’ve missed it, but I’ve seen nothing to suggest those scenarios also account for revenues from the non-Middlebury students we could attract. This omission makes the fully-remote Fall scenarios look far worse than the in-person or hybrid scenarios (similarly, the omission of potential legal costs from deaths due to an in-person Fall make the in-person and hybrid scenarios look rosier).

None of what I’m saying is new. It’s in Scott’s article. We discussed it at the AAUP budget town hall. It was one of the recommendations the AAUP Budget Working Group (full disclosure, I’m part of the BWG) submitted to the College administration. It’s econ 101.

This strategy would require some up-front investment to make sure the “Education” piece of the value proposition is on point, but the marginal cost of a student online is close to zero. There are a lot of folks – traditional students, non-traditional students, people who just want to learn some things and get an elite certification – who would pay for a good class from a great professor who’s adequately resourced and cares about their learning. We have an entire office – DLINQ – which we could scale up to meet this challenge. We’ve all learned a bit about how to do this online teaching thing from the Spring. Middlebury could be a real leader in this space, and do a lot of good for our brand and post-pandemic demand too (“Hey, maybe we should send junior to Midd – remember how great that online language class was? I hear it’s even better in person.”)

Priced appropriately and scaled to meet demand, a suite of high-quality online offerings could help Midd get through this crisis. We don’t have to compromise our commitment to higher education or our values to go online. If anything, going fully-remote is the option most consistent with our values as an institution.

And going online doesn’t mean we can’t bring some students back. There’s a strong moral case for bringing back students who would be safer on campus, or who lack access to high-speed internet, or who don’t have home environments conducive to learning, etc. There’s even an economic case, that we could price-discriminate and offer some (lucrative) beds on campus for those willing to pay full freight. But bringing back a small portion of the student body who would be unable to fully participate in a fully-remote semester (less than the majority, I would imagine) is 100% compatible with going online in the Fall.

None of this will be easy, but neither is a socially-distanced in-person Fall. And if we commit to in-person, we have less flexibility to go for the big market – we would be incurring the fixed costs of both prepping for in-person and going online. We’re stuck with a reduced value proposition that has a worse experience, worse education, is more fragile to tail risks like unexpected outbreaks and lawsuits, and few/no margins of adjustment.

We have been planning a lot for an in-person reopen. I think we should spend the same energy planning for a fully-remote Fall.