Retention and Revenue – you can’t afford to skimp here

When I was in private industry a couple of decades ago, most of our sales came from existing customers.  If, for any reason, one of our long-term relationships was in trouble, we dispatched whatever resources needed to reattach that customer to the hive.

Entering higher education, it was fascinating how bifurcated our relationship was with the student sales cycle.  We lavished attention on those considering our institution while substantially ignoring those who chose us a year or more ago, even though the majority of next year’s revenue currently occupied classroom seats and dorm beds.

It may be that the challenges of recruitment post Great Recession turned our thoughts toward existing students or the evolution of student success theory.  Either way, initiatives toward improving retention have become more common in the past five years or so, improving graduation rates and reducing transfers out (and transfers in, for a lot of places).

For the CFO, what does the math look like for all of this?  Is there justification to permanently invest in retention improvement? Let me suggest that the impact makes strategic investment worthwhile.

Assume that Example College has had a fall to fall freshman retention rate of 65%.  It’s not the worst of comparative institutions but is far from the best.  Tuition is $28,000, with a freshman discount rate of 50%, making net tuition revenue (NTR) per student $14,000 per year.  Assume that room and board are charged at $4,000 and $3,000 respectively, with marginal costs running at 10% for room and 67% for board.  Here then is the revenue contribution profile for a freshman student:

NTR       ($28,000 – 50%)                $14,000
Room     ($  4,000 – 10%)                    3,600
Board     ($  3,000 – 67%)                    1,000
    Total                                                                 $18,600
     X Freshman population                                     X  220
Net revenue from Freshmen (Year 1)                 $4.1 mm

 The next year, 65% of these students become sophomores and price increases move the $18,600 up to $19,600 per student.  So, this cohort of year 1 freshmen generate net revenues in the following way:

Net revenue per returning freshman                   $19,600
Returners (220 * 65%)                                          X  143
Net revenue from returning FR (Year 2)            $2.8 mm

So, what happens to Year 2 if the retention rate moves up five percentage points?

Amount of net revenue per student                    $19,600
Returners (220 * 70%)                                          X  154
Net revenue from returning FR (Year 2)            $3.0 mm

Due to higher retention, Example college would see a $200,000 increase in revenue in Year 2 and would likely see increased performance in years three and four as the cohort of freshmen enter their junior and senior years. A mere eleven students would not unduly tax campus resources or cause additional sections to be added.  The additional revenues, however, would have a material impact on the budget process. 

Recognizing the power of retention, CFO Colleague teamed up with Credo Higher Education to create a retention program that has been enormously successful, improving student success, time to graduation and net revenue.  We’d enjoy chatting about that.

In the meantime, in a world where chasing down new students is so challenging, let me encourage you to get serious about retention.  The numbers suggest that the CFO should be solidly in favor of investment in this important area.