The future is bright for students. They will have more options at a wider variety of prices and far greater transparency into the value of the educational services for which they are paying. However, the core post-secondary instructional model – a professor and a group of students learning a single subject over 8-12 weeks – will comprise far less of a student’s educational mix. To adapt, university brands will be stretched across a wide variety of educational offerings, many of which they will not offer directly.
The core university business model will always be whatever is required to access taxpayer subsidies. Since the mid-20th century, subsidy-organized universities have been the dominant providers of structured post-secondary education. However, the number of possible business models has grown dramatically driven by the economics of online delivery. These new models may be separate from, or integrate into, universities’ face-to-face and online programs, but all drive per-student revenue down or consume revenue and profit margin that had previously flowed to universities. To remain competitive, universities must attach new models to their core.
“Surviving universities will be either very large or will have leveraged their brand across a variety of business models, or both”
As the science fiction writer William Gibson famously said, “the future is already here, it’s just not evenly distributed.” The Internet has already transformed much of society, and its likely impact on higher education is already apparent among early adopters. Online coursework:
- Is far cheaper to deliver because there are fewer fixed costs and unit costs decline over time and scale.
- Consolidates markets because geography is not a barrier.
- Aggregates providers to take advantage of economies of scale when serving aggregated markets.
- Creates new providers who are not burdened by legacy, subsidy-seeking business models.
Competitors from within and outside of universities are already driving down price and risk (price’s less obvious cousin). Though colleges are loath to reduce list price, the total cost of a degree is dropping. Revenue per student is flat or declining. Higher priced online programs are losing market share to lower priced programs from public colleges.
The least subsidized and endowed colleges are going out of business. Competency based and lower priced models have grabbed enormous market share. Credit transfer among colleges and between colleges and alternative providers is rapidly growing. As anecdotal evidence, many colleges have initiated programs to develop prior learning assessment (PLA) policies, are exploring competency-based programs and are dabbling with Open Educational Resources (OER). The enrollment growth of non-college providers like StraighterLine prompted the Department of Education to create an experimental EQUIP program to try to bring new providers under the umbrella of Title IV financial aid. So, while list prices are not dropping for most universities, revenue per student is.
Risk is the likelihood that the student’s out-of-pocket and opportunity cost will result in the desired outcome. For today’s students, high prices, extended time to degree completion, low completion rates and declining premiums to the degree make enrolling in college a highrisk proposition. Some colleges are using online delivery to create lower cost, low-risk pathways that include coaching, tutoring and group work, to prove college readiness before enrolling in a higher price experience. Successful students receive automatic admission and transferrable college credit. Unsuccessful students spend dramatically less out of pocket, use no financial aid and don’t harm their academic standing. Generally branded by a college, these programs fall outside of core university business model due to the incompatibility of low-risk business models with financial aid eligibility.
Online delivery collapses geographic boundaries creating national and global markets and players. Further, benefits to scale are far greater online than in a face-to-face environment. Fixed costs and capital expenses like servers and content creation can be amortized over a much larger set of students. Per-student digital marketing expenses decline at scale. Further, scaled colleges and Online Program Manager’s (OPMs) have a much higher volume of prospects and students with whom to test different marketing messages and tactics. At scale, iteration is dramatically faster. The result is the growth of “mega-universities” or smaller colleges using scaled OPMs to achieve the same effect.
A college will award credit for coursework from other providers when it believes that the credit recognition will help with enrollment, yield, persistence or retention. To date, the volume of students taking coursework from alternative providers has grown rapidly but is still relatively small and concentrated among non-traditional students. However, the recent growth of employer-sponsored tuition programs will change that. Whether from tuition reimbursement management companies, sole source providers, or those that exact a revenue share from its college, all will offer far lower priced coursework to an aggregated set of students and pre-negotiate credit transfer relationships with a preferred set of colleges. Employers and employees get a far cheaper pathway to a degree and participating colleges get a new stream of students. Today, these students may attend one of many local colleges who deliver up to 100% of a program. Going forward, these students will go to a concentrated group of national providers who will deliver 25%-50% of the degree.
Today, “Credentials” show up on almost every contemporary higher education conference’s agenda. While deeming something a credential is easy, creating recognized value for a credential is hard. Credential value can only be established by government fiat (like degrees) or by recognition at scale. As employers use alternative providers to deliver college credit, they will create their own “stackable credentials” that transfer into a degree program. However, rather than being a buzzword, these credentials will necessarily have value within the employer’s employment hierarchy. Over time, market recognition will replace government fiat as the backing for the currency of credentials.
To summarize, online delivery creates new competition among universities and viable business models for new providers with whom universities both partner and compete. To succeed, most colleges will need to achieve scale by themselves or with partners. On the whole, this drives down the total revenue per student and funnels margins back to students in the form of lower prices or to new partners like OPMs. Concurrently, the currency of two and four-year degrees is weakening, as new providers are able to aggregate students through employer or consumer channels. Over time, student enrollment in a wide range of structured educational programs is likely to increase dramatically due to lower prices and risk, but per-student revenue, profit margins and demand for degrees from universities will decline resulting in fewer colleges but some at tremendous scale. Almost a decade ago, I claimed that higher education would eventually resemble the US Postal Service¹. These are two quasi-public enterprises given monopoly power at birth because of market limitations. This power diminished due to changing technology and demographics. Continued access to taxpayer subsidies ensures that the core model survives, but it is less relevant in a vastly expanded marketplace. All of which is terrific for consumers (and taxpayers).
1 American Enterprise Institute, (2012), Postsecondary Post- “Access”.
Burck Smith is the CEO and founder of StraighterLine.com. Founded in 2009 and based in Baltimore, StraighterLine helps colleges offer pathway programs that improve enrollment and retention and helps students reduce the price and risk of pursuing a degree. Ten years before launching StraighterLine, he co-founded SMARTHINKING (now a Pearson company), the largest online tutoring provider for schools and colleges. Burck has written chapters for three books on education policy for the American Enterprise Institute (AEI), and is a former independent consultant and journalist. Burck also served on the Board of Heliocampus, an early stage company providing institutional analytics solutions for colleges, and serves on the Boards Baltimore Collegiate School for Boys and Friends School of Baltimore. He is a Pahara/Aspen Institute Fellow, and holds a Master’s Degree in Public Policy from Harvard University’s John F. Kennedy School of Government and a B.A. from Williams College.