Unit 4: Cost Problem: The Revenue-to-Cost Spiral

The revenue-to-cost spiral results in cost disease within higher education. In his article, Martin (2009) maintained that in private industry revenue-to-cost spiral occurs when "higher revenues induce higher costs and those costs are used to justify future calls for more revenue" (p. 3). Unfortunately, costs in higher education are generally capped only by the total revenues. In other words, unlike private industry, a college or university cannot spend more than it takes in - unless of course the administration wishes to appear incompetent. To make matters worse, there are generally no incentives for colleges and universities to minimize costs. Martin observed that higher education is similar to private industry in that "as revenue increases, faculty, administrators, and board members extract more surplus from the cash flows in the form of higher costs and then use those costs as justification for more revenue" (p. 12). The cycle begins again next year thus developing a never ending spiral between revenues and costs. This creates enormous pressure thus forcing colleges and universities to seek out more revenues rather than cut costs. Regrettably it is often the students who must bear the brunt of the costs through higher tuition. It is certainly easy to see how the revenue-to-cost spiral is a problem that contributes to the cost disease in higher education.

Reference

Martin, R. E. (2009). The revenue-to-cost spiral in higher education. Raleigh, NC: The John William Pope Center for Higher Education Policy.