Student Lifetime Value - a paradigm shift from "drive-through university ...

are not yet prepared for this kind of commitment. Therefore, a paradigm shift from “drive-through university” to "partner for life" is needed. The critical question behind this transformation is the value of the relationship. Studies have shown that when HEIs succeed in transforming themselves into partnership-oriented organisations, they can anticipate real benefits from this transformation5, including:

Attila Pausits

Student Lifetime Value - a paradigm shift from "drive-through university" to "partner for life”

• increased competitiveness,

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• increased third-party funding through alumni management,

Introduction

• sustained lifelong learning activities,

As more and more higher education institutions (HEIs) retool themselves as service institutions where teaching and research outcomes closely correlate with the quality and long-term value of the relationship between students and the HEI, they are changing the entire landscape of the higher education academic environment. There are many different terms employed to highlight the shifting relationship between HEIs and their prospective students, current students, and alumni. Words like customers, clients or partners are imported from the corporate realm to describe the transformation of the HEI-student relationship from one based on knowledge-transfer and -development over a relatively short term to one based on service-orientation encompassing all the different stages of the relationship from first contact to alumni. Changing focus from teaching to learning, and thus, the improvement of service processes, forces many universities to move to a professional management approach. Increased competition for not just the student but for the entire relationship forces HEIs to try new approaches and utilize innovative management instruments. This presents both a challenge and an opportunity for improvement.

• better network building, • improved knowledge transfer, and • enhanced business development. The partner for life approach is based on the need and desire for lifelong learning among individuals and its importance to society. HEIs as learning and teaching providers must develop strategies for lifelong learning and support this strategy through relevant processes and services. Policy and strategy development must take place not only in theoretical papers describing this new world but also suggest real-world tools and methods for implementation. One practical tool that has been show to assist HEIs in moving to a partner for life approach is the adoption of standard management practices which provide the methodology and metrics to help HEIs analyse, plan and structure the entire relationship cycle from prospective students to current students to alumni.6 (For the rest of this paper, the word “student” will be used as a synonym for the whole relationship life cycle from first contact to alumnus/alumna.)

In addition coping with trends toward more service-orientation and the concomitant adoption of management practices, universities must also contend with the increased speed of globalisation, the demographics of an aging society, and rapidly changing technology. The European University Association in its charter stresses that HEIs must pay more attention to lifelong learning issues. 1 To be effective in supporting the goal of lifelong learning, HEIs have to expand the timeframe of the student-HEI relationship from the traditional view of a study programme with neat boundaries and limited scope to a lifetime model in which students take on different roles such as sponsor, fundraising contact, or student in a postgraduate programme.2

This coherent strategy and related processes can be consolidated in a Student Lifetime Management (SLM) model. The most basic element of this model is an understanding of student segmentation. While HEIs do not have the resources to support one-to-one relationships between students and the HEI, they can individualize and customize their core services and processes by using segmentation to identify students with common needs and similar profiles and interests. For example, to inform graduate students about new postgraduate programmes, the HEI can increase the effectiveness of its marketing efforts by reaching out to potential participants in a highly tailored form instead of addressing the whole alumni network in a general way. IT solutions to create and deal with different segments based on interests, working background, etc. already in broad use in the business sector are available for the higher education sector as well. How to measure the value of a relationship and of a single student over a lifetime is clearly not a simple task. This paper will investigate the methods of student value quantification and introduce the Student Lifetime Value (SLV) approach as one possible concept.

This paper takes as its main treatise the need for a change in focus at HEIs to a relationship-based management approach. Today, HEIs adapt their processes relative to single activities and interaction with students, e.g., student admission or alumni management. In loosely coupled systems3 such as HEIs, information about the relationship between HEIs and their students tends to be fragmented. Different departments and units store student data in information silos; in general, there is no possibility to see the aggregate of the interaction and exchange processes between an HEI and any particular student.4 To improve their teaching and service quality, HEIs must have access to a 360-degree view of their students. Once HEIs know more about their students, they can tailor their services and processes to enable the shift from a transaction-oriented to a relationshiporiented perspective.

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In the lifelong learning model, HEIs assume that students will complete not only a single course of studies, but that they will use the teaching services of the HEI again and again over time. Most HEIs 1 2 3 4

European University Association., 2008, p. 3 Pausits 2007c, 125ff. Weick, K. E., 1976 Pausits 2007b 85f.

