The 2U Pivot

I missed the 2U earnings release on July 28th and the press release on July 29th announcing their “new partnership model to increase access and affordability in higher education, embracing edX’s flexible approach to degree support.” I didn’t miss, however, the article in Inside Higher Ed describing its pivot.

The item that Inside Higher Ed co-founder Doug Lederman chose to focus on was 2U’s “reset of their core revenue sharing fee for degree programs” if its current partners lower the tuition that they charge students through the 2U online partnership. Mr. Lederman described the reduction of the 2U 60 percent (+/-) of revenues fee to a base fee of 35 percent as a fee much more in line with other OPM’s (online program managers) and competitors such as Coursera.

Mr. Lederman indicated that the reason 2U took such a large share of tuition revenue was its up-front investment to build online degree programs for its partners and the high cost of buying Google and Facebook keywords to market to students. Through its ownership of edX, 2U believes that it can support the lower cost basic fee by eliminating the SEO lead generation work and marketing to the 45 million plus people who have used the edX platform.

It must have been good fortunate or an oddly strange coincidence that I recently wrote about the Phil Hill online education model which he noted was the OPM successor model. I noted that 2U’s most recent annual report indicated that it took them three years to recover their upfront costs to develop an online program and market it until its enrollment is generating a positive margin. The annual report also noted that 2U’s 230 university clients were seeing more and more regional competition.

In their press release, 2U provided a graphic showing their stackable bundle. I appended it below.

The list of items included in the core bundle are bulleted below.

  • Lead nurturing (lead to enroll)
  • Student support (enroll to grad)
  • Digital Campus (LMS + ecosystem)
  • Program set up, pricing strategy, & ongoing management
  • Core marketing (platform, brand, organic, high-intent paid digital)
  • State authorization & licensure services for program launch.

I don’t know what the “high-intent paid digital” component of the core marketing services represents. Given the description of the enhanced marketing that I’ve listed below, it must not be much. Enhanced marketing services which will cost a university partner 15 percent of revenues include:

  • Paid digital & non-digital marketing support to drive scale
  • Scholarship sharing to optimize funnel conversion
  • Product marketing research
  • Access to 2UOS marketing tech & services

These “enhanced marketing” services are how almost every online program is marketed to the world at large. Buying keywords on Google, Facebook, Microsoft Bing, Yahoo, and other online social media platforms, optimizing them through SEO (search engine optimization) techniques, and converting them to leads are what drive up the marketing costs per new student to $5,000 or more.

I don’t believe that the edX platform as currently configured can generate the high quality, high volume leads that 2U’s university partners are used to. Phil Hill’s diagram refers to the “flywheel effect” of millions of low-cost leads where free courses are used to upsell learners to certificates that they pay for and then to degree programs that cost more because of the number of courses required. I believe that most of the edX learners are attracted to the platform because of the free courses. I doubt that most of them will be interested in the expensive 2U graduate degrees.

To ascertain an average cost for a 2U graduate program, I accessed their 2020 Transparency Report. Sales and marketing expenses decreased that year from 22 percent to 18 percent. I assume they believe they can continue to decrease those expenses as a percent of revenues to 15 percent. My first question for them is: How do you expect to reduce sales and marketing as a percent of revenues if you’re reducing tuition revenues?

The 2020 Transparency Report lists a price per credit for master’s degrees ranging from $352 to $2,592 per credit. In the footnote, the report states that the average credits for a degree are 47. Simple multiplication indicates that the tuition revenues for a master’s degree ranges from $16,500 to $121,800. I’ll randomly pick the midpoint between those two ranges which is $70,000 as the “average” cost of a master’s degree for the illustrative points of my discussion.

If the partner university does not opt to reduce their tuition and lower the percentage fee share, the 15 percent of tuition allocated to Enhanced Marketing represents $10,500 per master’s student paying $70,000. The university’s 40 percent tuition share represents $28,000. Let’s say that there are 200 students on average enrolled in each master’s program. The university’s tuition share would be $5,600,000 (note: I am not making an assumption for the period of time that it takes to complete a master’s degree).

I built a table that shows the impact to the university partner and the impact to 2U of various levels of tuition reduction for a partner that opts to cut tuition and go with the 35 percent fee share.

Impact of Master’s Degree Tuition Reductions to Net Revenue for University Partner & 2U
Current Tuition Proforma Tuition
 $70,000  $50,000  $40,000  $35,000  $25,000
University Rev share % Proforma University Rev Share %
 40%  55% 55% 55% 55%
University Rev/student Proforma University Rev/Student
 $ 28,000  $27,500  $22,000  $19,250  $13,750
2U Rev share % Proforma 2U Rev Share %
60% 45%  45%   45%  45%
2U Rev/student Proforma 2U Rev/Student
 $42,000  $22,500  $18,000  $15,750  $11,250
2U Marketing % 2U Proforma Marketing %
15%  0% 0%  0%  0%
2U Marketing $ 2U Proforma Marketing $
 $10,500                      –                     –                     –                   –
2U Rev/Student w/o Mkt 2U Proforma Rev/student w/o Mkt
 $31,500  $22,500  $18,000  $15,750  $11,250
Current Students Current Students
 200 200 200  200  200
Rev to University Proforma Rev to University
 $5,600,000  $5,500,000  $4,400,000  $3,850,000  $2,750,000
Rev to 2U w/o Mkt Proforma Rev to 2U w/o Mkt
 $6,300,000  $4,500,000  $3,600,000  $3,150,000  $2,250,000
Proforma Rev Increase/(Decrease) to University
 $(100,000)  $(1,200,000)  $(1,750,000)  $(2,850,000)
Proforma Rev Increase/(Decrease) to 2U
 $(1,800,000)  $(2,700,000)  $(3,150,000)  $(4,050,000)
# Students Needed to Match Original University Rev
 4 55  91 207
# Students Needed to Match Original 2U Rev
80 150  200 360

There was no scientific method to the proforma tuition points that I selected. I simply chose numbers that were less than the original “average” for a master’s degree and tried to space them out with a “reasonable” lower range. For simplicity purposes, I assumed that the university continued to utilize 2U for support services and content development which meant that the fee reduction was 15 percent for enhanced marketing and not 25 percent.

The projections were insightful. It’s my belief that very few of 2U’s existing university partners will substantially change their fee arrangements unless the core bundle price is less than 35 percent. My reasoning is simple. I don’t believe that the edX marketing platform will provide enough targeted leads to enroll the original number of students (200) if the enhanced marketing dollars are reduced. I think most of the edX learners are looking for inexpensive courses, not expensive degrees. My illustrative “extreme” tuition reduction from $70,000 to $25,000 is not enough, in my opinion, to attract 407 total learners if no enhanced marketing dollars are being spent.

Obviously, 2U and edX have mined all the available data for their 45 million learners. That information is not published and would likely be deemed proprietary. Will this new pricing structure work for new 2U/edX clients? Perhaps it will. Much will be dependent on the targeted degree, the targeted number of students, and the targeted marketing dollars. My guess is that 2U assumed its chances of adding new customers and new degrees was greater with this structure than its risk of having existing customers take the risk that they could sustain their existing student enrollments with limited marketing expenditures. Only time will tell.

Subjects of Interest

EdTech

Higher Education

Independent Schools

K-12

Student Persistence

Workforce