Unbundling — the future for higher education?

Part one: laying out the stall

Do you still buy albums — and skip the tracks you don’t like — or do you download individual songs, and only pay for the ones you want? The move towards unbundling has gathered momentum across industries including media, travel and leisure for two key reasons: in an environment where choice is almost limitless, unbundling not only makes things cheaper, but it also personalises your choices.

Education is experiencing something similar, and the unbundling of higher education is something we will see happen more and more over the next few years. It won’t happen immediately, for reasons we shall see. But a gradual shift is likely and — perhaps — even inevitable.

If we’re going to explore the pros and cons of unbundling, we first need a working definition. This from Michael B Horn at the Christensen Institute is fit for purpose:

‘As a technology matures […] new disruptive innovations emerge that are more modular — or unbundled — as customers become less willing to pay for things like power and increased reliability but instead prioritize the ability to customize affordably by mixing and matching different pieces that fit together according to precise standards.’

In practice, consider the way that easyJet operates, compared to how airlines used to be. Forty years ago, flying was a premium activity. easyJet’s model, based on Pacific Southwest Airlines in the US, is to identify that much of this premium comes from things customers pay for, but don’t necessarily want — a bundled product.

Jose Ferreira, CEO of Knewton, explains how bundling works. ‘The complexity of the bundle reduces the product’s transparency, impeding consumers’ ability to do cost-benefit analysis.’ In other words, you don’t notice that you’re paying more than the sum of the parts. This is where the first part of profit for bundles comes from. ‘The bundle includes a lot of stuff you could use but don’t,’ Ferreira says, ‘i.e., “breakage.” ’ This is the second and third part of profitability. A lot of the features on offer don’t get used — not everyone drinks the complimentary drinks on the flight. And for Ferreira, ‘breakage is a free lunch for suppliers; they are charging for services they don’t deliver. A few businesses are predicated entirely on breakage — e.g., gift cards, which count on a significant number of people never redeeming them.’ Business models with high breakage are not necessarily ‘doing something dubious,’ it should be emphasised. ‘There may simply be no obviously better pricing model.’

However — the internet is a great leveller, and customers are becoming more aware of what things are really worth. Add to this the entrepreneurial spirit of seeking gaps in the market, and you have a recipe for innovation. Pacific Southwest/EasyJet saw that by removing whole swathes of add-ons, customers could be offered unbeatable prices — and they would accept loss of luxury as a price for this. For instance, having to queue for an unallocated seat; paying for food and drink; and seeing flying as more like catching a bus than a premium service. ‘When a product’s outcomes are transparent, complex product bundles don’t last long,’ explains Ferreira. ‘They are inevitably broken down over time into smaller unit sizes, as consumers purchase only what they need. It is only when outcomes are non-transparent — as in, for instance, education (up until now) — that complex product bundles can survive and price can keep increasing.

Citing Andy Rosen and his book Change.edu, Ferreira argues that traditional universities make competitive profits in this way — bundling products services and then charging an all-in price for them. ‘Originally, the university bundle included courses, food, and board. Over time they’ve added more services, at first academic (extracurriculars, better libraries) and now luxury (rock-climbing walls, European-style bistros).’

Emphasising the point, Ryan Craig and Allison Williams write in Educause Review that ‘bundling has been central to the higher education business model for centuries. Colleges and universities combine content and a wide range of products and services into a single package, for which they charge “tuition and fees.” Tuition and fees cover everything from remedial coursework to elective courses to advanced courses in a chosen major and, extending far beyond the academic program, are used to pay for the 4 Rs.’ (Those four ‘R’s being — Rankings, Research, Real Estate and Rah! [sports].) ‘As a result,’ Craig and Williams say, ‘when students pay for a degree, they are also buying products and services related to real estate, dining, sports, and research.’ And in our current scenario, ‘higher education is still trending towards increasing bundle size,’ Ferreira says. ‘The more they bundle, the more they can raise prices.’

From theory to practice

But technology is changing this model — and changing it fast. Combine this with consumer savviness — digital natives expect to be able to pick and choose what they want now, only pay for what they need, and exercise choice by going elsewhere if they don’t find what they want — and you have a potent agenda for change.

As education services become more transparent, bundling becomes less credible as a model. Indeed, we are already seeing traditional universities relying as much on their prestige factor as on quality of product, because they can see that there is now nothing stopping start-up providers offering the same quality of product at much cheaper prices.

Jose Ferreira shows how simple this is in theory. Let’s imagine, he says, that we want to create ‘an unbundled, purely academic university. We’d offer high-quality courses and none of the other stuff.’ Ferreira suggests that ‘we’d pay professors $200,000 (including benefits, payroll taxes, etc.). At those rates we could attract some of the very best professors in the world.’ Of those professors, each might teach 250 students a year ‘and does nothing else’ (i.e., no research.) ‘Add in materials and tech fees around $100 and we could offer these courses for $900 per student per course, excluding marketing costs and considering only the cost of product delivery. These courses would be academically equivalent (incredible professor, great materials, office hours) to any “regular” university course, but delivered online at around 20% of the all-in cost’ of a bundled course that includes accommodation, food, gyms, bars, and for good measure, those ‘Jacuzzis and rock walls’.

Ferreira argues that ‘universities are creating courses like this as we speak’. He acknowledges that they aren’t always as good as the model example, ‘but they’re getting better all the time.’ Such ‘high-quality à la carte courses will become commonplace,’ he concludes.

In part two of this article, published Thursday, we’ll explore the idea of these à la carte courses — and ask whether they will indeed become ‘commonplace’.

This article was first published at http://elu2016.wordpress.com/

Sources at the end of part three.