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Pausits, A., 2006 Pausits, A., 2007d p. 61ff.

2. Student Lifetime Value There are different methods for determining the value of a customer. The evaluation criteria make possible a customer value assessment of the prospect pool and customer base that can be segmented according to their significance to the organization. This type of customer valuation and segmentation allows marketing efforts to be prioritized and geared toward specific customer groups. The assessments can be structured according to static as well as dynamic qualification criteria. From the point of view of student management, dynamic qualification criteria are better suited for customer value assessment, since they encompass an orientation to the past and future. It should be noted that student value cannot be defined by sales revenue alone, a position that is substantiated by state universities’ charter to be non-profit organisations as well as educational institutions. It seems appropriate to employ a comprehensive student valuation instead of merely tuition revenues as a gauge of relationship intensity. This gauge should include quantitative value components—such as tuition as a monetary subclass—and also qualitative performance measures such as potential referral and informational value. Students can serve as references for prospective students and also as “information channels” about the university to their own network of social and professional contacts. These human networks allow the HEI to reach a broader audience than through traditional channels like mail or internet alone.

according to their closeness to the organization, e.g., from potential user to patron. Customer profit margin analysis imputes actual revenues and expenses to each individual customer, and then classifies customers according to profit margin. Scoring models assign point scores to selected categories, calculate a total point score across all categories for each customer, then rank customers or customer groups accordingly. To date, valuation models have found scant application in higher education. Scientific journals for higher education continue to debate the applicability of endeavoring to quantify the customer relationship, but leave the question essentially unanswered. Although there have been first attempts to import this perspective into universities, for example, the Top Alumni Model at the University of Munich, these implementations are extremely limited and do not allow a comprehensive view across the entire customer base.

Calculation of Student Lifetime Value

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Applying the Customer-Equity (CE) approach according to BARTH et al. to the SLV: student relationships are treated as investments. At the beginning of the relationship, there is a payment equivalent to the cost of the acquisition, which the investor hopes will pay dividends in the future. Thus, SLV can be calculated based on the net present value method (see Figure 1):

In the rest of this paper, Student Lifetime Value (SLV) will be used to mean a dynamic measurement of student value over the entire course of the student-HEI relationship. The SLV is designed to serve as a decision support tool for SLM processes and activities. The SLV interprets the results of the student value assessment and applies them in support of HEI governance. Management by SLV thus is “the embodiment of all sales and marketing operations of an HEI according to student valuation. The sum total of the relationship should lead to a value-optimized student portfolio and ultimately to the maximization of the HEIs success. In the SLM approach, the relationship is structured and personalized according to student valuation. Students with a higher valuation experience a more intensive dialogue with the HEI with the goal of increasing their loyalty and revenues with regard to the HEI.” This approach is already taking place at many HEIs in the area of alumni management. For reasons of political and social consciousness, an implementation of this approach at the undergraduate level is not possible for state-funded universities. An improvement in service-orientation bought at the cost of unequal treatment of students according to their valuation is unimaginable and counterproductive in societies where education is considered to be a public good. However, it is both sensible and meaningful to use the SLV to segment the student market in order to target special services such as continuing education to the most receptive prospects. The SLV is not intended to be utilized the same way in all areas and across all processes of an HEI.

n

Kapitalwer NPV t = ∑ bt ∗ (1 + i) −t t =1

t= time period within the customer life cycle n= length of the customer life cycle b= profit and loss in the individual time periods i= internal interest rate Figure 1: Student Lifetime Value using the Net Present Value Method7

The relationship life cycle encompasses the entire timeframe of the student-HEI relationship, i.e., generally beginning with successful recruitment of students in the acquisition phase and ending with the cessation of the relationship. Empirical data such as the average drop-out rate, brand loyalty, and the dynamic of the particular market segment can be used to predict the length of the relationship.

