Sunday, June 8, 2008

Bringing in the Nonconsumers

Extending the discussion from my previous post, it seems to me that online education will change the nature of competition in higher education. We are approaching a tipping point, where the quality of online learning, new business/financial models, and the comfort level that prospective students feel will make traditional face-to-face classes less attractive, at least for many adult learners.

Recently, I saw a study of adult learners in Ohio, who had previously attended a higher education institution, but not graduated, and were not currently enrolled. These individuals, age 35 or younger, overwhelmingly preferred online or strongly blended/hybrid courses, as an attraction for returning to school. Less than 8% of the responders indicated that they would prefer a traditional campus-based program delivery.

Although I hope that branch campuses will be more responsive than many other types of institutions to this audience, I also foresee new providers coming along and profoundly changing the competitive landscape. Someone (not me, but I can't remember where I saw or heard this) referred to a "second wave" of online providers that is developing. This second wave will include large and small public institutions, private nonprofits, and emerging for-profits. The second wave will employ a different financial model than "first wave" institutions, and it is a model that will be disruptive.

To paint a picture of what I see coming, let me be clear that I am focusing on nonconsumers--those individuals with some college, but no degree, or those individuals who never attended. What will attract these nonconsumers, however, also will attract other adult learners and at least some traditional aged students.

If you consider my previous post about disruption in higher education, and some of the challenges created by the revenue requirements to operate a traditional campus, there is a huge door though which new providers can walk. To the extent that a traditional branch has an expensive infrastructure and is overshooting the real interests of students, a model that squeezes out costs and passes the savings to consumers, rather than to stockholders or a main campus, could deliver programs at much reduced tuition and still be profitable through increased enrollment (volume).

My ideas in this area were influenced by a fascinating book, called The Fortune at the Bottom of the Pyramid, by C. K. Prahalad. I won't try to explain the concepts of that book, but I do recommend it for those who are interested in strategy. Thinking about how disruption might occur, and linking it to new business models led me to the following points.

First, to be successful in the "new online era," an institution will have to provide those programs that meet the perceived needs of adult learners. If it provides other programs at all, they will have to be in demand by other populations. Otherwise, the institution will be carrying expenses that will hurt its ability to compete. Because online options trump any protected geographic service area a branch may have, if the branch does not provide the right programs, someone else will.

Second, the institution needs to squeeze out unnecessary costs. Investment should be in the "product"--the courses and programs--and in support services for students and faculty. Marketing approaches need to be targeted in such a way that the costs are not nearly as high as most first wave institutions spend. (Effective, lower-cost marketing strategies are beginning to emerge.)

Third, cost savings should be passed on to students, pushing down the price to attend. Most instituions, if anything, do the opposite, and they are stuck, because they need the revenue to cover fixed plant and nearly fixed staffing costs. An aggressive competitor, as long as it covers its actual costs, while maintaining some "profit" margin per student, could (I believe) charge far less than most institutions and still provide high quality programs and services.

Fourth, a key to making this work is to be able to scale enrollment to much higher than common levels. You probably are familiar with the notion of "unpacking" the role of the faculty member. Institutions that build scalable programs create efficient processes for course design and development and use facilitators or coaches to work directly with students, under the supervision of a faculty member/content expert. The result is significantly reduced cost per credit hour, as enrollment increases. Thus, the business model can allow for strong financial performance at much lower tuition. (First wave institutions tend not to charge lower tuition, hence their own vulnerability to future competition. A big issue for them is their very high marketing costs!)

I know this is a sketchy presentation, but companies and institutions are out there developing this strategy. I see the change in pricing as opening up the market, with rapid effects that will start to overcome the brand advantage that existing institutions tend to rely on. If I'm right, things will change very quickly, once the tipping point is reached.

So, if I were advising a traditional branch camps administrator, what can he or she do today that will be helpful? First, I'd say, "Don't overshoot what your students value." In other words, take a hard look at costs and push them down, at least as they affect the population of students I am focused on here. Second, be very careful about plant costs, services provided, and the mix of continuing and adjunct faculty. Services should concentrate on those that are highly valued by most students. Third, start working now to incorporate online and blended courses in your curriculum, partly to provide greater flexibility to students. If you have a strong brand identity, use it, but in the end, if I am correct about the aggressive pricing of second wave institutions, brand won't likely overcome price for most campuses.

Repositioning a traditional, full-service branch, in anticipation of new forms of competition is surely a difficult challenge under the best of conditions. That, I fear, is yet another reason that campuses could be vulnerable to new competition!