More than a Signal: Deconstructing the Value of an MBA Degree

I have an MBA from Northwestern University’s Kellogg School of Management. This is a top program and I’m proud of having been accepted to and graduating from it, but it did cost me almost $150,000 in direct tuition. So, do I think it was worth it? I think so, but I’m not always sure. It’s perhaps a more complex question that requires consideration along multiple dimensions. In this article, I’ll explore the value of an MBA.

In general, on average, how much is an MBA degree worth? 

That seems like a specific question to which there should be some specific answers. 

This article by Balance Careers focuses on applying a financial lens to the question. Here, you’d try to weigh two years of forgone salary and the direct cost of the MBA program against the increase in salary you’d earn after you have an MBA. So, let’s assume you make $75K per year, and the MBA itself will cost you $50K per year. It’s a two-year program. This means you are giving up $150K in salary over the two years. And the degree itself will cost you $100K.  Obtaining your MBA just cost you $250K, and you now need to compare that to the increase in salary you’ll experience from having the degree.

The article above provides example differences between pre-and post-MBA salaries and it seems like the difference is about $12,500 on average. Now, let’s use a little GMAT math. How long will it take you to pay back your MBA in this scenario? $12,500 per year * 20 years = $250,000. It will take you 20 years. That is a long time. You might argue that a $12,500 increase in salary is less than you’d expect. But I’d point out that many MBA programs cost much more than $50,000 per year.  I think pursuing an MBA based on a pure, realistic quantitative financial analysis can often be a tough sell. To convince yourself pursuing an MBA makes sense, you need to believe the degree will create opportunities that you can’t necessarily build into a financial model, but which represent substantial upside for your career.

But before we explore this idea further, I think it’s important to understand the fundamental nature of an MBA degree.

What does an MBA provide?

Obviously, an MBA is a master’s degree in the administration of business. But an MBA degree is not like a veterinary, medical, or nursing license that functions as a very real barrier to entry into a career.  You cannot be a vet, a doctor, or a nurse without having a VMD, MD, or RN degree. Acceptance rates into vet and medical school programs are low, from 10 to 30%.  Pass rates for the licensing exams (medical boards, NCLEX, etc.) that come after these academic programs reflect yet another barrier to entry into these careers. But if you aren’t concerned about the rankings or prestige of the program from which you graduate, you can get an MBA. Some MBA programs have acceptance rates near 100%.

In other words, if you have a VMD, an MD, or a RN, that without a doubt means something very specific and will create new career opportunities for you. An MBA is very different. Having an MBA does not, generally, automatically mean you can do any specific job that someone without an MBA can’t do.

This is because an MBA doesn’t always provide very specialized business skills. Although it’s an advanced degree in the study of business, some students enter MBA programs from completely different professions (e.g., teachers) and are as much being introduced to various business topics as they are building advanced knowledge about those topics. Yes - others do have lots of previous business experience, and they pursue more advanced knowledge in targeted areas. Either approach to an MBA can make a ton of sense, but it’s important to recognize the difference between the two and understand your unique situation.

The value of an MBA depends very much on your personal situation and how you plan to use the degree. The degree itself doesn’t necessarily offer any new career opportunity to you.

Should you get an MBA?

This is a personal question. It really depends on your situation. I think individuals generally pursue an MBA for one or more of the following reasons (though I’m sure I might be missing one or two):

• To “signal” that they are accomplished and intelligent professionals by associating themselves with an MBA brand
• To explore switching careers and take a break from your current one
• To obtain specific new positions at their current employer or in related industries
• To create “option value” and in a general sense, make themselves more marketable because they have “advanced” business skills
• To build a network of like-minded, successful peers
• To work on a specific business or project idea
• To build management, communication, and leadership skills
• To build specific more technical business skills (e.g., marketing, finance, product management, search engine optimization, etc.)

Some of these are, I think, more dangerous than others to rely on in understanding whether an MBA would be of value to you. For example, I would argue that, because anyone can get the letters “MBA” next to their name if they want to (i.e., by applying to and attending an unranked GMAT-optional MBA program, for example), just having an MBA doesn’t signal all that much. But, if you’ve attended a Top 10 MBA program, that’s a clear signal. An MBA from a top 10 program clearly tells future employers and business partners that you are credible, competent and talented (on some level). The same goes, maybe, for the top 20, or even 30 schools. But at some point, if you go to say, Michigan State for your MBA (~$50K per year tuition) because you are hoping to send a clear signal that you are talented, that is simply not as valuable a signal as spending $55K to get an MBA from UCLA. It’s important to be realistic about the brand you are buying into and the signal you think you are sending.

How can one get the most value out of a decision to pursue an MBA?

I think a better reason to obtain an MBA is because you have specific plans you would like to test. You want to start a project or a business in the process of building new more general business skills. In this Poet’s and Quants article on the value of an MBA, a self-made millionaire who doesn’t have an MBA  offers valuable advice on getting an MBA. Brian Wong, CEO and Co-founder of Kiip, a mobile advertising company, says “if you’re pursuing an MBA for a “safety net” or in hopes that it will give you “direction,” you’re doing it all wrong….my whole point is, I don’t want you to take an MBA for all the wrong reasons…don’t do something for some weird backup plan… Do something for an intention and I think you’ll get way more out of it.”

I think that’s good advice.

I would recommend not forgetting about the value of the brand and the signal when choosing where to get an MBA. Try to identify a school that helps you learn new things, where you can work on or build something or explore a specific new career, and that signals to others you are a valuable potential employee or business partner.

One way to increase the value of your MBA is to reduce its direct and indirect cost. One of the biggest “costs” is foregone salary of stopping your career for two years. If you consider an online MBA, you don’t have to stop working. 10 years ago, when perhaps the first few online MBA programs were being launched, the schools offering them where generally not very reputable, and you might be in danger of wasting a lot of money and time. But in 2018, many very reputable MBA programs are offering online programs taught by the same professors.  They provide the same MBA degree and same brand recognition. For example, Indiana University’s online MBA is ranked #2 by US News, and its full-time program is in the top 30.

In this article, the Mason business school at William and Mary makes the point that in 2018 university reputation outweighs any stigma associated with choosing to do your MBA online. I agree.

In sum, the value of an MBA is highly dependent on your personal situation, why you are going and what you do when you are there, and of course, also on where you go to obtain your MBA.

About the Author

Mark Skoskiewicz is the founder of MyGuru. For more information on our GMAT tutoring options, click here.