On Monetization in Ed-tech

Monetizing in ed-tech is tough.

Challenges like opaque decision-making processes, slow-moving agreement cycles and the asymmetry between the people who typically procure software (administrators), and the folks who actually use the software (profs, TAs and students), petrify even the bravest of entrepreneurs.

“Go start a VR company, don’t waste your time on this” I recall being told, in the early days of Campuswire, by a successful entrepreneur kind enough to take me to coffee.

“You’re a smart kid, do you really want to spend your 20s doing this?” asked another.

I remember scoffing to myself: “They just don’t get it”.

In my experience, most people who set out to solve problems in education aren’t driven primarily by making tons of money. In fact, many tend to build products that solve real problems but fail to become sustainable businesses, and are eventually forced to shut down.

So, for those of us stubborn enough to eschew conventional start-up wisdom and start a company in this challenging space, there are really just 4 approaches to monetization in higher-ed that anyone’s managed to scale:

1. Selling to administrators (Blackboard, Canvas (Instructure))
2. Not selling at all (Piazza)
3. Selling directly to students (Chegg, CourseHero, StudySoup)
4. Selling to professors (iClicker, TopHat, textbook publishers).

Startups have to tread carefully in choosing which approach to adopt — ultimately, this choice shapes who we hire, what we build, how quickly, or slowly, we move, who our investors are — basically everything about our companies.

Each approach has fundamentally different mechanics and successful companies always orient themselves around serving their customers — the people who actually decide to adopt, and usually pay for, the product. Change the customer and you’re changing the entire orientation of the company.

1. The Administrator-centric approach

Companies like Blackboard and Canvas choose university administrators as their customers.

They drive revenue by convincing campus CIOs, CTOs and other administrative bodies to buy their software. Everything they do as a company, if they’re to be successful, is centered around administrators.

Administrators tend to make decisions carefully, and choose to work with companies with whom they have deep, long-standing relationships.

So, if you’re employing the Blackboard model, your incentive is to invest in building a world-class sales /enterprise account management team to, above all, maintain deep relationships with administrators.

Spend $200k sponsoring that fancy higher-ed administrators conference in Vegas? Yes.

Invest $200k to poach that killer engineer from Google? Em, probably not.

Spend 75% of your time and half your budget interviewing and training sales people? Definitely.

Spend summers coding around the clock to ship heavily-requested features? Nope.

Because the customer (administrator) isn’t actually the user (prof, TA, student), the product becomes secondary, at best, to building a large, profitable business. Even the best businesses can notoriously only do one thing well — the administrator-centric model essentially guarantees that that one thing will be relationship management, and incentivizes companies to invest in hiring as many customer-facing people as possible.

Receiving hundreds of customer support requests? The administrator-centric approach incentivizes hiring more “customer success” people to create more “interactions” with your customers — actually improving the software, so there are fewer support requests to begin with, is, at best, a nice-to-have.

Selling support services can even drive more revenue than comes from actually selling software licenses (pause and consider for a moment the incentives at play here: intuitive, easy-to-use product == lost support services revenue!!).

Successful, sustainable companies are good at driving profits and, in the administrator-centric model, profit incentives are often disconnected, and sometimes even run contrary, to what’s actually best for end-users.

2. Not selling at all

Other ed-tech companies, attempting to circumvent the challenges of the administrator-centric approach altogether, decide to simply give their products away for free.

They don’t choose administrators, professors or students as their customers — they must not have any customers at all, right?

Wrong, of course — by definition, all businesses have customers, even when they’re hard to identify.

Most ed-tech companies who offer “free” products, monetize by either 1) selling advertisements, or 2) selling user data.

College students wield an enormous $574B in annual spending power and there’s an endless list of companies trying to market their products to them — selling access to these students, in the form of ads, is big business.

Student data is also an enormously valuable resource that most companies who employ the “Not selling at all” model, haven’t been able to resist tapping.

But, while lucrative, the “Not selling at all” approach, or, really, the “data-centric” approach, isn’t without its challenges.

Actually, it’s basically one big landmine.

In the US, educational data is protected by the Family Educational Rights and Privacy Act (FERPA), which is basically education’s own analog to HIPPA and is designed to protect the privacy of student educational records.

Trying to build a business around the selling of student data is inherently fraught, primarily because, when students are using these “free” products, they’re usually completely unaware they’re giving up their privacy in exchange for the service.

The data-centric model also totally misaligns the interests of the companies that employ it with the interests of the users of their products. Companies that give away free products are choosing advertisers and data-hungry businesses as their customers — not faculty, administrators or students.

Everything they do as a company will ultimately be in service of growing their profits. Reluctantly they’ll invest in their user-facing products, but only the minimum amount — just enough that users keep using the service and providing their data.

As the old aphorism goes, if you are not the customer, you are the product.

3. The Student-centric approach

Several of the largest, most profitable companies in ed-tech monetize by choosing students as their customers. They market their educational products and services directly to students, completely circumventing the challenges of working with university administrations, but without selling user data.

The student-centric approach looks much easier, and, on a first pass, more attractive, than the administrator-centric, professor-centric and data-centric approaches.

