OPINION

The Pros and Cons of Different Business Models in Edtech

The Pros and Cons of Different Business Models in Edtech

Dear Esteban,

I have an idea for an edtech product but have no idea on how to monetize it. What are the different business models possible in edtech?

—Are You My Model?

Dear "Are You My Model,"

There is a general perception that education is full of regulations and red tape that make it impossible to innovate. However, many edtech business models resemble business models you see in other industries with some nuances particular to the education space. Below is a quick summary of four common edtech business models, with an example of a company that is implementing each.

Bottom-Up: Freemium or Free Trial

With this model, teachers can begin using your product for free, with an option to upgrade to a paid version. This can work in two ways: through feature limitations (“freemium”), or time limitations (“free trial”).

The more common freemium model limits the amount of features or support a teacher receives for the free product, and the paid version is essentially a more robust version of the same product. Newsela, a personalized learning tool that allows students to read daily news articles and other nonfiction content at five different reading levels, uses this type of freemium model. The free version of their product gives students access to the daily articles along with comprehension quizzes. And Newsela Pro allows teachers to assign specific articles and to track individual and class-wide progress against Common Core reading and writing standards.

With the free trial model, the free and paid versions of the product are identical, but features on the trial version expire after, say, one month. This requires a teacher to convert to the paid version for prolonged use. This model is typically used when it is difficult to strip away features from the core offering. This model is common with companies that offer content, such as Mystery Science.

The great advantage of this model is that you can gain traction quickly and distribute your product straight to your end user without intermediaries. The main disadvantage is that in education you have a classic principal-agent problem (pun intended)—your users and your buyers are generally not the same. Teachers might love and use your product but lack the influence to get their schools to purchase it, or the budget to pay for it themselves. This is where smart companies actually create tools and strategies for teachers to use with their admin’s, essentially coaching them on available funding sources and how to position the product with admin’s.

Institutional

This is the more traditional model of selling to schools through district leaders. The sales strategy is generally referred as “top-down,” meaning a district makes a purchase for all the schools under its administration. The main advantage of an institutional business model is that districts are positioned to sign large contracts. The main disadvantage is that these contracts take a long time to close, and usually involve competing with other vendors in the “Request For Proposal” (RFP) process. Districts can be demanding customers in terms of compliance and customer service.

This is the best approach for edtech companies that need to integrate into school- or district-wide data systems, or whose users are going to be school administrators. Schoolzilla provides K-12 districts with a secure, hosted data warehouse and customizable dashboards that bring school data into focus for teachers, principals, and district leaders. It is principals and administrators who get day-to-day value from Schoolzilla, so it makes sense to sell to them. Plus, the very nature of a product like this necessitates an institutional business model; a single teacher can’t use Schoolzilla without a school- or district-wide implementation.

Consumer

The consumer approach is an emerging business model that allows schools to use a product for free, and then charges families if they want to continue usage at home. This model is suited to companies with products that kids can use on their own. Schools, in this case, essentially become lead generation (or “lead gen”) for consumer adoption.

With this model, it is important to create a “product loop” between school and home, where teachers use the product with kids in school and then also recommend to parents that students continue using the product at home. The advantage of this model is that schools love free (quality) products, which can drive user adoption, and parents tend to listen to teachers’ recommendations for what tools to use at home. This is a great way to establish a trusted brand, as Scholastic has proven.

ABCmouse provides educational games and activities to young children on a subscription basis and sells directly to parents. They also offer their content to teachers for free. As an impact investor, I like this model: On the impact side, it serves a social mission by reaching a student population that may not otherwise be able to afford these resources. On the investor side, distributing to schools for free is a cost effective way to make parents aware of your product.

The disadvantage of this model is that, at least in the US, it is not always easy to monetize consumers for supplemental educational content. Another disadvantage is that this model can be inequitable, with students from more wealthy backgrounds able to afford educational tools that their lower income peers cannot.

Sponsored

Finally, a less common, but quite interesting model is one where neither schools nor parents pay. Instead corporate or foundation sponsors pay for product placement, usually as part of a corporate social responsibility (CSR) initiative. The advantage of this model is that the sponsor will care mostly about usage, which is likely to be quite high if you’re offering a quality, free product to schools.

GoNoodle provides teachers with a library of “brain break” videos that help get young kids active, creative, and moving around. Because their app promotes children’s health, they developed a partnership model with hospitals and health plans, and even national brands like Finding Dory. The sponsors improve their brand image and visibility by providing GoNoodle to a community for free, and GoNoodle tracks and reports on the social impact of the sponsor’s funding.

We encourage you to be creative and find new ways to innovate with monetization and distribution, particularly as schools are becoming more open to different models of tech adoption. As the monetization guru Madhavan Ramanujam points out, sometimes the best product innovation is the monetization model itself.

—Esteban

This article is the first in a series of posts on BlendEd, a blog started by Esteban Sosnik (Partner at Reach Capital) and Guido Kovalskys (CEO of Nearpod).

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