The Education Business Blog

The economy has already had a huge impact on education budgets. But if you think it is bad now wait until the ARRA stimulus goes away. This chart tells the whole story.

Bright Green - Over 30%
Olive Green - 20-30%
Dark Green - Under 20%
White - Surplus

Nine States have deficits of over 30%, and this groups includes powerhouses like California, New York, Illinois, and New Jersey. Only Montana and North Dakota are not in deficit.

This is being driving by two factors. First, the sharp decline in property values is finally catching up to tax receipts. There is a three year lag in this mechanic. IF housing prices bottom out this coming summer as predicted that means we have three years from then before real estate taxes stop falling. 2013.

The second factor is the sour economic situation and the unemployment that goes along with it. The impact here is already moderating as these numbers turn. Unemployment has a relatively immediate impact on state incomes - as payroll taxes fall so do sales taxes while unemployment benefits soar. But it also bounces back faster when things improve.

Impact on School Budgets - No Posse Coming

This crisis is going to have a long term impact on education and the companies that serve this market. The Stimulus dollars have moderated the situation this year (and next). But, after 2011 the Feds are not coming to the rescue.

Investing in education is a high priority for the administration and makes sense in a downturn - but don't let that stop congress from sitting on their hands. Anyone who looks at DC right now and thinks there is political will to spend more is fooling themselves.

In comments please discuss how you think districts will react to this new reality.

I've written other posts on the choices districts face in this situation. See:

Government Spending on Children
Budgeting for Stimulus (company view)
SIIA Ed Tech Business Forum
Horrible News on Education Employment
Holy Crap What is a Major Crisis?
Life on the Tip of the ARRA Spear
Will ARRA Funds be used for Change or Propping up the Status Quo?
History, Poetry, Hope, and Fear

And much more on the Economy and Education Tab

One of the annoying parts of running a blog are the spam comments from people who want to surreptitiously sneak a back-link to their site on your blog. Askimet handles most of this automatically (thank you - thank you - thank you) but every day one or two servings of spam get past the filters.

Normally the posts are pretty lame "Great post - please write more...blah blah blah" hoping that your ego gets in front of your ability to see that the website link is "buy-cheap-crap.com."

Today was different. Whoever was at the other end of the intertubes was clearly making an effort to at least amuse themselves. While I won't post the link I will share the content of the comment for your amusement.

This post reminds me of when I was a boy growing up in Louisville. My grandfather used to say "When life give you lemons, make lemonade". But he was a hopeless alcoholic who never made much sense so I never paid much attention to him. Have a great day!

Not only did they make me smile - they wished me a nice day - with an exclamation point!

This just goes to show that ANY job, no matter how meaningless and annoying to other people, can be done with panache. We all end up in career cul-de-sacs during our lives - when you are there take heart from this example. The bad job will end one way or another - but self-worth can be wiped out if you let it get to you. Resist!

My hope for the poster is that he/she can find a more productive use of their talents - word problems for on-line math homework helpers perhaps?

OK - admit it, trade shows are fun. Sometimes traveling to a distant city, circulating with your peers, and dining out on the company can be a kick. You are learning too - about competitors and about your customers. The deadlines around a trade show can produce drama and tension, and some people thrive on that.

By comparison web marketing can be a daily slog and there isn't much direct contact with the customer. Web marketing requires persistence and patience. Success is metered in small steps and delivered incremental improvements over time.

In this article I explore who should prioritize shows and who should focus on web marketing and I share some ideas about how to compare the two.

I focus on these two activities because in most cases the best source of funds to drive growth in web presence is a bloated show budget. The palette of marketers is much broader - and the metrics used here can be used to compare the full range of options.

What's a marketeer to do?

Big companies are answering this question in different ways. Apple is shunning trade shows in education pretty much altogether (zero presence at FETC last week). Promethean had a campus sized booth, cheerleaders, and free gourmet cupcakes for all.

Who is right? As always the most important question to ask about marketing spending is "compared to what?"

In order to influence customers you need to be present in different media and locations (print, web, trade shows, catalogs, peer to peer, PR etc.). Customers lend credibility to companies they see popping up in different places.

