Marginal Revenue Initiatives – be careful what you wish for

Your Ohio factory makes a cast iron base for exterior light poles. Because of how heavy the product is and the expense of shipping overseas, your entire market is in North America where you offer free shipping to retailers. The factory is profitable, but the second shift has room for more orders.

A European distributor approaches you about buying a bunch of your product but only if you cover shipping to their warehouse in the Netherlands. They would take care of marketing costs in their region as well. You think this over, recognizing that only incremental costs would have to be covered since the rest of your operation is paid for by current sales. And, the expense of shipping back to North America means that your new distributor wouldn’t take away from existing sales.

You decide to take the deal, add a few people to the second shift and enjoy greater profitability.

Your Texas factory is another story. Their decorative outdoor light fixtures are cast aluminum, lighter and smaller than the heavy bases made in Ohio. Competition is fierce, with others bringing new designs to market and pricing their product aggressively. The factory is not profitable with but one shift working. Your market, so far, has been limited to North America as well.

Another European distributor approaches you about buying product at a pretty steep discount but all you have to do is deliver loads to their New York warehouse. They will cover the cost of shipping from there by including your product with other stuff they constantly send overseas. It seems like a win since you appear to be better off with the deal than without it. The volume causes you to add a second shift and you now seem to be losing less money. Progress.

A month after the first shipment, one of your loyal retailers sends you and ad showing someone offering the same product they purchase from you for less than wholesale. “What’s the deal?” You then learn that the European distributor hasn’t been sending everything overseas. Higher margin retailers leave you, with some buying their product from your new distributor. The losses mount. There’s trouble in Texas.

These cases represent why I am leery of the infatuation that higher education has with marginal revenue schemes. If we add this sport or that program, we can increase our enrollment, even though the new students are much more costly to serve and they pay less because of increased discounts. The presumption is always that we will continue to enroll everyone who attends for other purposes and that these students are merely additive. I’ve sat through too many “strategic enrollment” sessions where no attention is paid to how we continue to recruit our bread and butter students. And, too often, risks are being taken when we are not doing well financially.

Some questions deserve to be asked whenever a new initiative is being considered:

1.      What will be the academic profile of these new students? Will we have to add remedial resources to accommodate their needs?

2.      Are there any retention concerns associated with this initiative?

3.      Will recruiters be diverted toward satisfying the expectations of the new sport or program? A coach with a roster to fill is hard to say “no” to.

4.      Is the atmosphere of our institution changing with these new students? Does it make our percentage of athletes such that non-athletes will feel out of place?

5.      Are our numbers declining anyway, meaning that the loss of people paying more will be offset in part by those who pay less?

In my observation, ensuring that existing programs, sports and opportunities are well represented, promoted and resourced is a better way to engender stability than to rely on tangential initiatives. Otherwise, the reason why your core is declining will not be addressed and you will wake up one day realizing that everyone attends your place because of some special deal.

Food for thought as plans for next fall’s recruitment cycle are being put in place.