The Economics of Online Education

As more and more universities are opening up to the idea of online proposition, it becomes important to raise the question: “Can online-education be a profitable and sustainable business?” To answer this question, let us explore the various important facets of this model which would decide the feasibility and financial sustenance of the e-idea. Some key parameters to be considered are the demand, ability to supply, technology and delivery process. The demand for the service is abundant as previously discussed and so is the availability of market players who could cater to this growing demand. Hence, the viability of the proposition rests solely on the issues of effectively delivering the services and choosing or rather designing an appropriate business model. It is critical to analyze the following factors to assess the economics of the idea:
-Virtual university vs. traditional university (in transformation)
-Selling commodity vs. selling ‘experience’
-Technology: availability and costs
-Process of delivering quality and differentiation
-Cost analysis: Initial vs. marginal

Virtual University vs. Traditional University
There could be two different versions of an online education: a virtual online model and an existing university expanding its traditional model to accommodate the online proposition. Both models have different economics. A virtual model starts from scratch and has no prior experience with a traditional education model; it prepares curricula either by itself or in conjunction with an existing educational institution; it also has low infrastructure expenses but simultaneously no branding support. It is relatively easy to start this business, but what matters are the quality of content and the process of delivery. For standard modules or programs, this seems to be a good venture as the content would not be difficult or expensive to produce or distribute. However, care needs to be taken to ensure the target segment for the program is carefully identified, as this model is not only competing with traditional models but also with online propositions of existing reputed educational institutions. On the other side are the existing schools that would be extending their services to e-learning. These do face a challenge of adopting a business model which may not be compatible with their existing proposition. There is a risk of cannibalizing their existing successful business model. Both models, if to be continued simultaneously, need to be targeting reasonably different markets. This model has an edge over a new virtual setup in terms of already available content and existing and successful brand; thus the institution could charge a premium. The model does not require huge costs as the content is available, and only needs to be digitized; it is also relatively easier to generate demand for the proposition, riding on the back of the existing traditional model. However, the institution still needs to work towards differentiating the model, not by the content but by the process of delivery.

Selling Commodity vs. Selling ‘Experience’
The institution may well decide to sell 10,000 degrees a year or may like a number that is much lower (i.e. < 200). The question is whether the institution is attempting to focus on the quality of the students and education or is merely happy with building the numbers and playing on cost. Online education does provide an opportunity to reach the masses with very low marginal costs but simultaneously could affect its reputation. Though it is extremely hard to replicate the experience and environment of a traditional model, an attempt to get the program experience as close to the traditional experience would be considered a good differentiating factor. This ‘experience’ would not stem from the content of the program as it is easily replicable, but from the content delivery process reaching the end user. Again, the type of module and the class of customer segment would decide upon the extent of the „experience? required to be instilled in the program.

Technology: Availability and Costs
The complete business idea of online education is dependent on technology. The base of this technology is the internet which is the fastest growing tool in terms of number of users. According to Lance Secretan, “It took 37 years for TV to reach 50 million homes and it took the web 4 years to do the same.” Though the base technology (the internet) does not seem to be a constraint, the bandwidth available to support the online education is questionable. Technology such as streaming audio and video requires huge bandwidth which may not be a constraint for institutions but for end users. In most countries, the internet is at a nascent stage. More importantly the bandwidth to support “virtual reality” is not available. Even in developed countries it would be very expensive to have synchronous and interactive video lectures or sessions. Though the pace of technological advancements is increasingly fast, and thus the bandwidth problem would soon be resolved, it may still be expensive to have a model that provides a similar learning experience to a traditional model. Therefore, the educational institutions would need to strike a balance between the experience and the cost depending on their target market segment(s).

Delivering Quality and Differentiation
In order to differentiate itself from others, it would be essential for an institution to focus on the process of delivering value to the end users. Educational institutions, keeping in mind their target market(s) and the available technology, would have to decide on the extent to which they should replicate or rather extend the strengths and benefits of their existing traditional model, if any, to the online proposition. Aspects such as how to hold online lectures or how to transfer digitalized case material or even how to structure the program to make it more effective, would need to be evaluated. If the proposition is to sell the program as a commodity, it would be better to conduct it in an asynchronous fashion, focus on delivering standard requirements, and cut down costs rather than add a new experience to it. This excludes premium programs with higher fees. These ones would be targeting people who are willing to pay for the technology needed to get a real experience of learning.

Cost Analysis: Initial vs. Marginal
The costs associated with an online proposition are low when compared to the ones of a traditional model which requires much greater infrastructure. The profits would depend upon the economic rent that could be derived from the services offered. This economic rent could only be sustained in the long run if the institution has sufficiently differentiated itself from its competitors. The online model also has very low marginal costs compared to the initial set-up expenses. Unlike a traditional model which is limited by the size of its buildings (physical infrastructure) or the number of its faculty members, the capacity of an online model can be stretched to a great extent. This would help reduce marginal costs until a further increase in users requires significant investments in technology upgrades. From the above arguments, there is no doubt that a sustainable online education model is definitely achievable. However, care has to be taken when defining the model that is in appropriate accordance with the targeted customer and service provision. Established universities, no doubt, have an edge over the new virtual universities but at the same time they carry the risk of endangering their established and successful traditional model. The economics would also significantly vary depending upon the differentiation strategy, if at all, is pursued by the players. Selling a commodity would require a different strategy and would have different implications compared to the proposition when selling experience. The availability and costs associated with the technology would vary depending upon the geographical location of the institution and the students.