How Michigan Ross Can Give 500,000 Alumni Free or Half-Price Executive Education And Still Make Money

First published forbes.com 10/2015 The University of Michigan Ross School of Business on October 12 announced free lifetime open-enrolment executive education for all its degree alumni, a business model inflection that raises interesting issues in strategic cannibalization, and which threatens the status quo of both MBA and wider short-course leadership development industries.

The “Alumni Advantage” offer means UM graduates have lifelong free access to executive education, in Ann Arbor, in Hong Kong, Malaysia, India, and online. Non-Ross UM alumni are eligible for half-price.

The offer applies only to open-enrolment executive education programs. The school will continue to operate custom in-company executive education in the normal way.

Still, there are about 3,400 students at Ross School at any one time (including about 400 MBAs, adding themselves consistently to 45,000 MBA alumni), and the University of Michigan estimates its global alumni base at more than 500,000. That’s a lot of people to promise free stuff to.

The question is how Ross can sustain this offer, and why it expects to gain more in value than it gives up in fees.

Picture: University of Michigan michiganross.umich.edu

The Ross School, University of Michigan. Picture: University of Michigan. michiganross.umich.edu

It is standard practice for executive education units to limit free or concession seats on programs so as to create a sustainable ratio of paying vs. non-paying delegates, and to cancel programs that don’t have enough paying delegates.

In this they are something like airlines. Once a program hits an acceptable profit (or acceptable strategic loss) threshold, the marginal cost of the unused seats is close to zero and and the revenue value of the empty seat is zero, so it’s relatively easy to give them away. Also, executive education can push class size, within reason, to accommodate the giveaway seats.

With obligation managed in this way, the only revenue loss to be born is the number of alumni who would have been full-price buyers of open programs multiplied by the value of what they would have spent. It’s hard to know what that number might have been, but we can assume that Ross Exec Ed knows its existing open-program customer base, and that it’s not thickly populated with paying UM alumni.

All this is why Professor Scott Derue, Ross School Associate Dean for Executive Education, in an interview with Forbes.com is able to say: “I do not expect a major impact on (Ross) Executive Education from a business perspective. We will continue to serve our clients at a high level and enroll participants from across the globe in our open-enrolment and custom programs.”

MBA Calculus

On the other side of the ledger, the move has various significant upsides.

First, it completely changes the Ross MBA cost-benefit calculation, not to mention that of all other Ross and UM degrees. The $61,590 per year (full-time MBA, out of state) for two years that the Ross MBA pays will now buy them as much business school education as they could ever use.

This should drive up MBA admissions interest, and therefore student quality, all of which will push the Ross MBA up the business school rankings, where it is currently ranked 24th in the world.

Full-time MBA–the  traditional flagship b-school degree–rankings have an disproportionate effect on the general reputation of a business school and the desirability of all its products and services. So pushing its MBA ranking gives the Ross School impetus in executive education and all across the board in gaining parity with the historically elite providers such as Harvard, Wharton, Stanford, Chicago GSB, and European equivalents LBS and INSEAD.

MOOCs

There are other benefits. Open short-courses, which have always required a heavy and consistent marketing spend, are becoming harder than ever to sell due to mostly free MOOC (massively open online course) purveyors such Coursera, edX or Udacity, as well as readily available product from a myriad of b-schools, policy schools, and wider professional education providers. There is huge pressure on profit margins.

So Ross is astutely giving away product that has become quite difficult and costly to sell.

But part of the reason for keeping open programs going is they function as a “shop-window” for the in-company custom side of the business. This side, with bespoke programs designed to directly advance clients’ strategic and business interests, typically renews via senior relationships and is less sensitive to price.

Furthermore, from a marketing point of view, the alumni who see benefit in the open programs they will now attend become gateways to custom programs potentially sold to the organizations they work for.

Donor dividend

Still more benefit is to be had from genuine alumni integration into the life of the business school. B-schools tout the value of their global alumni networks, but beyond immediate cohort friendships this benefit is at least dubious, and perhaps widely overestimated.

When Derue says: “We are redefining the relationship between student and school to be a lifetime partnership,” he has a valid basis to claim there is a real possibility that Ross alumni will be around, involved, integrated, and so add value in a way that other schools cannot match.

And, to cap it all, there’s a likely quid-pro-quo donor dividend. Being active in the life of graduates and giving them clear and present value is not going to hurt the Ross School or UM when it comes time to solicit alumni donations.