INSEAD, the international business school, recently published a study together with ESMT announcing that US undergraduate colleges and universities that have fallen in US News & World Report rankings have increased tuition fees to signal status to potential applicants. Counter to prevailing organisational theory which suggests that loss in status results in lower prices, certain organisations, including US colleges, react to status loss by increasing fees above expected levels and without investing equivalent sums in resources to improve their services. An attempt to enhance status by price signalling has been described as the “Chivas Regal strategy”, named after a previously middling brand of whiskey purported to have doubled its sales by doubling its price without any changes to the drink.
The study which was authored by Noah Askin, Assistant Professor of Organisational Behaviour at INSEAD, and Matthew S. Bothner, Professor of Strategy and Deutsche Telekom Chair at European School of Management and Technology, reveals that US undergraduate colleges and universities that take this approach to pricing do improve slightly in the rankings in the following two years. The data did not provide enough information to indicate whether this approach would be effective over the long run. Declining colleges using higher prices to signal status was more likely t o be seen among schools with more disparate groups of applicants and those whose peer schools were already charging higher prices.
The effect was more concentrated among institutions in the middle band of the top tier (those ranked below 50 yet still reasonably well within the top tier of ranked schools), where competition for rankings is most intense and where schools faced the threat of falling further down the ranks, or dropping out of this high status group.
“The price of higher education in the US has surged 500 per cent in real terms since 1985, and many people will be concerned that colleges sliding in the rankings are hiking tuition ostensibly without making improvements to the services and experience,” said Noah Askin, Assistant Professor of Organisational Behaviour at INSEAD. “The research shows that these institutions are particularly status-seeking and reactionary when they fall in the rankings. There have been calls for more scrutiny of college tuition fees and some schools are actively trying to disengage from the rankings, but as long as fees are a public display of a school’s self-presented value, and the rankings maintain some level of importance, this strategy is very likely to continue.” Matthew S. Bothner, Professor of Strategy and Deutsche Telekom Chair at European School of Management and Technology, said: “We wanted to understand when a higher price is used to send a status signal. We found that this strategy is reserved for the more widely- known schools, and for those whose rivals already price high. Even in an arms race for status, no school wants to be seen as pricing unfairly.
” The study, called Status-Aspirational Pricing: The “Chivas Regal Strategy” in U.S. Higher Education, 2006–2012, observes that while there are situations and markets where prices are primarily determined by buyers’ preferences and a relatively static status hierarchy, there are other goods – mostly luxury and experience goods such as fine whisky and wines, holidays, restaurants, and higher education – where the quality of the product or service being purchased is not necessarily obvious before it is consumed or experienced. When there’s lack of clarity around what is being paid for, and when status matters, there is freedom for producers to set a higher price.