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Beware fees: your future depends on them

In March, most colleges put their prospectus to bed. This leaves time for design, proofing and printing but rarely leaves enough time for the complex business of course planning. Matching staff, rooms and qualifications to potential students is hard enough. Doing so in a way that delivers funding and achievement targets is particularly taxing. Somehow, by Easter, it is finished. The course fee is often an after-thought. Setting fees is a simple process in most colleges: take the hourly rate from last year and apply a fixed percentage increase. The fees you set this summer last until next year. And then you start again.

Anyone booking a journey knows that price-setting can be more elaborate than this. The price of a Virgin train ticket varies by a factor of three depending on when you start. Leave at 8am, pay pound;90. Leave at 10am, travel for pound;30. Yield managers in airlines vary prices on an hourly basis in response to demand. Just now, there are lots of price cuts and lots of offers. A more successful business - Sky TV - offers a bewildering range of packages to generate income running at pound;350 per subscriber per year. It charges just enough to fleece its customers without losing them. Even your local bar may be in on the act. Happy hours allow you to get drunk for less, as long as you do it early. All fixed-cost businesses - bars, TV stations, airlines - know the value of varying prices to raise income.

Colleges are another fixed-cost business but get more money from government than from fees. Sophisticated pricing strategies are a distraction. Yield management exists but the techniques are focused on generating as much Learning and Skills Council funding as possible. A network of consultants helps squeeze the last penny out of the funding formula. An army of auditors helps the LSC claw some of it back. The new system of development plans may curb this wasteful activity but not yet.

Fees may be marginal to many colleges but they have attracted a lot of interest from the Department for Education and Skills. It has employed two different market research firms to carry out surveys on fees. One survey is looking at what colleges charge and why. The other survey asks learners what they think about what they pay. This research is part of the adult learning funding review and may help the department come up with a new policy. Its last attempt at a policy came in 2000 when a consultation paper suggested fixing fees nationally. The Government would pay 75 per cent of course costs. Fees would pay 25 per cent. There was strong opposition in the consultation and the policy was softened. The Government expects fees to cover 25 per cent of costs but lets colleges charge what they want.

This time, the policy will be more focused. The Learning and Skills Development Agency has proposed a fourfold classification of courses based on student motivation. Using these distinctions, courses preparing people for work might end up with higher government subsidy and lower fees than courses taken for recreation. The overall aim will be to target subsidy and raise fee income. The trouble will be in the implementation. Past efforts at inferring motivation from the qualification taken failed. Determined hobbyists will do any kind of vocational qualification if it gets them a cheaper course.

The growing pressure to raise fee income comes after years of measures that have reduced it. The list of people entitled to free courses has expanded incrementally over the past 10 years as a result of government targets and the growth of tax credits. The LSC introduced rules in 2001 that capped fees to prevent what it defines as overcharging. Most significantly, the relentless pressure of enrolment targets keeps college fee levels low. The marginal benefit of the funding brought by an extra student is almost always greater than the marginal cost of cutting their fee to recruit them.

Some colleges offer full-time courses for free to get students in.

In the long-term, generating fee income is the secret to prosperity in adult learning. People of all levels of income will pay for what they value - mobile telephones, for example. Motivated learners will pay fees if they can afford them. Affordability means keeping costs low, reducing overheads and offering differential pricing.

In the short-term, the challenge is how to handle 2003-4. Current pay settlements combined with rises in pensions and national insurance add up to a 10 per cent increase in pay costs for 2003-4. The LSC has offered a 10 per cent increase in its rates to help pay this but will students? Government policy created many of the costs. The Government will pick up part of the bill. Closing the gap could mean a tough budget round for some colleges this year.

Julian Gravatt is finance director at the City Lit, London

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