Monday, January 23, 2006

Service Guarantees for Higher Education: A Modest Proposal

Should colleges offer a service guarantee for the product they provide? Most schools offer no particular guarantee or service warranty; you pay, you play, the end. If this were to change, it could increase school enrollments by reducing the perceived risk of first-time college entrants, thus increasing their willingness to give college a try.

Although a service guarantee for a university education may seem novel, higher education is profoundly suitable for such a guarantee. Service marketers use the following criteria for appropriateness of a service guarantee:

The price for the service is high. Almost all higher education is expensive in both absolute and relative terms, particularly when books, supplies, and the opportunity cost of lost time spent in a classroom are factored in.

The negative impact of unsolved problems is high. A negative experience in a class can result in having to take the class over again (doubling the original purchase price), a perceived need to change majors (incurring great costs to the individual as formerly-valid prerequisite classes become useless), and even a perceived need to drop out of college or change schools (transaction costs for the consumer, major impacts on the school).

The customer’s ego is on the line. A negative experience with a class in a university setting is often perceived by the customer as being the result of their stupidity or their mistakes. While this may be true in some instances, providing a solution that ameliorates this perception would be highly valuable to customers.

Buyer resistance is high. This is not always the case. Many students are highly motivated to attend school and have little or no resistance. However, there are a number of marginal consumers who could be persuaded to attend college, and their resistance is fairly high. A service guarantee could lower that resistance and bring in many additional students.

Customer expertise with the service is low. Some students have attended other schools before transferring to a new school, but for many students, college is a one-stop experience - they go to one school and that's that.

The industry has a bad image for service quality. The higher education industry as a whole has a growing negative reputation – diploma mill, “they just want your money”, etc.

The company depends on frequent customer purchases. All colleges rely on a high retention rate; they expect and plan for students to return semester after semester.

The company’s business is affected deeply by word of mouth. While schools vary in the amount of out-of-state and Internet recruiting they do, it is inevitable that prospective students will place a high value on first-hand reports from former or current students.

So on balance, higher education seems to be a very strong candidate industry for a service guarantee. In addition to the classical criteria, this idea is also supported by the non-innovative nature of most schools. That ensures that competitors will not quickly copy even a successful service guarantee policy - strengthening the advantage gained by word-of-mouth.

How should such a guarantee be structured?

Although it is tempting to offer a guarantee on the basis of content or knowledge, such a guarantee would be very difficult to objectively define. One person might believe the knowledge they gained in a particular class to be useless hokum, while another might find it highly useful. Such considerations would also be deeply personal; for example, Frank is learning nothing new in his intro finance course, while other members of the class are struggling to absorb all the new material. This isn't necessarily because Frank is a genius, maybe it's because he's been exposed to this material before in his day job at the bank, while other students haven't. A content-based guarantee could not be unconditional and would be difficult to understand and communicate.

I believe a more productive approach would be to offer a credit refund at the individual class level. A student who was dissatisfied with a particular class could, for any reason, request a credit. The class would remain on their transcript but would not apply towards their degree program. The amount of the tuition and fees for that class would be applied towards the next semester as a credit, so there would be no cash outlay to the university. A student would be limited to, say, three credit hours worth of refund per year of full-time attendance to reduce the potential for abuse.

This policy should be unconditional, within the broad limit of three credit hours per year. It would be easy to understand and communicate to students, as part of the ordinary communication as to policies and procedures that occurs every year. It is meaningful – when a student is unhappy with a class, they know that they can won’t have to pay for it. It produces an incentive to the service provider, in that professors who regularly have students applying for refunds are likely to be examined closely by the appropriate dean. It is easy to invoke – just fill out a form online or in the registrar’s office. It is easy to collect, since the university just creates a credit for the student on the next term’s bill.

I think such a guarantee could go a long way towards moving today's inefficient schools towards a more market-driven, customer-satisfying approach.


flint cordoroy said...

Most U.S. colleges will take anyone who can pay, or sign the student loan forms. If a college were to offer a guarantee of success they would have to do at least 2 things:

1. be much more selective in who they let in.

2. give much more arduous professional level coursework, and make it easier in general for students to flunk out.

emily1 said...

there are a lot of jobs that require a college degree when there's no logical reason to require one. that's part of the problem.

flint cordoroy said...

That is true, emily. But it is an atmosphere of informal collusion. The greater the technical requirements for most positions in a company, the greater everyone feels they deserve more money. And the more secure they feel in their jobs, being able to summarily reject applicants without the technical degrees. That is basically every MBA job in the country, as well as states requiring teachers to obtain Masters Degrees. Most School Districts recieve no net benefit from hiring superintendents with Ph.Ds.

Creating tedium and then rewarding yourself a premium for it is the biggest growth industry in the United States.

Imposing standards or rigour that most customers don't care about creates jobs. That is why we have such a high per capita number of lawyers in this country, and selling or buying a house has become so difficult most people hire agents and realitors. Every CPA owes their job to unnecesary obtuseness. Most nurses and dental assistants require far more coursework than is necessary for their job functions.