Dec 16 2013

How MOOCs Can Be Free and Profitable at the Same Time

A look at the economics of MOOCs.

In three years, massive open online courses (MOOCs) have taken online education into uncharted territory. MOOCs promise to bring educational content to anyone with a computer, and companies like Coursera and edX are gaining attention amid an environment of stubbornly high unemployment, prohibitively expensive education and a nationwide skills gap. But the value of a MOOC education is still not clear. Critics argue that the meteoric rise of MOOCs will eventually collapse under the weight of a few key weaknesses — namely, high attrition rates and a lack of participation from underprivileged students. These criticisms, however, ignore the market forces that led to the rise of MOOCs in the first place and will continue to support the movement going forward.

Competition Will Make MOOCs a Necessity

Competition sometimes creates a phenomenon called the “prisoner’s dilemma” in which sellers must choose between two bad options to stay competitive. A good example of this is the proliferation of credit card rewards. These rewards cost the credit card companies money, but they must offer them to attract customers. Even though the rewards create a loss for the company, getting rid of them altogether and losing the large segment of customers who have come to expect them would be worse.

Universities are highly competitive, and they invest significant money into faculty, facilities, research and now a new loss-leader: MOOCs. These courses offer universities a way to find and recruit high performers. They also increase brand awareness by showcasing their best professors or most exciting content to a large audience. The content can also be licensed over time to other organizations. Rather quickly, MOOCs are becoming an important part of a university’s digital strategy. Less than three years after the birth of MOOCs, 24 of the 25 top colleges according to U.S. News and World Report are offering MOOC courses. In such an environment, even reluctant universities are encouraged to consider MOOCs to stay competitive.

MOOCs Can Be Free and Profitable

MOOCs are expensive to produce; in many cases, a single course costs an institution more than $100,000. However, if they are able to live up to their potential and bring high-quality education to the underserved, they must continue to be available for free or nearly free. It seems that as MOOCs inevitably monetize, they will lose their two most important features: massiveness and openness.

Two things help here. First, MOOCs are reusable. Whereas the cost of a professor, a lecture hall and other variable expenses must be incurred for each brick-and-mortar class, the cost of a MOOC is incurred one time, up front (with smaller, ongoing maintenance costs), and that content is sold over a longer period of time.

Second, MOOCs can utilize a freemium model to keep costs low for most students and upsell students and organizations that want premium features. Most MOOC providers now offer a certification track, which allows students to pay for an official certificate upon successful completion of a course. They have also started to partner with organizations willing to pay for content as part of their training and development programs. Last month, edX partnered with Tenaris to deliver off-the-shelf and custom content for more than 27,000 employees.

By using this freemium model and extending the sellable life of their content, universities can make these courses massive, open and profitable.

MOOCs Create New Customer Segments for Universities

Price discrimination is a seller’s response to customers having different price tolerances for a product. Think first class, business class and economy class on an airplane. Higher education has been historically resistant to price discrimination. While financial aid, community college and state universities have done a good job of making college accessible to more people, a private four-year education is becoming difficult to afford, with prices rising faster than all other cost-of-living expenses, including healthcare.

When a customer segment in a competitive market cannot afford a certain good, sellers will offer a cheaper version of their product to capture those customers. Just like an airline’s economy class does not receive all the benefits of first class, a Harvard MOOC will not be as valuable as a brick-and-mortar Harvard experience. Despite this, we’ve seen MOOC classes appeal to new customer segments. College alumni, teachers and corporate trainees are customers who most likely would not pay for an undergraduate education, but they will pay a smaller price for an on-demand online course. Universities are not likely to neglect these potential customers.

What It Means for Higher Education

While much of the debate rages around what is “right” and what is “wrong” with MOOCs, that debate only touches some of the factors that influence whether the industry will last. Powerful competitive forces make a strong case for keeping MOOCs as a part of the educational landscape. MOOCs will likely evolve many times in the next few years, and metrics like attrition and student body will change with those evolutions. But the economic forces will not change so quickly. They should be given important consideration when debating the future of MOOCs.

<p>Karen Roach/Hemera/Thinkstock</p>

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