Applying the SLV to HEIs at first seems problematic. Although the model takes qualitative and quantitative features into account and although these represent a closer approximation for the valuation of the student-HEI relationship than, for example, an A-B-C analysis, there is still the need to adjust the qualitative metrics to fit the higher education sector. According to PIETERSON et al., the quantitative parameters of the SLV are first and foremost the revenues and expenditures attributable to each individual student. Specifically, these are the acquisition costs at the beginning of the SLC as represented by the sum of all investments in a potential student. The bottom line is determined by all future revenues and expenses incurred by the particular student over the course of the Student Life Cycle. The expense side of the balance sheet includes overhead and operational costs attributable to the student as well as service costs incurred, for example via the use of a student service. Other procedures for determining customer value include the loyalty ladder concept, customer profit margin analysis, or various other scoring models. The loyalty ladder concept categorises customers

Profit and loss can be determined using the revenues and expenses attributable to a particular student in the time period under examination. Special attention should be paid to the qualitative parameters of the SLV. Considered together with empirical values, these should be multiplied with their respective probabilities and included in the calculation. The internal interest rate corresponds to the capital costs of the relationship and can be derived from risk-return considerations with regard to reducing the systematic risk of a relationship. According to SPAHLINGER et al. and ZEZELJ, the primary consideration in the adoption of the SLV approach is not to arrive at the most accurate calculation of student value, but to gain a means of 7

Dittrich, S., 2000, p. 119

decision support. Alone the possibility of segmenting a heterogeneous student body into groups according to low, medium and high student valuation provides a basis for future marketing activities, e.g., after completion of undergraduate studies. There is a clear benefit in being able to market master’s degree programs to the target group of prospective students most likely to continue their education after attaining a bachelor’s degree. MEYER and DULLINGER define three student value propositions: •

The monetary student value corresponds to quantitative measures such as tuition fees, profit

2005 Prospects—Master‘s Programme

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Prospects--Seminar Prospects--PhD Programme Prospect with IT Background

The informational value rates how much the HEI profits from the student’s knowledge, e.g., research.

•

The referral value assesses the network value of the student, e.g. by measuring how many prospects are moved to interact with the HEI because of the student. These are the ways in which the strategic and monetary valuation of the customer can be combined and explored over the length of the relationship. The foundation for these considerations rests on an in-depth understanding about the natural progression of the student life cycle. Universities already collect data relative to students; these could serve as a basis for ascertaining student status. By developing and amending the data they already have, universities can begin to estimate SLV.

3. Student Life Cycle Analysis How to ascertain profit and loss within a time period is a question that deserves some discussion. In order to calculate a monetary student value, one must conduct an analysis of the target group according to financial, qualitative and network-based factors. Marketing and acquisition cost data can be specifically collected in the various phases of the student life cycle so that income and expenses can be compared. These calculations provide information about the value of investing in particular target group or person. An essential point to consider in the computation of profit margin is the length of the relationship. (See Figure 2.)

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margin, etc. •

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Figure 2: Example of a Student Lifetime Value Calculation

The challenge of arriving at a monetary student value over time is that the estimated income and expenses relative to a student are not constants, but figures that must be adjusted over time via appropriate discounting. This can be achieved by including the discount rate in the net present value calculation where discount rate is the rate of return that could be earned on an investment in the financial markets with similar risk. And therein lies another weakness of the model. . An HEI’s mission is not profit maximisation, but teaching, research and providing services to the public. In fact HEIs do not even have the option of investing in a financial market or higher education market. Although HEIs have to manage their financial resources in a proper way, the goal is not to make money. The net present value calculation is an exact method for evaluating investment possibilities and alternatives—but only to the degree that relevant information about monetary effects can be known. In its present form, the process is not sufficiently viable for the Student Lifetime Value approach since—especially in the areas of education and continuing education—factors other than monetary success come into play. This analysis makes it possible to arrive at an income- and expense-based compilation. At first glance, this approach appears to be accurate according to generally accepted accounting practices, whereby the discount rate may vary over time. In summary, the net present value method is well-suited for input/output calculations as well as financial investments. However, its use as an educational decision tool for individuals over a long span of time and with everchanging life circumstances is unrealistic. In order to capture the informational value of a student, further quantitative and qualitative measures must be considered. These measures may vary from one education institution to another. The following table shows some examples of these measures:

Quantitative Measures

Qualitative Measures

Project Collaboration (Hours worked—project yield)

Individual level of knowledge (qualifications value)

Research collaboration (Hours worked—Research budget)

Research projects (academic value)

Patents

Significance in the social structure of a course of studies (social value)

