A SaaS Educational Content Pricing Model Emerges

In January 2001 as the dot com boom burst online education site wwwrrr.com went out of business overnight, literally. Coverage tended to focus on the employees – who ultimately filed a class action lawsuit for back pay and 401k contributions.

Lost in that ugly coverage was the blunt reality for teachers and schools that the new era of on-line content had a very dark side. Teachers who were relying on wwwrrr’s materials on January 9th were left with absolutely nothing on January 10th. They had no warning.

When schools buy a textbook they own the thing. If the vendor stops offering the book the school still has the thing. With cloud-based solutions schools are buying a license to a service. If the vendor stops offering the service it evaporates. Teachers rightly want some assurance that if they integrate a useful solution into their lesson plans that they can use it for several years.

There are enormous benefits associated with cloud-based materials (see below*). As the wwwrrr story illustrates there are significant hurdles to overcome as well.

The trick is to find a business model that insures products will be supported and sustained over the long haul. At the heart of this challenge is the question of how cloud-based instructional materials are priced. As we transition from physical textbooks to digital content we need a pricing model that is fair to everyone.

Pricing for cloud-based instructional materials will probably not look like the enterprise or personal SaaS markets because there are some unique structural issues that have to be reckoned with.

This post examines the market forces that are driving an emerging standard for SaaS pricing in education.

Production & Maintenance

As soon as textbooks are at the press the product becomes inert which is one of the big knocks on them. The benefit is that a book can be useful in and of itself decades after it was published. There is no ongoing maintenance.

Software is more like a living organism that has to survive in a larger ecosystem. OS revisions, bug squashing, content updates, and new hardware platforms make ongoing maintenance an imperative. Software evolves as the platform evolves, sometimes on a daily basis.**

This means that publishers have to dedicate teams to the product after it is released, and those people need to be fairly compensated for the work they do. There is a need for an ongoing revenue stream to support this vital work.

Enter Subscription Pricing

The obvious solution to this problem is to sell the software as a service (SaaS) on a subscription.

Software as a Service (SaaS)pricing models are well-established in the corporate and personal software spaces. SalesforceEvernote  Netflix  and Google  have proven and accepted business models. In the education space, the Student Information Systems (SIS) market has gelled around standard subscription practices. SaaS instructional materials remain a laggard. The transition from the old adoption model for textbooks to something better adapted to digital content is very much in motion.

Investors are pushing hard for subscription models – they like the predictability of a steady stream of income. Since subscriptions cost less on an annual basis than a purchase it takes longer to spin up to profitability, but performance is much more sustainable over the long haul. Thus VCs and Private Equity investors place a valuation premium on this model.

The obvious result has been a slew of subscription-based educational software startups over the last several years.

Spiky Funding & Market Cadence

Subscriptions in schools run smack into the uncertain nature of school funding, particularly for materials purchases. There is no guarantee from year to year that a given funding source will be available.

The market solved this for print by doing adoptions on a scheduled refresh cycle (usually 5-7 years) for each subject area. Funds are specifically (categorically) set aside for this purpose. A big burst of funding over 18-24 months buys all the books, and then a small residual fund is available for replacing damaged or missing books through the tail of the adoption.

This funding structure is very unfriendly model for subscription-based products because the funding is so spiky.

That said, the cadence of switching core materials every 5-7 years makes a lot of sense for teachers. It usually takes them a couple of years to master a new set of materials, which they can then leverage into another 3-5 years of practice without having to completely start anew.***

Additionally, all the review and approval mechanisms are tuned to this cadence at the state, school board, and teacher level. There will be significant institutional inertia to something like an ongoing or even annual cycle for new materials. Educators are pressed enough for time already.

Think of the 5-7 year materials cycle as the QWERTY keyboard of purchasing. It will survive long after its original purpose has been obviated by new technology because the switching costs are so high and it still solves the basic problem.

An Education-Specific Solution

What appears to be emerging is the ability to pre-pay subscriptions over a set of years that mimics the traditional adoption cycle. This maintains the cadence that everyone is familiar and comfortable with, without presupposing the funds will be available through the full cycle. Schools can buy a single year if they just want to try something out, but the best pricing options are all at some level of multi-year commitment. There is no doubt that schools are buying a subscription-based service not a physical product, but the purchase cycle mirrors the older product purchase model.

From the vendor perspective cash flow will look very similar to today, but revenue recognition on the income statement will take a big hit in the initial years (subscriptions have to be recognized over the life of the subscription). Dollars you collect today won’t be recognized for up to six years and will sit in an unearned income bucket on the balance sheet.

Investors should plan on revising their analyses of financial statements to account for these shifts. I expect to see a much higher emphasis on cash flow than EBIDTA in this new world.

Vendors should be careful about managing cash to make sure the resources for maintenance are available through the life of the contract. This isn’t a windfall for them. Even though the cash is in the bank they should budget to the income statement.

A multi-year subscription requires a level of trust that the vendor will be around through the full term. This will play to the advantage of larger companies and those with well-established brands.

I expect this model will emerge as the dominant pricing structure over the next 2-3 years. That will be a good thing for teachers, students, and vendors. It will help fuel a new generation of innovative solutions.

*Using the cloud solves a wide range of problems schools face when deploying instructional software.

A quick review:
Installation and maintenance evaporate – this is a massive headache for thinly stretched School District IT staff.

  • Software is no longer hardware dependent, well-crafted solutions run on older computers and the latest tablets.
  • User authentication is based on where the user is, not what machine they are using.

From the vendor’s perspective many of these benefits have a mirror image.

  • Minimal set up makes it easier to trial and implement new solutions, reducing transactional friction.
  • It is possible to paint a path forward to tablets when they are still a small fraction of the market.
  • With web-based authentication, it becomes easier to see what is getting used   (i.e. what is valued in the classroom).  Do.  More.  Of.  That.

The forces of change are all lined up behind this shift.

** This by the way is one of the primary filters educators should be use to evaluate OER solutions. All software needs a clearly sustainable source of funds for product maintenance. Unsupported solutions have a high risk of becoming unexpectedly obsolete in the middle of a school year because something in the larger ecosystem has shifted.

*** This is based on the the teacher’s own learning curve. In the textbook world it is understood that student outcomes do not improve in the first year as the teacher adapts the new tools to their unique needs and style. Typically benefits start to emerge in the second year and are not fully established until the third year. SaaS, with a one year subscription cycle, asks teachers to make a renewal decision based on their own challenges from year one. The obvious result is lower renewal rates. This isn’t a new problem,  the pattern is familiar from print. But the ability to walk away from the digital materials after one year means they don’t have enough time to generate meaningful improvements.