Thursday, March 11, 2010

Making It Up in Volume

There's a wonderful I Love Lucy episode in which Lucy and Ethel decide to go into the salad dressing business. When Ricky asks about the economics of it, Lucy responds that they lose two cents on every bottle, but they make it up in volume.

This piece in IHE reminded me of that. It basically asks why colleges haven't adopted enrollment growth as an economic survival strategy.

So much to say...

Start with two really obvious points. First, enrollments boomed over the last year. That's more recession-driven than strategy-driven, but it's also true that many colleges -- very much including my own -- have made a conscious choice to accommodate as much of that new demand as possible. It's a rare case of economic incentive -- we need the tuition/fee revenue -- and mission -- we're here for people who need us, when they need us -- actually aligning. So the premise behind the question "why haven't you taken more students?" is false; we have.

Second, though, part of the economic model of public education is that the student doesn't pay the full cost of instruction. In a really basic sense, we lose money on every student.

(The easy way to see that is to take the institution's operating budget, and to see what percentage of it is paid through tuition and fee revenue. If it's less than 100 -- which is true by design -- then the students aren't paying the full cost. Here, students pay slightly over half the cost.)

Now the astute reader will notice an implicit contradiction between points one and two, like Lucy's with the salad dressing. If you lose money on every student, then does volume actually help?

The answer depends on your timeframe. In the very short term, yes. Over time, no.

Adding a student or two to an existing section -- assuming you don't violate any caps -- is a short-term revenue generator. As bad as this year's budget has been, it would have been even worse if we hadn't had the enrollment influx we did. The underlying fixed costs don't really move when you add a student here and a student there; you just divide, say, the cost of the library by more tuitions. As long as the support services can handle the increased load, so the marginal costs of new students are truly trivial, then yes, you can make money with them.

But over time, as those extra students add up, you have to backfill to maintain services. Yesterday's post was a reaction to the fact that we've hit the point where we really can't just keep adding more work to existing staff without things and people starting to break. You can't increase your financial aid applications by a third and not add staff to process them. It just doesn't work. (That's especially true as the regulations and penalties become ever more onerous.) When we add sections, we add adjuncts to teach them, which adds cost. Over time, we need to hire more full-time faculty to keep the ratio reasonable; that adds more cost. With sustained higher enrollments, we get more activity in the library, more demand for counseling (students now have to wait weeks for an appointment), more demand on facilities, more student records to maintain, and the like. Once you get past the very short term, those all require substantial investment, which more than siphons away the additional tuition/fee revenue. And that's not a function of mismanagement; it's built into the design of the institution.

I usually roll my eyes when I hear condemnations of running a college like a business, because "like a business" is often used interchangeably with "on a budget." But this article really does go all the way over, and really does miss the point. Businesses experience growth as a profit source. Non-profits often experience growth as a cost.

This is why the for-profits are growing as quickly as they are. Unlike the publics, and many private non-profits, the for-profits actually make money on every student. Growth pays for itself and then some. In the absence of sustained public support, growth costs us. Without the public doing its part to support public higher ed, we simply cannot compete with the for-profits over time. We were never meant to; that wasn't the mission.

I'm sure this article was well-intended, but it missed the point in a really fundamental way. Public education isn't supposed to be self-supporting. That's why it's public. We sell our salad dressing on the cheap because we want people to have it, not because we expect to make it up in volume.