What to Learn from the Retail Sector about Setting Tuition

'Tis the season for independent schools to set tuition for 2010-11.  As finance committees and governing boards ponder enrollment forecasts and potential tuition levels, new data from the retail sector testify to the importance of consumer psychology to future demand.  According to a December 21, 2009, study of Holiday 2009 shopping trends by America's Research Group (ARG), a large number of consumers delayed holiday shopping in hopes of seeing the 60-70% discounts retailers offered in 2008.  

ARG attributes this behavior to the long memory consumers hold of past pricing practices.  In essence, once they taste deep discounting (as happened in the 2008 nadir of the recession), consumers develop an expectation that discounts will recur.  What seems missing is the notion that discounting in 2008 was a one-time response to economic adversity, not a new policy to be repeated each next holiday cycle.

Airlines have long experienced the same phenomenon.  Cut prices to $99 round-trip to fill seats, say, between St. Louis and Chicago, when demand drops, and fliers will subsequently expect to pay that fare even when seats are scarce.  In effect, discounting is perceived as the new normal or even a more rational price, not as an aberration launched to respond to situational factors.

Hence we reiterate the conventional wisdom of independent schools always raising tuition, at least by a small margin.  If experience in other retail sectors is any guide (and independent schools should think of themselves as offering a premium service at retail), failing to do so will most likely create the expectation of the same in future years.