A marketing budget is a series of compromises that should maximize visibility and revenue. One of the challenges in marketing is justifying visibility when there isn't a direct tie to revenue (i.e. when your CRM can't make a direct link). Depending on your circumstances both trade shows and the web can fall into this category.

I believe the relative value of trade shows has declined precipitously in recent years when compared to web marketing. That doesn't mean you should abandon shows, you just need to think very carefully about using them in the right way. At the end of the day what really matters is profitable revenue.

Lets dive into a pool of numbers to look deeper at this question.

Trade Show Economics

Lets make some rough comparisons to get a sense of the relative worth of the two channels.

Consider a trade show with 5,000 attendees.

• A company with a decent presence (a 20x10 space) might get 100 leads a day requiring follow up.
• If the show goes 3 days this equates to 300 leads.
• These leads will require sales time and energy to further qualify and in the end might be whittled down to 50 sales (1% of the attendees at the show).
• The cost of attending the event will probably be somewhere around $20,000 (booth space, shipping, travel costs, entertainment, signage, drayage) with another $15,000 or so staff time in setting up the show, manning the booth, and then qualifying the leads and closing the business after the show.
• Total outlay $35,000 and a cost per lead of $116.

Go to 10 shows and your annual show budget is $350,000.

With a gross margin target of 70% you need to make $1,000 per sale, or $500,000 to make these events revenue neutral. You should be promoting expensive products or reaching decision makers who buy in large lots to make these economics work. If your average order size is less than $1,000 you are losing money on the trade shows (using the lead/order flow assumptions above).

Scale this up or down - the basic economics remain the same. Go cheap and end up in the back corner in a 10x10 and your leads will drop and be lower quality. Glitz it up with rock star lighting and your cost per lead skyrockets along with the required revenue.

Non-Economic Benefits of Trade Shows

There are also non-revenue benefits to being at a trade show and these shouldn't be dismissed out of hand. You build brand awareness, network with other providers in the market, and provide support to current customers.

The most compelling benefit is that full fledged sales conversations can take place at the event itself. If decision makers (larger budgets, more influence) are present at a show then a low number of leads may not be as much of a concern, in fact the show may be an extremely efficient of way of meeting with large number of these folks in a short time.

In education this would argue for attending AASA but not IRA. The attendees do need to be walking the floor not playing golf, so your mileage will vary.

Another valid reason to attend a trade show is influence with the sponsoring organization. If the membership are important customers of yours it is good form to show up and support their professional association.

Brand impressions are less - well - impressive. Assume that 30% of the show attendees are paying enough attention when they walk by your booth that they get an impression. You will reach 15,000 people over the course of a year at a cost of $23 per. Yawn. At the end of the day (or fiscal year) top and bottom line results are all that count - impressions won't buy a cup of coffee.

One other thing - trade shows are moon shots. It is almost impossible to learn and modify on the fly - the event passes so quickly that if your show promotion or materials fall flat you have no chance to recover - until next year.

Internet Marketing Economics

Now lets look at a comparable example for web site.

• The company has invested a significant amount in building out their web presence using an outside contractor to do the heavy lifting which cost $200,000.
• Amortize this over three years and your annual expense is $66,000.
• In addition to this they have three people dedicated to managing the web presence for both content and technical infrastructure at an annual cost of $150,000.
• Ongoing SEO and on-line marketing might cost another $15,000 a year.
• Coding and contract design to tweak and extend the site might cost another $40,000 a year.
• Total annual expense is $271,000.
• Average daily traffic for the site is 700 visits with a 2% conversion rate to leads and 1% purchases.
• On an annual basis this translates into 255,000 impressions, 12,775 leads, and about 6,300 purchases.

The cost per impression is $1.06, cost per lead is $21.31 and the cost per sale is $43.01. The breakeven cost per sale (using the same 70% gross margin) is $61.44 and annually $387,000.

Non-Economic Benefits of Web Marketing

The brand impression argument is much more compelling for the website - the cost per impression is a fraction of a tradeshow's ($1 vs $23) and the volume is higher.

