The Cost of an MBA: Why Pay Higher MBA Fees?

Why The Cost of an MBA Varies from School to School

The cost of an MBA, or the fees business schools charge for their MBA programs, can vary considerably depending on the school you're applying to.

The price tag that each business school places on their MBA program depends on a variety of factors. As an MBA applicant, you need to understand that, although they are all given the same three letter acronym, no two MBA degrees are the same.

MBA Pricing Explained

Business schools do not operate like supermarkets. Why is this and what does this mean for you as an MBA applicant?

A supermarket has a simple business model: to provide the same kind of goods as their competitors but at the lowest cost possible; to encourage the customer to spend the highest percentage of their budget in their store and not with their competitors; and to drive down the cost of buying their goods to sell at, usually, the highest profit.

MBA degrees, however, operate on a different model. Business schools don't think of their service as a ‘cost’ to their customer (the MBA student), but as an ‘investment’ in the MBA student's future career.

The value of a business school comes when an MBA graduates the program and rejoins the workplace, and finds employers that are willing to match their improved salary expectations and to provide a good working environment.

This is why it’s essential that candidates realize that MBA degrees are not all the same; and nor is the cost of the varying MBA degrees on offer.

MBA cost versus return: do the math

There is no such thing as a generic MBA degree. You graduate with ‘an MBA degree from Harvard’ or ‘an MBA degree from London Business School’. That's why your choice of business school is perhaps the most important career decision that you can make.

It’s true that the investment on an MBA degree from the best business schools can seem like a huge expense.

London Business School’s 18-month MBA program costs almost GBP£50,000 (around USD$80,000) in course fees alone, though the school claims an average salary of almost three times that after graduation. Wharton’s 21-month MBA program has fees around the USD$85,000 mark with expected average salaries of about USD$120,000. In both cases, the return on investment (ROI) of the MBA degree is high.

So, why do MBA candidates commit to such seemingly extravagant course fees for the best business schools when there are far more moderately priced MBAs available in virtually every country in the world?

IE Business School's International MBA program fees for their November 2012 and April 2013 intake are scheduled to be EUR€59,200 (a little under USD$78,000), though IE topped the BusinessWeek ranking for Return on Investment (ROI) in 2008.

Lisa Bevill, IE’s director of admissions, notes the advantages of studying at a top-ranked business school: “The first is high-caliber classmates [and] a key part of your learning will come from your classmates, so it’s important who is in the classroom with you. They turn into a high quality alumni network, which has a huge impact on future job opportunities and business partnerships.

“Top ranked schools will also be audited by rankings and are more likely to be recognized by world leading accreditation bodies – meaning that the MBA programs at these schools guarantee a certain level of academic standard.”

The real cost of an MBA

Nick Barniville, MBA director at the European School of Management and Technology (ESMT) in Berlin, says: “It’s very naïve to choose an MBA on the basis of price. We teach MBA students to take a more rational approach. A ‘cheap’ MBA can be a much worse investment decision than an ‘expensive’ MBA.”

For Barniville, looking at business schools and applying the kind of financial models that MBA programs encourage is an advantageous way of working out whether an MBA degree at a certain business school makes a reasonable investment.

“Potential MBA students make their decision based on their calculation of the net present value (NPV) of the investment. They take the opportunity cost of foregoing their current salary for either one or two years, add this to the price of tuition, less any financial aid available, and living expenses in their target cities, and compare this to the expected increase in income that they are likely to earn over their career post-MBA. All else being equal, the school which has the highest NPV will be chosen.”

However dozens of decisions go into deciding the right business school for you other than just cost or return on investment of an MBA.

Is the school the right ‘fit’? In other words, does the culture of the business school seem to suit you?

Are the academics interested and experienced in what you want? Is the school in the right country or strong at the areas of business that you’re interested in? Will you get the career you’re after at that school?

Liz Wagoner, assistant director of admissions at Boston University's School of Management, says: “Students should look at their career goals and which program is the best to help them achieve those goals. We encourage candidates to consider the resources and the network that they’ll have access to.

“Boston University is the fourth largest private research institution in the US, and this allows our students some incredible opportunities as far as both resources and networking. At the end of the day, though finances and rankings should be part of the conversation, ultimately it should be about fit and finding the best program for the candidate.”

MBA salary expectations

While much is made of the post-MBA salary increase, it is important to remember that most MBAs expect to work for several years, even decades, after their course finishes.  That's why it's important to also account for the money made over the length of your post-MBA career. It's impossible to predict this accurately, but it does not take an overt risk to predict that an MBA will catapult most graduates into a higher revenue stream.

The BusinessWeek ranking of business schools according to return on investment is therefore a useful indicator. However, the fact that it only bases ROI on how long it will take the average student to repay the course fees makes it slightly limited.

Extended over the decades of an MBA alumni's working life it can be expected that graduates from the top business schools will find that they repay their decision to do an MBA many times over.