Business Models in K-12 Education

Last night, I had the pleasure of being one of the judges for a pitch competition that is sponsored by a student-run group at Harvard called BRIDGE @ HGSE. As I listened to pitches from a group of eight really smart, thoughtful teams, I could not help but reflect on the challenges associated with developing a business model in K-12 education. Much has been written on this subject already, though my favorite piece remains Larry Berger’s “K-12 Entrepreneurship: Slow Entry, Distant Exit” published back in 2007.

While Larry’s piece captures an additional level of nuance from the perspective of someone who has successfully navigated the market during his decade at the helm of Wireless Generation, I thought I would take a minute to summarize my current thinking while it’s top of mind. My lens is toward providers of digital content and tools, but I believe my perspective largely applies to all products.

First, there are effectively three basic revenue models for product vendors in K-12 education:

  1. External funders (foundation, government grant) pay for products on behalf of schools or parents; this is effectively “subsidized demand”
  2. Traditional demand (school, district) pays for products
  3. Families pay for products

The problem is that there is typically not enough money from #1 to support massive scale, so inevitably vendors have to figure out how to convince schools, districts and/or parents to actually pay for their product if they want to grow beyond a niche market. This is what typically happens next:

  • A new product vendor looks at the fact that K-12 education is a $500 billion annual market and get really excited. They think, “If only a could capture a 0.1% market share, I’d be set.”
  • After they dig in a little further, though, they realize that the market is highly fragmented with 15,000 districts and 100,000 schools. “This may not be as easy as I thought.” 
  • They start by targeting a few districts and/or charter management organizations (CMOs). They tend to have a few quick wins and start to feel confident.
  • Their attempts to sell into more districts are stifled by a long sales cycle, onerous procurement rules, limited discretionary funds and demands for an “evidence base.”
  • Their attempts to sell into more CMOs may be more successful given the discretion these organizations have over procurement. The challenge is that they represent limited demand and tend to be demanding customers.
  • Rather than deal with districts, some vendors decide that it must be easier to sell directly to principals and teachers. If their product is cheap enough and solves a real problem, they have some success going this route. The challenge is that most schools only have limited discretionary dollars, so this approach does not work for expensive products. Moreover, because each school represents limited demand, it takes a lot of effort to generate real revenue this way.
  • To accelerate the adoption of their product or service, some vendors decide to give away some stuff for free (typically teachers or students) and charge for premium services (typically to districts). This so-called freemium model seems promising in theory, but many vendors struggle to achieve the type of conversion rate from adoption to paying customers that they need to sustain the model.
  • Frustrated at the traditional system, they ask, “Why not go straight to families?” While the rise of apps on mobile devices and tablets has made this an increasingly viable option for smaller vendors with innovative products, most families will not spend more than $5 for an app (note: this data point is anecdotal, not based on real market research). This one-time, small dollar revenue model may work for more limited products, but it is likely insufficient to sustain more comprehensive products that need to generate significant revenue to offset larger expenses (e.g. R&D).
  • For these more comprehensive products, vendors decide they need to charge parents a monthly subscription fee to generate sufficient revenue. They reason that some parents spend hundreds if not thousands of dollars on private tutors, so why not charge them $9.95 / month for a product that is almost as good. It remains to be seen whether parents will become more comfortable paying these types of subscription fees for these types of products, but at present this direct-to-parent market is still fairly limited. This approach also tends to narrow the target market to families of means, which creates equity concerns for vendors who wish to serve all students.
  • Finally, some small but promising vendors realize that it may be easier to partner with large, existing vendors with a strong foothold in the market (e.g. licensing technology, leveraging their distribution channels). This may be a viable option for some but the uneven power dynamic between the two players can create complications.

Where does this leave the growing number of innovators who are developing products that may be able to make a real difference in our K-12 education system? I’ll admit that I am not quite sure. On one hand, the rapid proliferation of web-enabled devices as distribution channels creates a real opportunity to reshape the way schools, districts, parents and students purchase products. On the other hand, technology alone will not magically fix the challenge of generating revenue in a highly fragmented market. Moving toward a more functional marketplace will require leadership on the part of states and districts to rethink outdated and unnecessary procurement rules. It will also require entrepreneurs to not only offer products that solve real problems for educators, but also develop innovative business models that allow them to generate real revenue at scale. I’m optimistic we will start seeing more activity on both fronts in the coming years.  

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One thought on “Business Models in K-12 Education

  1. Pingback: My Advice to Education Entrepreneurs at Harvard | Maximize Potential by Scott Benson

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