Even better - the quality of the raw leads you get on the web are often the highest short of personal contacts from your sales force. I carefully chose the phrase "raw leads" because the downside of web leads vs. show leads is that they are unqualified - no one has talked to them yet to get a sense of how truly interested they are.

But - these customers are actively seeking you out when they search on the web and then put their hand up for attention. At a trade show most of the people who stop are just chatting - they were walking down the aisle and needed a break. This is one of the fundamental differences in on-line lead generation and all other forms (here is an extended post on this subject).

While websites generate leads at a slower pace, over time they greatly surpass tradeshows in high quality leads because the volume is so much higher. It isn't even a tortoise and hare story since the leads from a 3 day trade show are equaled on the web in 10 days (100/day vs. 31/day).

The Bottom Line

So lets break it down. The following chart maps out the examples I gave above.

From a marketing investment standpoint these are equal - the return to the company after the cost of goods and cost of sales is zero. But this isn't realistic for a specific company - it merely shows the price points at which each option starts making a net contribution to the larger business. Between $61 and $1,000 the web is going to be a much better deal for you.

Get Real

The key is to make this specific to your company. You do that by applying your average order sizes and gross margins for shows and the web and your specific metrics (costs, response rates etc).

Here is an example from an average of a few supplemental companies that I have familiarity with. Their trade show related sales are typically double what they earn on the web largely because a Rep is actively working them. BUT - even with the benefit of this difference they are losing money on trade shows and are wildly profitable on the web.

To get to parity on the contribution margin if we hold the web order size at $250 the comparable trade show revenues need to be $4,000 per sale.

But what about gross margins - won't they affect this result? Somewhat - but order size has a bigger impact on this decision. If your gross margins are 90% you have a breakeven of $778 on trade shows and $48 on the web. If they are 40% breakeven is $1750 for shows and $108 for the web. The essential story doesn't change.

This example makes clear why Apple is shunning shows and Promethean is investing heavily. Apple sells tons of individual computers at something less than $4k with moderate gross margins while Promethean is mostly doing building or district level deals that bring in orders in six and seven figures with higher gross margins. The gearing all works in Promethean's favor for shows and in Apple's favor for the web.

In Conclusion

The conclusion is pretty clear - if your average order size is modest you probably should not be prioritizing trade shows (or you should be focused on dramatically increasing your average order size). Most companies should go to a handful of shows for the non-economic benefits - but choose carefully and scale your presence appropriately.

Don't be seduced by the work and "prestige" involved in trade shows - its easy to think that because you are busy and talking to customers that you are doing the most productive thing. Dig deeper - challenge your comfort zone on this.

Do you think about your web presence as a 24/7/365 trade show booth or is it something you feel like you have to do? Is it getting the same level of sustained attention that major events get?

Shouldn't it?

FETC 2010 provided an opportunity to assess the health of the Education Technology market. In today's guest blog my friend Mike Baum shares his take on the highlights and lowlights of this year's trade show

By Mike Baum

Coming to Orlando from Wisconsin in January, I expect warmer weather. I didn’t expect 50 degrees to be greeted as a warming trend. And when I saw the conference center adjacent to my hotel was hosting a national beekeeping convention with the alarming title “Keeping the Hive Alive,” I began to watch out for falling metaphors.

Traffic Report

The Florida Education Technology Conference (FETC) 2010 wasn’t all bad news by any means, but true optimists had their work cut out. Attendance and traffic, while possibly higher than last year’s debacle, were light and sporadic. Exhibitors by one account were down by 100, with absentees divided between business casualties of 2008-09 and firms keeping powder dry for ISTE (nee NECC) in July and possibly TCEA next month.

At least one long-time major exhibitor has permanently downgraded FETC to a “regional show” vs. the must-attend national show it once was. Companies still seem to consider FETC an important “announcement show” – more in a moment – but that’s due less to real significance and more to just the calendar, like the New Hampshire primary used to be.

Attendees

Booth visitors were mostly classroom teachers, some school administrators; of the few district people I encountered, most were IT with focus on the “T” – not engaged in curriculum decisions. Some shoppers, few buyers, at least at this moment.