The only significant challenge to running these businesses, from a revenue viewpoint, is dealing with the customer churn inherently built into the model (naturally, 20% — 30% of students stop being students every year.)

So, aside from accommodating the large marketing budgets necessary to reintroduce students to your offerings each year, the student-centric approach generally makes for good business.

The real, somewhat subtle challenge only appears upon closer inspection, when taking into account the kinds of educational products the student-centric approach sometimes leads companies to build.

Simply put, most students’ primary goal with educational products isn’t to learn — it’s to get an “A”. Learning, whilst also attractive, tends to be secondary. And today, the internet has made it easier than ever to get an “A” without actually learning.

Don’t feel like writing that essay? Don’t bother, just buy one. That problem-set too hard? No worries — just get some smart kid in India to do it for you.

Examples abound and the evidence is clear: it’s extremely hard to scale the student-centric model without building tools that make it easier for students to cheat.

Even some of the best-funded, best-meaning companies are struggling to pull it off.

4. The Professor-centric approach

At Campuswire, after surveying the full menu of options, we decided on the professor-centric approach.

Choosing professors as customers is great for a few reasons.

First, the things professors tend to care about line up perfectly with our mission. Most faculty, we find, are primarily looking to 1) save time and 2) better engage their students, and our mission is to optimize the world’s teaching and learning — it’s an ideal match.

Providing tools that make faculty more efficient frees up their time so they can focus on helping students succeed, and helping faculty keep students engaged improves learning.

We have great relationships with many of our professors, but most faculty simply don’t care how good we are at relationship-building (many actually prefer to be left in peace) — they really only care that our software actually helps them improve their teaching.

But, by far, the best thing about choosing professors as our customers is that we can simply walk up to them and ask them what they want us to build! There’s no guesswork and no complexity in deciding what to focus on.

If we’re good at building tools that faculty want, we’ll be successful. If we’re not, we won’t.

The professor-centric approach, however, isn’t without its challenges.

The main challenge, of course, is money — whilst most faculty have the autonomy to decide which tools to adopt in their classes, they often lack the budget to pay for them.

The companies who’ve successfully scaled the professor-centric model tend to solve this problem by passing the cost onto students.

And while in some cases this works fine, in many ways it’s unideal. Some students may come from low-income backgrounds and struggle to handle the extra expense and, in any case, requiring students to purchase learning materials, in addition to paying their tuition, can make some feel like they’re being charged twice.

Our approach to address these challenges, whilst keeping professors as our customers, is to give faculty as much choice flexibility as possible:

1. First, we offer, and will always offer, Campuswire, on our Basic plan, for free.

Professors can choose to use Campuswire’s Basic plan in their classes, with an unlimited number of students, for as long as they like.

Our aim is that, over the course of using Campuswire on our Basic plan, faculty see the value our Pro features would deliver to them and their students, and eventually decide to upgrade to our Pro plan.

2. If faculty decide to upgrade to Pro, they’ll have two ways to pay: 1) department-pay or 2) student-pay.

Faculty who choose to upgrade to Pro will also be able to choose between getting their department to purchase Pro licenses for their students and having each of their students purchasing their own Pro licenses.

3. Pro will include features that replace tools faculty are already using, and that their students are already paying for, and be priced to be cheaper than those tools.

Among other powerful features, Pro will include things like a clicker alternative, for example, that makes it easy for faculty to implement active learning strategies in their courses.

71% of our professors already use clickers in their courses, and Pro licenses will be priced to be less expensive than traditional clickers, allowing faculty to actually save their students money by upgrading to Pro.

That’s the core of our monetization strategy — the Dropbox model: you can use Campuswire for free, and it’s an amazing tool, but you have the option of upgrading to our Pro plan to get additional features and unlimited usage.

Ultimately, our primary goal in designing our monetization strategy is to maximize interest alignment between our users, and us as a company, and the way to do that is to make sure our users are our customers.

We want to come into work every day and ask ourselves “how can we make Campuswire better so more professors choose to adopt it?” — we want our North Star to be super clear.

The Holy Grail

Ultimately all of these monetization approaches have their challenges — we’ve just opted for the one that maximizes the chances that we do a great job serving our users.

We did ask ourselves, however, “What would the perfect monetization model for higher-ed look like, and what would it take for that to be possible?”.

The answer we landed on is the professor-centric model, except with the payment challenges completely solved, with the help of administrators:

1. Students pay tuition
2. A nominal portion of their tuition goes to the Course Tools Fund
3. The Course Tools Fund is dispersed to teaching faculty (probably via the CTL) based on the number of students they’re teaching during the current term ($N per student, where N is probably somewhere between $50 and $200)
4. Faculty now have total control over which tools they adopt (with guidance from the CTL), and the ability to pay for them too.
5. Companies en masse, for the first time ever, fall over themselves rushing to address the needs of faculty.

Obviously there’s a bunch of subtle implementation details that would need to be addressed, but in just five simple steps, universities could meaningfully improve the incentive alignment between ed-tech companies, and the users of the products they create.

Ultimately, the arc of a company’s focus will bend towards its customers, and we’ll do everything we can to ensure our focus is on the needs of faculty.

If you’re interested in discussing monetization in ed-tech, feel free to reach out to me at tade@campuswire.com.

— TO