If there are more students enrolled, how can an institution have fewer dollars for operation and investment? Understanding how price inelasticity in an admit pool can drive up a discount rate without significant increases to class size is critical to setting enrollment and net tuition revenue targets. Making sense of market share and prospective student pool—within the context of increased competition, discounting, and changing demographics—can help an institution to set realistic enrollment goals. However, understanding a prospective student pool’s price elasticity is also vital to determining the right size for the institution.

Put simply, when decreases in cost or increases to grant aid offered to students do not successfully increase enrollment to offset the institutional expenditure, the admit pool may be inelastic. In response to an inelastic population, if grant aid is slightly reduced, a campus should anticipate some decrease in enrollment. However, in spite of fewer students being enrolled, an increase in net tuition revenue will be realized. More specifically, with an inelastic admit pool, although increasing gift aid will likely gain a few students, net tuition revenue will be eroded. That is, the tuition revenue generated by the additional students will not make up for the extra dollars spent on those students who would have probably enrolled with a lower award.

Conversely, when an admit pool is elastic, additional scholarships (or lower cost) will generate more students and increase net tuition revenue. Essentially, more aid will increase the number of students who enroll at a high enough yield to “pay” for the additional institutional gift aid that is spent. In the case of an elastic admit pool, a higher discount rate will actually result in greater net tuition revenue because of the additional enrollment generated by the increased gift aid. [Read more…]