Table 1: Examples of Informational Value

2005 Prospects—Master‘s Programme

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Quantitative measures can be correlated with the monetary value of a student’s contribution to the university. Hours worked by the student can be used as an evaluation criterion. The potential value of patents to which the student contributed his efforts can also feed into the SLC calculation via this input stream. The weighting of the quantitative measures is dependent upon the value placed by the HEI on each individual measure. The recommendation herein is to define a catalogue that assigns a weighting to each measure in order to quantify the qualitative criteria, and allow comparison and consolidation to monetary (quantitative) values.8 The weighting catalog is dependent to a great degree on the strategic direction of the university. Universities with a strong focus on research will assign a greater weight to research-based criteria such as publication in scientific journals than to social competencies. If an HEI’s core competence is its teaching, the social competencies of the students will receive a greater weighting.

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Revenues Expenditures Profit margin Informational value Referral value Student Lifetime Value

According to LANGER et al., quantifying referral value is possible by examining commitment to the HEI using three measures: preparedness of the student to recommend the HEI, remain in contact with the HEI, and select the HEI for further courses of study. Surveying and analysing these criteria allows quantification of referral value. One drawback of the LANGER et al. model is that it does not take a time dimension into account. In terms of the Life Cycle approach, referral value, like all other values under consideration, is a dynamic value. Assessment of referral value ought to be done on a periodic basis and incorporated in the student life cycle analysis as a dynamic variable. Figure 3 shows the core model of the SLV:

Figure 3. Model system for SLV Calculations To reduce the complexity of the model system, the layers of detail pertaining to informational and referral value were left out. These quantified (qualitative and quantitative) measures can be added for completeness. Qualitative measures can be quantified through intangible values. Scoring models can be developed to arrive at a monetary valuation. As an example, using this method, publication of a scientific article—weighted according to the prestige of the journal in which it appears—gets a value of anywhere from 2,000 to 8,000 euros. Similar models exist at American universities to allocate budget to teaching staff. Professors who amass many publication credits at prestigious journals over the course of an academic year qualify for a budget increase in the following academic year. However, this model leaves out the contributions of research assistants and students.

4. Summary If they want to thrive in the future, HEIs have to use the relationship capital of students and alumni in a better way. If alumni are the only group considered by HEIs as customers because, as former students, they can support the university via sponsoring and other contributions, it is already too late. Instead, the alumni effort has to begin when the students first make contact as prospects, even before they begin their studies. The potential relationship with alumni can be optimised only if the phase of forming the relationship is seen not as a purely isolated activity, but as part of a full life cycle process. Therefore, a shift to relationship-orientation is essential. The model of Student Life Cycle Management describes the relationship over the long term and divides it into different life stages, so that the relationship can be better structured and leveraged over the student life cycle. Customer-oriented management is about creating framework conditions that make it possible to proactively encourage the service processes of the HEI. It is necessary to systematically guide customer relationships towards segment-specific strategic objectives so that an exemplary type of 8

Pausits, A. 2007d 88f.

relationship can be assured in each stage and predefined criteria for success can be met. The special service character of education has already been addressed. The intensity of the relationship, particularly between students and the HE institution, makes it possible to regularly collect data on, renew and adjust the course of the relationship. The elementary categorisation of the individual stages also becomes easier. Therefore, it is important that the Student Life Cycle Management system is understood not as a rigid conception, but as a flexible instrument for optimising the entire student-HEI relationship. To arrive at accurate figures using the SLV seems problematic due to the relevance for the actual CLV of future events within the student life cycle. For this reason, sufficient empirical data should be used in the determination of potential values. On the other hand, there are factors such as personal circumstances of the student, new rivals to the HEI, changing economic conditions, and trends that are not in the control of the HEI. It becomes clear that the SLV approach does not have unlimited applicability for calculating student valuation. Fine-tuning the SLV with informational and referral values is dependent upon active exchange between student and HEI during the educational process in the case of the informational value and upon the quality of the data as it pertains to networking value of its graduates in the case of referral value. Existing attempts by HEIs to structure their student data have classified the student body in accordance with operational and administrative goals. These existing data can serve as a basis for the SLV computational model, but must be expanded with qualitative and quantitative measures designed to evaluate student status as it pertains to the HEI’s value and weighting system. We conclude that a valuation of the student-HEI relationship is a necessity. Only by segmenting the student population can available resources be deployed more effectively and thus, the potential of the relationship fully realized.

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