Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Dynamic Pricing Is Changing College Tuition
Transcript
- Lucas: So you know how airlines charge more for a seat booked two days before departure than two months out? And how hotels raise rates during a conference week? That logic is quietly creeping into college tuition, and it's reshaping how millions of students pay for school. Luna: I've seen headlines about tuition discounts and merit aid, but are we talking about actual dynamic pricing — like, price changing by the day? Lucas: Not quite by the day, but the mechanism is identical in spirit. The sticker price you see on a university website is rarely what anyone pays. The actual net price depends on who you are — your family's income, your test scores, even your zip code. Schools are using data to set different prices for different students, just like airlines do with seats. Luna: So the published tuition is like the airline's list price, and the financial aid offer is the discount to fill the seat. Lucas: Exactly. And the most interesting case is Purdue University. In 2012, Purdue's president Mitch Daniels announced a tuition freeze — not just for one year, but for multiple years. It was a radical move when most public universities were raising tuition 5 to 10 percent annually. But here's the dynamic pricing twist: Purdue didn't freeze the net price. They froze the sticker price, then used aggressive financial aid to price-discriminate. Luna: Right, so wealthy families pay closer to the sticker price, and lower-income students pay less. That's price discrimination by income, essentially. Lucas: Yes, and it worked. Between 2012 and 2020, Purdue's in-state enrollment grew about 14 percent, while their average net tuition per student actually declined slightly. They attracted more students from a wider income range. The tuition freeze became a marketing tool — 'we haven't raised prices' — but behind the scenes, they were using targeted discounts to fill seats. It's the same yield management that hotels use. Luna: But there's a catch, right? Not every school can pull off a Purdue. They had a strong brand and a big endowment to backstop the freeze. Lucas: True. Purdue's endowment was about two billion dollars at the time, which gave them breathing room. But smaller schools without that cushion are using a different form of dynamic pricing: tuition discounting. According to the National Association of College and University Business Officers, the average tuition discount rate for first-time freshmen hit about 51 percent in 2024. That means the average student pays about half the sticker price. Schools are essentially marking down tuition like a retailer marks down winter coats in February. Luna: Fifty-one percent — that's huge. So the sticker price is almost meaningless at this point. Lucas: For many schools, yes. The problem is that discounting can become a race to the bottom. If every school offers a fifty percent discount, then the net price is what matters, and schools compete on that. Some end up enrolling students who pay very little, which hurts revenue. The schools with the strongest brands — like Ivy Leagues or top publics — can maintain higher net prices because students perceive more value. But for non-selective schools, it's a brutal market. That's where dynamic pricing gets more sophisticated. Luna: Give me an example of sophisticated. Are we talking algorithms? Lucas: Yes, some schools now use predictive models to set financial aid offers. They take data from FAFSA, plus demographic info, plus behavioral data — like whether the student visited campus or opened emails. Then they model the likelihood that a student will enroll at a given price. If the model says a student is very likely to come regardless, they offer less aid. If the student is on the fence, they offer more. It's basically the same algorithm that an airline uses to decide whether to drop a fare or hold it. Luna: That sounds like price discrimination based on willingness to pay. Is that legal in education? Lucas: It is, as long as it's not discriminatory on the basis of race or gender. Schools are allowed to use financial need and academic merit. But the line gets blurry. For example, some schools have been accused of 'gapping' — offering aid that's less than the calculated need, effectively pricing out lower-income students. And then there's the whole question of transparency. Most families have no idea that the price they're quoted is the result of a yield management model. Luna: So we have Purdue's freeze model, and the algorithmic discount model. Is there a third approach? Lucas: Yes, and it's the most controversial: income-share agreements, or ISAs. The most famous example is Lambda School, now called Bloom Institute of Technology. They offered a deal where students pay nothing upfront, but after graduating and getting a job above a certain salary, they pay a percentage of their income for a fixed number of years. That's dynamic pricing in reverse — the price adjusts based on the student's future ability to pay. Luna: So the school takes on the risk instead of the student. If the student earns little, they pay little. Lucas: Right. And if the student earns a lot, the school shares in that upside. Lambda School claimed that their ISA capped payments at a certain multiple of the tuition, so it wasn't indefinite. But the model ran into trouble. Critics pointed out that the school had an incentive to only accept students likely to get high-paying jobs, which could lead to cherry-picking. Also, regulatory uncertainty — the Department of Education under both Trump and Biden has been unclear on whether ISAs count as loans. Several schools have discontinued their ISA programs. Luna: So dynamic pricing in education has a lot of moving parts. Where does this leave the typical student or parent? Lucas: The key takeaway is: never pay sticker price. Always negotiate. Financial aid offices have discretion, and if you have a competing offer from another school, you can ask for a match. Some schools will adjust. It's like haggling for a hotel room, but with higher stakes. Also, look at net price calculators — schools are required to have them on their websites. They'll give you a personalized estimate based on your financial data. That's a step toward transparency. Luna: But those calculators are only as good as the data you put in, and they don't account for merit aid from special programs or scholarships. Lucas: True. And they're static — they don't show how the price might change if you improve your test scores or apply earlier. But they're a start. The bigger picture is that higher education is moving toward a more market-driven pricing model, whether we like it or not. The question is whether that makes college more accessible or more opaque. I think it can go either way depending on regulation and transparency. Luna: And speaking of transparency and access, this is actually a good moment to mention something about this show. Lucas, we've been doing Pricing Power for a while now, and it's listener-supported — no ads, no sponsors. That only works because a small group of listeners chips in monthly. Lucas: Yeah, it's a rare model for a business podcast, but it keeps us independent. If you've gotten something out of these episodes, you can join that group at Buy Me a Coffee dot com slash fexingo. No pressure, seriously — just putting it out there. Luna: Exactly. And to close out today's topic, I think the big question moving forward is: will dynamic pricing widen the gap between wealthy and low-income students, or can it be used to make college more affordable for everyone? The answer probably lies in how transparent schools are about their pricing models. Lucas: I'd add that students and families need to become savvier consumers. Compare net prices, negotiate, and remember that the sticker price is just an opening bid. That's the real lesson from the airline industry — don't take the first price you see. Thanks for listening, and we'll be back next time with another angle on pricing power.