To some extent this was to be expected: continued weak economy, a state whose budgetary problems are in the top 10 or 15, still early in the decision-making year. And as Lee’s last entry of 2009 noted, spending is likely to come even later this year than usual, nationwide. One bad swallow does not the Heimlich Maneuver make. Still, I think one can reasonably draw some conclusions – both negative and positive.

Implications

Negative: with apologies to my beekeeping friends, the buzz is over, at least for a while. One presenter at the show pointed out that we’ve come off a decade of education spending at 2X GDP growth, and that’s over. Much of that money came from rising property taxes driven by the real-estate bubble. The splash from that burst bubble is likely to dampen ed budgets for the next 2-3 years.

Tech spending may be further retarded by success: technology is ubiquitous in society and pretty plentiful in schools, so it’s not a question anymore of adding technology so much as what you do with what you’ve got, to really impact educational outcomes.

Vendors also have an increasing amount of “good free” to compete with – perhaps a dozen FETC sessions touted free resources from everyone from district or state consortiums (Florida especially is rife with them) to our friends at Google. So we all will have to come up with compelling educational reasons to make incremental or replacement purchases, at least for some time yet.

Positive: life goes on, technology is here to stay, and even if the market is stagnant there’s always gain in market share. NetTrekker formally announced expansion of their popular safe-search and web resource platform to the U.K. Discovery Education announced plans to enter the next Florida adoption head to head with traditional textbooks, as they did successfully in Oregon. Online delivery of content isn’t a panacea, but where it provides schools with a clear advantage it will sell. Expect pushback from the traditional publishers, of course, but historically they have trouble really focusing on ed tech.

What To Do?

The key, I believe, is finding fertile spots – I hate to call them “niches” – where technology makes it easier to do things educators want to or must do in light of larger trends. Such as?

Professional development – increased demand for “job-embedded” PD, which has to be largely online-enabled.

Writing – several people have pointed out that kids are actually writing more than ever before, between texting, blogs, and social networking – and if those messages are often short and cryptic, well, so is haiku.

Assessment – isn’t going away, must be delivered in short, teacher-friendly bursts to be really effective in improving outcomes.

Games – to many, a four-letter word, but increasing research (as presented by Lee at a fascinating session) shows they can demonstrate real educational outcomes if properly designed.

Targeted applications that help individualize, improve academic learning time, increase motivation.

Up here in the frozen north we know that a hard freeze is necessary every so often – kills mosquitoes, and many seeds actually require one to germinate in the spring. Maybe that’s an encouragement while we’re working to keep the hive alive.

Mike Baum
Principal
Sophia Consulting LLC
mhbaum@gmail.com

Mike is a business growth consultant specializing in K-12 marketing and product strategies. Former CEO of Renaissance Learning, he has 15 years of experience in the education market and over 25 years of helping companies become bigger companies.

While we hash out what ARRA Stimulus funds mean for education there are larger issues at play in how we allocate public spending on children.

The New York Times has a good piece today that links to several good resources on this topic.

In a nutshell - 2.2% of GDP declining to 1.9% by 2019.

Bambi Meets Godzilla is the best 90 seconds of student film - ever. This classic came up at dinner tonight and it warmed my heart the same way it did 30 years ago.

Thank you Marv Newland, a man of many talents.

[This post has nothing to do with Educational Publishing. Really. Next post - So You Are The Startup That Is Going To Take Pearson Down...]

Is it just me or is everyone else sick of getting "wishing you a merry christmas" emails flooding their inboxes?

I know, I know - we're all hella busy and this is the time of year we are supposed to reconnect, so sending an on-line card or email seems like a quick solution.

But it reeks of insincerity. And its spam. So stop - pretty please?

Say what you will about the post office but the physical act of writing something - even your name - and applying a stamp forced people to put some kind of filter on who they sent holiday cards to. Now we are all a wrist flick away from a list of 600 people you "care" about.

If you really care about me stop cluttering my in-box with holiday flavored spam. Just so you know - these emails are kill-on-sight for me - I don't even open them.

Social Media Meets the Holidays

Good social media is personal, sincere, and conversational. These on-line cards don't meet any one of these criteria. It is an old broadcast mentality hijacking the new technology.

Normally the Curmudgeon doesn't make suggestions - he just gripes and the world moves on ignoring the muttering figure in the corner with the askew elf hat and a fistful of cookies.

