How to move on from simple counting to measure program efficiency

As I see the regular drum beat of program closures continue to make headlines, I wonder if decision makers have the right tools at their disposal to effectively measure program health. One of the most common justifications for eliminating programs is their low financial efficiency.

While financial efficiency is certainly among the critical metrics required to evaluate programs, it needs to be measured accurately to be an effective decision-making tool. Very often, low program headcounts, as measured by number of enrolled or graduating students, is cited as the metric used to gauge financial efficiency.

Unfortunately, this simplistic analysis often hides deeper truths, misleading decision-makers and disservicing the students and faculty who benefit from small but sustainable programs.

Follow the contribution margin

The core measure of financial efficiency for the academic curriculum of a higher ed institution is contribution margin. Contribution margin is a standard financial metric used across industries that measures the difference between revenues and the direct expenses incurred to generate those revenues.

In a higher education context, revenues come from student tuition and fees paid to take classes. Direct expenses consist primarily of the wages paid to instructors to teach classes. Thus, the class is the core economic unit of a higher ed institution, and the best way to measure contribution margin is to calculate it for each class taught.

Contribution margin, by design, does not include indirect expenses, such as administrative overhead, building maintenance, etc. The reason for this is that direct expenses vary in response to the teaching load whereas indirect expenses do not change on the margins; for example, adding another section of a course may require incurring the expense of an additional adjunct faculty to teach it, but likely has a negligible impact on the building maintenance costs nor does it materially change the institution’s administrative burden. Thus, direct and indirect expenses have different operational drivers, meaning that optimizing the different types of expenses requires very different decision making processes.

Program efficiency is class efficiency

Our intuition tells us that a larger program (i.e., one which enrolls or graduates more students) should be more financially efficient than a smaller program. This relies on two basic assumptions:

1. Revenues are roughly proportional to the number of students. This assumption largely holds true, and a larger program will typically have higher revenues than a smaller program.

2. Expenses are roughly fixed, with all programs having a similar overall expense, or at least that expenses reliably scale more slowly with student headcount than revenues.

It is the second assumption that is wildly off base, meaning that large programs can be highly inefficient while small programs can be extremely efficient.

Expense structures are driven by class sizes, not program sizes. At the class level our intuition that larger equals more efficient does hold; teaching one class with a hundred students is obviously more efficient than teaching a hundred classes with one student each, since the revenues are the same, but the instructor expenses are a hundred-fold greater in the latter scenario.

The fundamental reality for program efficiency is that a program is financially efficient if and only if the classes taken by its students are financially efficient. If a small inter-disciplinary program only graduates a handful of students per year, but all of the classes taken by those students are full of students from other programs, then its overall efficiency will be high. If a large program offers a huge number of elective classes so that each class contains only a small number of students, then its efficiency will be low. In fact, one of the best ways to promote financial efficiency at an institution is to encourage programs to share as many classes as possible with other programs.

It’s time to make the margin

If class contribution margin is demonstrably the superior metric to measure program efficiency, then why do so many institutions and policy makers continue to rely on the number of graduates or enrollments as their working proxy?

In my experience it is because measuring contribution margin is a challenging data-intensive task. At most institutions, tuition is not assessed with each class as an individual line item. Assigning tuition to classes thus requires pro-rating each students’ total across their classes taken. Then there are the complexities of financial aid, course fees, administrative fees, tuition rate differentials, etc. Allocating instructor expenses is typically an even more involved process, particularly for full-time faculty. Annual salaries must be adjusted for non-teaching workloads (e.g., research and service), pro-rated across classes taught, take into account classes with multiple instructors, and more. It’s almost enough to make the simple task of counting graduates look appealing!

Contribution margin, however, absolutely can be calculated with the right tools and processes in place, providing much needed clarity to institutional decision makers. While the implementation details will vary between institutions, the essential concept works remarkably well across the higher education landscape, from community colleges to research-intensive universities, and for programs at all degree levels. For nearly all institutions, one of the absolute best actions available to improve their financial health is to better measure the financial health of their programs using class contribution margin analysis.

This article was originally published by University Business June 2025. You can read it here: https://universitybusiness.com/how-to-move-on-from-simple-counting-to-measure-program-efficiency/