How to price your edtech product: Lessons from successful startups
A major challenge in the early days of any edtech startup is pricing. Without a constant flow of new signups allowing you to test different price points, or a clearly defined target customer group you could survey, it’s largely a shot in the dark.
One way to think of the price you can charge is by asking yourself three questions:
- Does it allow you to turn a profit given your business model?
- Do people consider it reasonable for the type of product you’re offering?
- Are customers willing to pay it for the value they get from your product?
A shortcut many startups will take is choosing a price point close to other companies in the same field, but this can at best lead to unrealized profits, and at worse an inability to sell at all.
Below, I will explore examples of successful companies and the choices they made to support their pricing strategy.
This advice applies especially to direct-to-consumer startups, but institutional procurement is becoming ever more transparent, and subject to the same considerations.
The right price depends on your business model
The goal of a business is not to generate revenue, but to make profit.
When you blindly price your product at the same level as your competitors, you are ignoring how their capitalization, costs and strategy may be radically different from that of your company.
Babbel is one of the leading language learning platforms. Unlike their competitors, the company chose to eschew the freemium model and charge for their courses outright. The Babbel subscription starts at just $12.95/month, and goes as low as $6.95/month if you pre-pay for a year.
As one of the few profitable companies in the space, Babbel has become a role model for language learning startups struggling to monetize their product. This likely led to more than a few downfalls of promising projects who ignored the very particular choices Babbel made to maintain such a low price point.
1. Babbel is a marketing machine. Most of their team has a marketing background, and the entire entire business is built around optimizing the customer acquisition funnel. While other sites try to reduce their signup form to a single field, Babbel asks you everything, from age to profession, that could help them target ads in the future. The company has a very complex marketing strategy that combines inbound content marketing, paid online advertising, TV spots, subway ads, inflight magazines, and much more.
2. Babbel works on very long timescales. Babbel understands most people are ready to pay for a course at very particular moments, and will make an impulse buy if approached at the right time, with the right offer. Babbel spends large sums of money on brand awareness, and getting millions of potential leads into the funnel, so they can close the sale 2, 3, 4 years down the line, and recover the customer acquisition cost even later. Without tens of millions in venture capital funding, and a proven product-market fit, you won’t survive to see an ROI at this price point.
Babbel is a real success story, and one that should serve as inspiration to edtech entrepreneurs. But the lesson to be learned is not to mindlessly price your service under $10. Rather, it is to look for the right business model that leverages your unique strengths, and gives you a sustainable competitive advantage.
You can’t ignore price expectations
Most educational startup projects fall into existing categories, perhaps with a little twist, or adapted to a particular niche.
There’s nothing wrong with that. E-learning accounts for under 10% of the $155M education market, and there’s as much value in bringing existing ideas to new groups of learners, as there is in radical innovation.
What many forget, however, is each product category comes with existing customer expectations, and particularly price expectations.
This means a well-off customer, looking for a niche course that will be of great personal benefit to them, may still be unwilling to pay more than $5 for an iPhone app, $10 for a Udemy-style video course, or $25 for an online tutor.
If your customer is ready to pay a high price to learn a particular topic, you must distance yourself from product categories that offer their courses at a much lower price point — through a vastly different design, clever marketing, and new features. Better yet, choose a course delivery method already associated with premium content.
MasterClass is an online platform where students gain access to tutorials and lectures by industry experts.
It entered the extremely competitive and saturated video course market in 2015, but achieved much success through clever positioning targeting a very different niche.
1. MasterClass sells access to celebrity experts. The product they’re selling isn’t a course. It is exclusive insight into the thought processes and techniques of the people who inspired you to enter a field in the first place. Price shopping is a non-issue, because there simply isn’t another place where you can buy a one on one lecture from Deadmaus, or Aaron Sorkin.
2. The product screams premium. Every detail of the MasterClass site and marketing makes it clear this isn’t just another online video course. It’s very name spells out the value proposition, all videos have an extremely high production value, and the design of the website is unlike any other platform.