• Take the same minute you would have to write a physical card and send a personal note to those you truly care about. Ask them a question - start a conversation that will last into the new year. Write from the heart.
• Go on to Facebook and scribble on the walls of your real friends (you know - the ones who would help you move on an hot August Saturday).
• Pick up the phone and call already.

Oh - and to all my friends out there - Happy Holidays. I mean it - really.

At PCI we are putting the finishing touches on our 2010 budget. The Stimulus funds are creating a particular challenge as we look out over the next 12-24 months. On the one hand there should be plenty of new money in the market next year. On the other, despite ARRA an additional 9 states are sliding into California like crises as the housing slump begins to affect tax receipts.

There are two core questions companies need to answer as they think about priorities for the coming year.

• Timing - when will the funds flow?
• Volume - how much of the stimulus will be available for instructional materials?

1. When will stimulus dollars flow for instructional materials?

By December 11th 2009 less than 40.1% of the stimulus funds have been committed, and much less than that in some specific funds (e.g. Special Ed is only 12.3% spent). Since funds have to be obligated by this coming fall and spent by the fall of 2011 that probably signals a wave of orders in next summer's buying season.

But wait! It has taken three years. but tax receipts are finally catching up to the housing slump. Since 34% of education funding comes from property taxes (Richard Sims, NEA) this is going to mean that moving forward more ARRA funds are going to supplant state funding. Depending on a particular state's reliance on property taxes and how hard they have been hit by the Great Recession we will see a wide variety of state level differences.

[click to see a state level report of ARRA spending]

This affect is going to be felt broadly. Texas, which has not been hit particularly hard by the slump, is facing a shortfall and is planning budget cuts. Florida on the other hand is in full blown crisis mode (along with NJ, IL, WI, and several others). You will need to look at where your pockets of strength are to gauge the impact on your particular business.

We expect the spring to be tight - Superintendents will sit on any funds they have until they know their new allocations from the legislatures. Once this issue has been resolved the summer will be extremely busy.

% of Spending by Month

For publishers this kind of curve presents a particular budgeting challenge. The investments you need to make in staffing, inventory, and marketing to maximize your returns during the summer need to be made during the spring when the outcome will be in doubt. It would be easy to bet wrong in either direction - either holding back and letting competitors reap more than their fair share or overspending and being left with your own ugly budget cuts in the waning months of the year.

2. How much of the stimulus will be spent on instructional materials?

If the curve above represents when the funds will flow what about the amplitude? Just how much growth will ARRA mean for Education Publishers? I've speculated before that about 4%-5% of the stimulus will be spent on instructional materials. Normally materials are about 1%-2% of education funding but because there are so many restrictions on how ARRA funds can be spent we expect a slightly higher amount to flow to materials. They are a relatively quick and non-controversial investment in most cases.

This would mean an incremental $4-$5 billion in the publishing and materials markets. Since the funding sources that will go for materials have the most money left the big bump is still ahead of us. Title 1 has 78% left, IDEA has 88% left, and Ed Tech has 98% left [link]. By contrast only 1% of the construction money is still available.

This will be spread over 2010 and 2011 but odds are that about 60% of the balance will be spent in 2010. Roughly, that could translate into an incremental $2.6 billion available to publishers this coming year. Wow.

The chart below presents an interesting view of a company doing $10m in revenues pre-stimulus. Note that in both scenarios (flat and up 20%) the revenues will be below a normal year through May. For the first four months to equal a normal year's revenues annual sales would have to be up 50% over a normal year.

Revenue Projection by Month

Education Publishers will have to be tracking their sales pipeline very closely to see what the summer is going to look like - otherwise you run the risk of making cuts or holding back on inventory that could hurt in the summer months. If you have not instituted one yet or if yours is lax - time to batten down the hatches there.

Conclusion

This is going to be a very unusual year in a market that is used to a high degree of predictability. Mileage by state will vary widely - so dig deep in your planning scenarios to project the impact in your areas of geographic strength.

Plan for the best, expect the worst, and watch all your leading indicators very closely.

