Pricing Strategy – A Pricing Dilemma
Why is the price of a 1-year INSEAD MBA £49,000 while the price of a higher-ranked 2-year London Business School MBA is £57,000?
Kunal S. Shah, MBA 2012 April 6, 2012
The MBA program was introduced for the first time in the United States in the early 20 th Century and was modeled on the basis of the prevalent 2-year graduate programs. It gained significant traction after its inception, however was later criticized for its lack of practical relevance. It was often said that “MBA was too academic, too theoretical and divorced from real-life business practice.”1 Business school subsequently responded by improving quality of teaching and content. The first year was dedicated to teaching core courses, and the second year allowed for flexibility around student-specific preferred content. A number of schools in Europe, specifically in the U.K., were started based on the Harvard Business School model. However, some schools in Europe such as INSEAD, IMD and a few others were started by companies that in an effort to provide management training in the mid-1900s. London Business School on the other hand was started on the basis of the conventional format (with an MBA focus) during the same period in 1964. With regard to tuition fees, the MBA degree at London Business School (LBS) is ~25% more expensive than the INSEAD MBA, i.e. £57,000 vs. £49,000. However, the key difference between both programs is that the LBS MBA is a 2-year program, whereas the INSEAD MBA runs for only 1 year. This difference in price is the pricing dilemma that I will explore and attempt to explain in in this paper. I will look at this issue by evaluating (1) the cost structure and supply side of both schools, (2) consumer behavior and the prevalent demand environment, and lastly (3) the role of competition and its potential impact on the prices of both schools.
The Role of Costs
On numerous occasions during the Pricing Strategy class (class), we learned that a difference in costs does not automatically imply a difference in price; low/high cost does not have to mean low/high price. Using that logic, the discrepancy in prices between both programs doesn’t necessarily mean that LBS costs are lower than that of INSEAD. However, we will evaluate the LBS cost structure in comparison to that of INSEAD’s to get a sense of whether costs may be driving the price variance. As per Appendix 1, it appears that the cost structure for LBS is dominated by staff costs; the rest spread across other expenses that a university of LBS’s nature may incur. INSEAD likely has similar cost categories, but it is unlikely that INSEAD incurs exactly the same costs (as I was unable to locate the school’s income statement). Therefore we could make a few assumptions to estimate INSEAD’s costs based on LBS’s income statement. Pricing Dilemma – LBS vs. INSEAD Page 2
Before any analysis, it is important to note that this cost analysis will compare costs on an annual basis as LBS offers a 2-year program, whereas INSEAD is a 1-year one. If the annual costs that INSEAD incurs per year is double that of LBS, we could infer that a large part of the price discrepancy is driven by price. Also, as we are evaluating the pricing of the MBA programs, we will assume that this is the only program that both schools offer and ignore the effect of the Executive MBA and other programs offered by both schools. Larger size of INSEAD’s campus (land and buildings): definitely results in additional expense. However, I think it is fair to assume that INSEAD has paid off the cost of its land and does not need to account for the cost in its P&L. Therefore, on the basis of the cost categories illustrated in Appendix 1, INSEAD may incur higher costs due to additional maintenance requirements of its significantly larger campus. Therefore we could estimate double cost of the “Premises and Utilities”, “Residences, catering and conferences”,...
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