Online Education Business Model(s)
A recent article on OPMs from Phil Hill’s PhilonEdTech blog, triggered a link to an article of his from a year ago. In that article, he utilized the graphic below to describe the “emerging OPM successor model.”
While I agree that this model reflects a possible strategy for 2U/EdX and Coursera, I’m not sure the other OPM’s have access to millions of registered global learners. Nonetheless, I found the graphic helpful for a discussion about the online education market in general.
If you look at the lower right-hand corner of this graphic, the small image reflects the current OPM partnership with its higher education clients. In return for developing, hosting, and marketing online degrees, the OPM and university would share the revenues. Phil’s image with the single $ attributed to the OPM versus the $$ to the university is reversed since many of those original arrangements provided as much of a 60 percent revenue share to the OPM.
Critics of OPM’s have argued that the 60 percent revenue share was too much and led to unnecessary and inefficient tuition prices. They are partially correct. If the university had taken the time to build an online degree and market it on their own, the tuition might have been lower than the tuition charged by the OPM, particularly if the university was able to scale the online offerings. However, some provosts and deans thought otherwise. With a small investment of time working with the OPM to provide curriculum, the university received 40 percent of the tuition by allowing the OPM to use their brand and do the hard work, market the university’s online programs to prospective students.
In 2U’s most recent 10K annual report filed with the Securities and Exchange Commission, the company disclosed that it typically takes three years for them to recover their upfront costs to develop an online program and market it until its enrollment is generating a positive margin. They have 230 university clients and note that they are seeing more and more “regional” competition as more universities offer online degree programs.
When I see the notation to the immediate left of the graphic that states “incentive for more partners and courses”, I agree that there is always an incentive for more partners and courses for the traditional OPM. At the same time, I believe the evidence is strong that there are a limited number of students (non-traditional and traditional) who are interested in online degree programs. Higher education enrollments have decreased during the pandemic, and no one is predicting an overall rise any time soon. I believe that Phil’s language is intended to reflect offerings beyond degrees, but I’ll limit my observations to degrees for now.
The next notation to the left in this diagram is marked “University or Corporate Branded Content (MOOCs, Free Courses)”. This is an area that is difficult to define, hence the parentheses notating MOOCs and Free Courses. There are a handful of large MOOC providers and 2U bought one of them (EdX). Yet, there are many universities that distribute content related to their brand.
EdX’s original concept was to offer MOOCs through its elite partners (MIT, Harvard, Berkeley, the University of Texas System, The University System of Maryland, Georgetown University, Brown University, Arizona State University, Dartmouth College and 160 others including many outside of the United States). The EdX website says that they offer 2,800+ courses and have had 44 million people enroll in at least one of their courses. That’s why the next graphic moving clockwise to the left says “low-cost acquisition.”
I disagree with that notation. It’s possible that it would be more accurate if it said “low-cost lead generation.” Clearly, 2U had that in mind when it looked at EdX’s 44 million plus people who enrolled in at least one course. Of course, that ignores the low rate of course completion (under 10 percent for EdX and Coursera) as cited in this Inside Higher Education article published in 2019. There may be 44 million potential leads, but that doesn’t mean that a lot of time and money will be spent to try to recruit them to be a paying student in a degree or certificate program.
2U’s recent 10K filing notes that they “invest substantial resources in developing and implementing data-driven marketing strategies that focus on identifying the right potential student at the right time. These marketing efforts make substantial use of search engine optimization (SEO), paid search, social media and custom website development and deployment and [they] rely on a small number of internet search engines and marketing partners.” This is the typical methodology of marketing for all the large online degree providers.
The largest online degree providers (Southern New Hampshire University and Western Governors University are the two largest in terms of online student enrollments) spend substantial sums on television advertising which is not mentioned in 2U’s disclosure. I think 2U relies on the SEO, paid search spending since it’s more targeted and utilizing their clients’ trademarked brands lowers the cost per lead.
It’s tough to find public data on what the average cost is to recruit an online student but if traditional students average $2,100, online students are going to be higher because of the tremendous competition. I have heard that the universities with the highest number of online enrollments have an average student acquisition cost exceeding $5,000. If you’re offering a $45,000 degree, a student acquisition cost of $5,000 might be worth it, but if you’re selling a low-cost course or certificate, you must find ways to acquire students at much lower costs.
That’s the theoretical premise of MOOCs or free courses which is the graphic in the upper left-hand corner of Phil Hill’s chart. Attract people to enroll in free courses and “upsell” them to enroll in certificates and degrees. It’s not as easy or as inexpensive as it sounds. When you introduce the “spectrum of paid offerings” via the graphic in the upper right corner, the number of competitors increases substantially.
There are nearly 6,000 colleges and universities in the U.S. according to the Department of Education. Approximately 4,000 of them are degree granting. As we know, not everyone seeks to earn a degree. The providers of short-courses, professional certificates, bootcamps, and sub-degree certificate stacks are not likely to be the 6,000 colleges in the U.S. who could also be in that business.
The reason that colleges and universities are having a tough time pivoting to this other educational market has a lot to do with the fact that their traditional business model which includes marketing to prospective students does not align with the business model for providing short courses, professional certificates, and bootcamps. Courses change quicker, students expect on demand course availability, and jobs availability or promotion opportunities after completing these shorter programs.
If you’re contemplating an investment in a provider in this non-degree market or if you’re a leader at a traditional college or university that is contemplating entering this market, you must get a firm understanding of the marketing strategy that will enable you to be successful. I haven’t seen many marketing flywheels in education or any other industry for that matter. Just as a flywheel needs energy to propel it on its next rotation, marketing needs money. The three biggest questions are: (1) how much will the student/learner acquisition cost be, (2) how many students/learners can I attract at that price point, and (3) what will the average revenue per student be?
Good luck wrestling with those questions. There are no easy solutions and many startups and new providers fail to generate a sustainable number of students/learners at an affordable cost.