The tribe gathered, bad coffee was drunk, stale muffins were eaten, and we shared insights and guesses about where education technology and publishing are headed in era of tight budgets and ARRA munificence. It was a typical first week of December in New York.

Here is the first of my overviews of what happened during the week. Subsequently I'll dig into the AEP CEO Roundtable, the MDR Christmas Party, and the AEP Hall of Fame Breakfast.

SIIA Education Technology Business Forum - Tuesday Dec. 1

International

The panel on International Opportunities discussed the trends outside of the US market - the growth of mobile phones as a platform, the demand for professional development to make sure existing investments are being used, and that no one (not even Pearson) can do go international on your own - partnerships are essential.

One point that was almost a throw away at the end but which is critical for companies just starting down the international path - translation is not localization. The management tools, images, and examples all need to be culturally appropriate.

Funniest moment - when Steve Dowling from Pearson was asked how companies smaller than Pearson can take advantage of international opportunities he deadpanned "We'll make you an offer..."

Investment

A second panel "Where are the Investment Dollars?" struggled to answer this question. Short answer - they are not there - come back next year. George Cigale, the moderator, jested in earnest that given what we heard from the investment professionals on the panel that it would be easier to raise $5 million through revenue tied to ARRA than to try to raise capital.

Investors see Education as the last inefficient media market and want to invest in companies that are going to create disruptive innovation. Incumbents who are trying to accommodate the current system need not apply.

Also - if you have already done all the hard work of building a product and proving that the business model works they would be interested in possibly, maybe, looking at it. Next year.

Part of the reason for this hesitance is that while the Stimulus is creating unprecedented opportunities for education companies, it is making valuations problematic since investors rightly see current performance as unsustainable.

My humble suggestion is that until investor groups demonstrate a willingness to actually take some risks alongside entrepreneurs that we stop inviting them to this event. We are like a battered spouse, always hoping they will love us next year if we just try harder. There are many examples of small education companies who have found alternative paths to capitalization - those are the examples we need to be elevating to the podium.

Fundamentally education can be an extremely profitable market with intense long term loyalty. The problem for most investors is that it is all about a mountain of slow nickels rather than a small pile of quick dollars.

We are the proverbial turtle and most investors have the patience of a gerbil. One good outcome (hopefully) of the current downturn is that it will wring some of the quick-buck-at-any-cost mentality out of the investor community. A return to fundamentals will greatly help education.

Post Stimulus Outlook

This panel tackled the question of what a post stimulus market will look like. Richard Sims, Chief Economist for the NEA, shared a frank and rather brutal analysis of what lies ahead for education budgets. The punch line - while real estate started to tank in 2006 it wasn't until 2009 that actual tax receipts started to suffer at the state and local level. There is a three year lag in the funding flow. This matters because 38.5% of education spending comes from real estate taxes.

If the market bottoms out next summer we have 3-4 years of declining state budgets ahead of us. There are 9 additional states who will find themselves in California's shoes in 2010 including NJ. FL, and IL. He projected that it will be somewhere between 2018 and 2020 that we return to 2006 levels of funding. Get used to it.

He was also not as concerned with the debt we are running up - but only if we spend it on things that generate growth in the long term. Debt financing is a common model for companies - and the US has shown before that it can also work for countries.

Companies have to be focused more than ever on the parts of their solutions that help districts be more efficient and that deliver savings over traditional ways of doing things.

Obama's Education Technology Policy

Karen Cator, the new head of Education Technology at the USDOE, spoke about the plan they are assembling to drive technology usage in schools. I'll write in more detail about this later but the bottom line is that the tech plan will focus on enabling the four assurances included in ARRA. They intend to use the bully pulpit to make sure that our tech dollars are going for useful items rather than flashy products that gather dust.

Summary

I came away from the day inspired by the entrepreneurs that are working hard to build interesting businesses in the education market. I also came away chastened by the pessimism of the investment community and hard realities of our economic situation.

Those of us in the business need to get up every morning willing to make a difference in children's lives and focused on doing it in an efficient and sustainable manner.

Technorati Tags: AEP Hall of Fame, Association of Education Publishers, CEO Roundtable, Ed TEch Business Forum, ETBF