How Non-Profit Business Schools Maximize Profits
“The only difference between Stanford and Google is we have a higher profit margin. This school is a success story.” (Professor Jeffrey Pfeffer, Stanford Graduate School of Business, from A Sex Scandal Rocks Stanford’s Business School)
How can a non-profit have a higher profit margin than a monopoly search provider facing constant anti-trust scrutiny? Or is this simply a case of unjustified bravado from yet another legacy organization facing an uncertain role in the education of future generations?
The Business School Business demonstrated the substantial gap that exists between the tuition and fees charged by schools and the actual costs of providing a business school education. Schools do not label the gap between revenue and cost as profit. Instead, they use the proceeds to subsidize a variety of other activities from progressive subsidies such as student scholarships to regressive subsidies such as generous salaries for “casually” productive faculty and administrators. After all, the school needs to appear to have near-zero profit to maintain its non-profit status.
Like many other for-profit and non-profit businesses, business schools seek growth. But unlike many businesses, growing revenue by simply increasing enrollment (growing supply to satisfy higher demand) is not a preferred choice. Higher enrollment without a commensurate increase in applications will hurt the perceived exclusivity of the school.
So how do business schools grow revenues and profits under these circumstances? The default option is to continue to limit enrollment and increase tuition at rates far beyond what would be justified based on the true costs of providing education:
- If applications remain steady while tuition increases, administrators have clearly underpriced their offering; it’s time to raise tuition even faster!
- Maintain and grow applications by expanding marketing efforts especially in international markets (for example, see How Elite B-Schools Pump Up Applicant Pools)
If there is appetite for even greater revenue growth, the next option is to create new degree programs targeting previously untapped student pools. Targeting is achieved through some combination of:
- Subject matter specialization (e.g., programs geared to specific industries such as finance, manufacturing, real estate, information systems, etc.)
- Program duration and student time commitment (e.g., 1-year vs. 2-year duration, part-time vs. full-time, etc.)
- Student age and experience level (e.g., pre-MBA, executive MBA, etc.)
By offering additional degree programs, legacy business schools are able to maintain exclusivity in their “headline” full-time MBA degree programs while growing enrollment and extracting as much value as each new population of students is willing to pay. The additional programs typically are far less exclusive (Stanford even has a six-week executive education certificate program granting anyone who pays the $63,500 fee access to the business school's alumni network.)
Table 1 provides examples of the offerings from several leading programs in the San Francisco Bay Area. The engineering schools at Stanford and Berkeley have both followed the profit maximization strategy used by business schools: they have entered the management education business to capture more of the value from engineering graduates who may be considering business school.
Table 1. Schools use a variety of programs to target different student populations at different price points.
Now that we understand how schools grow revenues, it is time to shift the focus to expenses. Profits are maximized by reducing expenses directly related to a degree program, leaving more funds (“profits”) available to subsidize other activities (see The Business School Business) such as allowing some faculty and administrators to collect generous salaries with minimal productive output.
Business schools reduce expenses by managing course offerings, class sizes, and teaching duties. Examples of these “efficiency gains” include (see Table 2):
- Adding required courses (courses guaranteed to have full rosters) as shown in Figure 1
- Reducing elective offerings to increase average enrollment per course (similar to airlines reducing flights to maximize occupied seats per flight)
- Cross-listing elective offerings across degree programs (cost sharing across programs)
- Shifting more of the teaching load to lower-cost adjunct faculty and lecturers
Figure 1. Degree requirements in the part-time evening/weekend MBA program at UC Berkeley have increased steadily in recent years.
Table 2. Elective offerings at UC Berkeley's Haas School of Business have decreased in recent years even as tuition and fees have skyrocketed. By sharing electives across degree programs (cross-listed courses), the school is able to gain further efficiency.
The combination of rapid growth in tuition and efficiency gains allows business school revenues to grow much faster than expenses for services offered to students. For example, in just the last decade, UC Berkeley has expanded the profit margins in its two primary MBA programs by anywhere from 11% of tuition to 41% of tuition (see Table 3). Jeffrey Pfeffer's claim is justified: Profit margins at leading business schools would be the envy of any for-profit business including industry-leading companies such as Google!
Table 3. Tuition is growing at a much faster rate than costs across many leading business schools including UC Berkeley (illustrated here) leading to rapid profit margin expansion.