Can a new product enter the education market and generate organic growth in the market? Not really. This is one of the core issues new entrants have to wrap their heads around as they think about how to sell and market to schools. Education is (mostly) a zero sum game.
Today we tackle issue #3 in our series on selling and marketing to educators.
In normal times education budgets grow at 2%-5% a year. Most start-ups or new products need to grow at a huge multiple of that – 30% to 300% or even more. Mathematically in order for you to grow someone else is must lose out. Normally in a market that is over $500 billion you would think that there is plenty of room for growth. There is – but it is less than you might first assume.
In a business market, if someone comes up with a new widget that dramatically improves productivity, growth can come from increased profits and/or rapid market expansion. Three underlying facts about education funds make this much harder to leverage.
- Education funding comes from four primary sources. States provide about 46%, local taxes another 37%, the Federal Government chips in 8% and the final 9% is from private sources (mostly private schools). Over 90% of this is government spending which does not have the volatility (up or down) that one can see in a business or consumer market. Lower volatility is a good thing in bad times – kids still show up in school every fall no matter what (for more on my take on who will do well in the current climate follow the link).
- Most of the $500 billion + that schools spend is for people and services. Education is people intensive business and roughly 80% of school district budgets go for staff. So take off $400 billion. Of the remaining 20% almost all of that goes for services – buses, food, athletics, accounting, etc. At the end of the day only 1-2% is spent on instructional materials and technology ($5-$10 billion). Another $1-$2 billion are spent on education enterprise systems and services (Student Information, Accounting, etc.).
- Within the instructional materials market many funds are dedicated to a specific purpose – further limiting the scope of what you may be able to compete for. These are called categorical funds. Examples include textbook adoptions at the state level and Perkins funds for career education at the federal level.
It seems kind of funny to say that the market is only $5-$10 billion. This is roughly the same size as Hollywood or consumer Video Games. But I have seen many business plans from people outside of education who trumpet the $500 billion number. It just aint so, don’t be a n00b.
What all of this means is that your amazing new learning widget or software is going to have to steal market share from someone else. You may be thinking to yourself – “this doesn’t apply to us since no one else does what we do – we don’t have competition.” Wrong.
I once heard a Principal tell a technology vendor that he didn’t need computers to teach – he just needed a pencil and a pad of paper. At the most basic level he was right. If you are selling instructional materials you are competing with a teacher simply talking. You are also competing for their time and effort. At a more practical level some other vendor or product is going to loose out if you succeed.
There are three lessons to take way from this.
First – be clear about who you are going to take market dollars from and where those dollars come from. This will help you focus your product offerings so that they meet the specific requirements of the funding source you are are going to tap.
Second – you must do your competitive research – too many companies are so in love with their own products that they don’t spend the time to understand why customers are already buying competitive/alternative products. Assume you are going to be in a dogfight. You might avoid this – but don’t plan on it.
Third – this market grows more slowly than others but once you have customers it is less volatile. When you have grabbed a piece of the market it is often solid for years – if not decades (see Plaid Phonics at 50 years and counting). The downside is that some investors will push you to grow at an unrealistic rate given the time it takes to build a position.
At the outset I said that education is (mostly) a zero sum game. The “mostly” is because there are a couple of extrinsic sources of growth.
One option is to bring in sponsorship dollars from corporations and non-profits – essentially making your products free to schools. Channel 1 and Whyville (client) are both good examples of this approach.
Another option is to lobby for additional government spending – earmarks. This is usually more opportunistic than deliberate – policy makers decide on a priority and companies work to bend it to their advantage. Voyager and Dibbels fueled a lot of their growth this way.
Foundation grants are a good way to get started – but with rare exceptions they do not provide a sustainable business model and in most cases they are restricted from overtly supporting commercial ventures. If your product happens to get purchased as part of a larger initiative that is fine, but outright support would be extremely unusual.
Once you have selected a target market (see #2 on the series) you need to do additional homework and determine how those customers are meeting their needs today and who your competition is. Driving the kind of rapid growth a new product or start up demands requires that you know who you are displacing. Your products and messaging can only be tailored to the situation when you have this level of awareness.