MasterClass is a great example of how you can distance your offering from existing learning platforms that might have inadvertently price-anchored your potential customers.
Remember this works both ways. I’ve seen more than one edtech startup who targeted the mass market, but projected a decidedly premium image in their marketing, alienating potential customers before they even had a chance to try out the product. Pricing is itself a form of communication!
Oh, once you’ve already captured your high-value niche online, don’t succumb to requests for a mobile app. Or do, but design it as a free value-add to your core product, lest the low price in the Apple and Play Store canibilizes your profits elsewhere.
Other edtech startups who understand price expectations: Chineasy
You must provide value to justify the price
Last but not least, you must deliver the value that justifies the price your customer paid for the product. This is especially true of SaaS (software as a service) startups selling a monthly subscription, but few great business got built by overpromising and underdelivering.
Note this value is likely not mastery of the topic you teach in the course. It can even be entirely unrelated to the course content.
Going back to our MasterClass example, even though their courses have genuine educational value, the primary value their provide is not making you a better cook or chess player. After all, you could just as well learn those from the myriad of free videos on YouTube. The value they provide is insight into the thinking of an expert you admire.
Similarly, the primary value Duolingo offers to their users is not language mastery (most people can barely introduce themselves after finishing the course). It is the feeling, through gamification that builds an illusion of steady progress, that you can learn a language.
For this example, we’ll look at at how not to go about pricing.
eduFire was a an online video tutoring and group video course website. Today, there are hundreds of competitors in this space, but back in 2008, eduFire was one of the pioneers.
eduFire grew a loyal following in its early days and attracted $1.7M in VC funding, but after a failed experiment with a $30/month all-you-can-eat pricing plan, the startup was forced to sell, and eventually close down.
I’m including this example in the lesson on customer value, but it includes just as many learnings on failing to carefully consider your business plan, and setting correct price expecations.
I have not worked for eduFire, and only interacted with founder Jon Bischke on one short occasion. My analysis is based on observation as an outsider, and what I’ve gleaned from tutors who worked at the company at the time.
1. The all-you-can-eat experiment: Problems started when eduFire, presumably under investor pressure to accelerate their growth, chose to offer a $29/month plan that gave learners access to unlimited group video lessons. This incredibly low price point (what you’d pay for just a few lessons a month on their own) attracted masses of new users to the website.
2. Many students, little quality. Unsurprisngly, the influx of customers included avid self-learners such as myself who had the time and motivation to take several classes every day. The tutors offering courses on eduFire quickly became overwhelmed and their revenues eroded. Some left the platform entirely, further exacerbating the problem. Others cut corners, shortened their lessons, and quite simply did not put in as much heart anymore.
3. Back to the old ways: It quickly became clear that the unlimited plan is unsustainable. Students would complain about quality, tutors about eroding revenues, and I can only imagine the impact this experiment had on eduFire’s bottom line. After about a year, eduFire was forced to revert to charging for individual lessons.
4. But not quite: Unsurprisingly, the reversal was met with an outcry from eduFire’s most vocal users, who have happily abused the unlimited plan and would now be forced to pay 10, even 20 times more for the same service. Worse yet, the course quality has gone down so much in the meantime, that the site just did not offer the value necessary to charge its original prices.
The story of eduFire is an excellent example of the importance of having a pricing strategy that is clear and thought-through. It is also a lesson on how even short-term price experiments can forever anchor your users at an unsustainable price point, and how small changes in pricing can change the kinds of customers and service providers you attract.
How to choose a price for your educational product
Pricing is a messy business with which even large companies and serial entrepreneurs constantly struggle.
You’ll have to experiment, talk to your users, and experiment some more. Approach this quest with a framework that accounts for your particular strengths and the gaps in the market, and eventually you will zero in on a price point that’s not just right for your business, but a competitive advantage in its own right!