The Browne Review has created a quasi-marketplace for English higher education (and Welsh institutions, if not Welsh students). These are truly interesting times. While nobody has an infallible crystal ball, The Parthenon Group's international experience highlights lessons that should inform the thinking of English and Welsh higher education institutions. Most importantly, the high fees that will be charged across the sector will encourage new providers to enter the market, with far-reaching consequences in the medium term.
First, the good news: there is no higher education market in the world where the dominant basis of competition is price. Even better, in England and Wales student demand outstrips supply in aggregate, and the current pricing of annual tuition fees at close to £9,000 for most universities and most courses was predicted (if not by the government) and is rational and sustainable - but only in the short term.
Threats abound to this cosy supply-constrained market and charging £9,000 has made them much more dangerous. Although price is not the dominant basis of competition, there is a price-sensitive segment in every university marketplace we have examined, and the higher the fees, the larger the segment. In the US, we estimate it to be about 20 per cent (in a market with much higher fees than here). But few UK universities have adequate plans to survey students to understand how they will factor price or debt into their decisions.
More intense competition is coming from other players in the sector: from further education colleges and new partnerships between for-profits and existing providers. By charging £,000 for three years, England and Wales have just become Treasure Island to for-profit companies that know from experience that they can teach degrees for much less.
Earlier this year, we worked with one UK-based for-profit that will offer UK-validated degrees for about £3,500 a year, taught face to face. Some of our US for-profit clients charge comparable amounts - less for online courses. They are also more likely to condense courses into two years (saving fees and living expenses, and bringing forward future earnings). This isn't a hypothetical threat: UK students are in the business plans and sales targets of both domestic and international for-profits.
The business models of traditional universities exacerbate the situation. The costs of teaching higher education are mostly fixed, which means margins are very sensitive to student numbers. Most institutions have a small number of popular courses (for example, business studies) that make huge margins and subsidise the rest, including large numbers of courses that whet little student appetite but are of great interest to academics. We estimate that at least a third, and probably closer to half, of all courses do not cover their full costs.
Happily for those students whose fees subsidise minority interests (and therefore get really bad value for money), the for-profits do not operate this way. They focus on providing courses that large numbers of students want to do. They also provide them at scale, because every marginal student means more profit. They do this partly by targeting specific groups (such as ethnic minorities, the less affluent or mature students) that are underserved by the traditional sector.
They also spend heavily on marketing. Apollo Group forks out about $1 billion (£600 million) a year on marketing and student recruitment. That's roughly 200 times what a typical university spends in the UK or, to put it another way, more than the entire sector. Some of the students at the for-profits will be new to higher education, but many will be poached from the traditional sector.
In preparing for competition, universities must do the commercial basics better. They must understand course profitability; stop, merge or find scale in unprofitable ones; understand what students, parents and employers value and provide it; sharpen their focus on student lifetime returns on investment; and communicate this through greater marketing spend and effectiveness.
For all but the research elite, these moves will be essential but painful. It is therefore vital that the sector sees the short period of supply-demand imbalance as the opportunity to reform rather than "wait and see".
Universities must begin to provide the platform for more sophisticated strategies, including: greater pricing differentiation; international growth; regionalisation; improved employer partnerships; greater student employability; and targeting particular student segments - for example, adult learners.
The sector will encourage aggressive, deep-pocketed entrants through high fees. With too few exceptions, universities are poorly prepared for this competition, relying on their reputations to remain above the fray. Our analysis and experience tell us that for most, this will not be enough.