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Growing Education Marketplace Good News for Schools and Startups

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EDUCATION COMPANIES
AP

Earlier this year, I tried my luck at a TEDxSFED Speaker Search. TEDx is the well-reputed TED's local brand, and SFED is the education-specific group dedicated to bringing innovative ideas to education.

My colleague, Rafael Corrales, and I were discussing education markets, comparative advantage and scalable business models when it became apparent that disruption in the education industry from "freemium" models is imminent.

Freemium means free to premium. It's a business model that arose largely with web-based companies, and was articulated by Fred Wilson in 2006. With freemium, a company starts with a product. They distribute that product for free to those willing to give it a try, usually in a market where people are paying for a similar good. Through word of mouth and typically web-based marketing tactics, the company picks up more users. The intent is to create a product with a lot of value that spreads to a large audience.

Then the company can begin to sell related premium services. Though 95 percent of a business' clientele might continue using the free product, 5 percent may elect premium services. As a result, the freemium model can shrink an inefficient market hugely. Whereas all of these people would have been paying for similar services elsewhere, they are now getting what they need for free. Then, only if the product is outstanding, users will upgrade to paid services.

Historically speaking, the education market has been slow to "get" market trends. The freemium model works so well because it focuses on ground-up adoption, targeting a large amount of people before making any sales to a smaller percentage of them. In the education world, the analogy would be: adopt a multitude of teachers and students (the majority of people in the space), then sell up to districts and administrators. But, education is traditionally very top-down. With a federalized system, we see a trickle down of funding from a very small percentage of the industry. Policy and money go through the U.S. Department of Education, state departments, superintendents, district boards, unions, schools and finally to students. This has created an exceptionally bloated market, saturated with legacy market providers, and sets up barriers to entry that make it difficult for smaller vendors to penetrate.

With the education market so large and inefficient, disruption from freemium models is imminent. At this point, we are seeing some more innovative companies emerging, despite the bureaucratic structure of education. Albeit, this is happening with a five-year lag behind other markets like entertainment and communication. Just think of Pandora, Skype, Yammer, Survey Monkey and Flickr!

A notable example of market trends is Blackboard's recent move to shift its strategy with a freemium option. After about 20 years of being a leader in the education technology space, and drawing in almost $500 million last year, Blackboard released a free suite, CourseSites, that demonstrates a move toward the more typically "startup" mentality. The feasibility of such a move is demonstrated by Mailchimp's move to freemium after eight years. In the education space, I'm interested to see if the big guys can compete with innovative startups.

So, ultimately, what does "freemium" hold for the future of education?

When innovative companies begin to enter bloated, inefficient markets, we will see more products that better meet the needs of users. First of all, costs will drop for schools and educators since more and more competitors will offer free products. As I mentioned, companies with free products depend on the utility of their product to generate loyalty and convert non-paying users to paying customers. This means better products!

Secondly, a freemium landscape opens the door for smaller companies to enter a market that is traditionally very difficult to penetrate. No longer will schools and districts be bound by contracts with expensive vendors, but instead, they will be able to allocate their resources toward the best products out there. Thus, the endgame here is a less bloated market with more nimble and innovative companies that can deliver better products to schools for lower costs.

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