pricing online learning v1

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Pricing Online Learningwritten by Jeff Cobb

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2! Pricing Online Learning

rom Balancing Act: The Newsletter (No.94: June 2007):

There are only a few really vital aspects ofpricing: The perceived value of your offering, theprice point, the margin of profit, and the volume

of sales. You can materially affect all of themunilaterally.

I ran across the above passage from AlanWeiss, author ofMillion Dollar Consulting:The Professionals Guide to Growing a Practice nearly two years ago when I was attemptingto articulate my thoughts about how toprice e-learning. It struck me as a goodframework at the time, and it still does.Here are some brief thoughts on how thesevital aspects apply in our currentenvironment.

The Perceived Value of Your

Offerings

What you are able to charge for your e-learning offerings or anything else, forthat matter is dependent upon the valueyour prospective customers place uponthem. It is essential to recognize that thisvalue is a dynamic phenomenon. It changesover time and from customer to customer,and most importantly, you have the power

to impact it through your product strategy,marketing efforts, and ongoing interactionwith prospects and customers.

When attempting to assess the value thatprospective customers might place on youre-learning offerings (e.g., through surveys,competitive analysis, etc.), I believe it isimportant to lay aside any biases you mayhave or assume your customers have about the delivery method or how onlineofferings relate to any classroom-basededucation you may offer. If you start withthe assumption that education deliveredonline is inherently of lower value thanclassroom-based education that is almostcertainly where you will end up with yourcustomers.

Instead, consider the qualities yourprospects are likely to value across any ofthe educational experiences you offer regardless of delivery method - and thendetermine where each e-learning productfits within your full range of educational

offerings.

As a general rule, perceived value of aneducational product tends to be lowerwhen,

the product is highly generic,designed for the largest possibleaudience

the product offers users limited orno ability to get input specific totheir individual needs

the intellectual content of theproduct is produced by an unknownor little known expert

free or lower cost alternatives to theproduct are widely known and easyto find

Note also that convenience as a value driverfor a product the driver I most often seeassociations use for e-learning almostalways correlates with lower perceived

value. The reason for this is thatconvenience is nearly always based on atransactional relationship with a customerrather than a deeper, more nuancedexchange of value.

The bottom line is that e-learning is not aninherently low-value offering. You havecontrol over all of the factors above, and thestrategic decisions you make about eachwill drive the perceived value of yourofferings up or down. Determine where itmakes most sense for e-learning to play arole across the spectrum of educationalvalue your organization offers, and thenplan and implement accordingly.

The Margin of Profit

Margin is the spread between what youcharge for a product or service and what it

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costs you to provide the product or service.It is critical to understand how value isperceived and constructed because it is akey factor in determining the top end of thisspread. On the bottom end is cost.

A key factor that makes e-learning soattractive for associations and otherorganizations that sell education is that intheory it offers an opportunity for drivingdown costs substantially, thus creating thepossibility of higher margins by managingthe bottom end of the spread. In practice,many organizations do not actually have agood gauge on their underlying costs forcreating and delivering e-learning. Manyalso make the decision to price e-learningsignificantly lower than their place-basedofferings without considering the value

factors discussed above or the overallimpact on margins. The result is that thefull net revenue potential of e-learning isoften not realized.

While organizations do not have completecontrol over value perception, they do havethe ability to influence value perceptionsignificantly. And certainly they shouldhave control over the amount they invest toconstruct a desired level of value. In otherwords, any organization that pursues e-learning strategically and plans properlyshould be able to achieve and maintainhealthy margins. (Or possibly determinethat healthy margins cannot be achievedand thus make the strategic decision to stayout of e-learning.)

There is no magic number or percentage forwhat your margins should be, but whetheryou operate on a for-profit or a nonprofit

basis, my bias is always to try to maximizemargins. There will nearly always bedownward pressure on prices in the future

and you will need to continue to invest inyour e-learning offerings. Your marginsgive you the funds to do that, and the morecushion you can create, the better.

The Volume of Sales

Value is one key factor in determining thetop end of your margin spread. Volume isanother. High perceived value doesnt getyou very far if the size of the market you are

targeting isnt large enough to cover yourtotal costs. Put another way, if your totalproduct costs are $100, finding two peoplewho value the product at $40 per unit wontdo you much good (youll lose $20), butfinding 5 people who value it at $25 will(youll make $25).

Seems simple enough, but of course, there ismore than a little guesswork involved indetermining how many potentialpurchasers value your product and at whatlevel. This is an area in which organizationsselling e-learning can benefit greatly fromtwo essential practices of successful Internetmarketers:

Test (and re-test) your market beforeproducing

To the greatest extent possible, pre-sell before producing

Covering these two items fully is beyondthe scope of this article, but the general idea

is that you can test a products viability bycreating a variety of different promotionsfor it that ask people to take an action like,for example, handing over their e-mailaddress in exchange for additional, valuableinformation.1 The response rates to thesepromotions gives you an idea of how manypeople are actually interested in theproduct. Based on the size of this group,you can then run an introductory offer at aprice designed to at least cover your fixedproduction costs.

I deal with many groups that are in aposition to all but skip the first step simply

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by going to a member or customer with theability to make a reasonably large purchaseand setting a per unit price that covers totalfixed costs for launching the product. Evenin these cases, though, I still recommenddoing broader market testing: you may

have your downside covered, but you alsowant to know what your upside might be(i.e., how large your overall market it) tohelp you gauge how much you shouldinvest in promotion and assess the level ofgross margin you may ultimately haveavailable to apply against operational costs.

I noted above that my bias is to try alwaysto maximize margins, but of course this hasto be done within the context of volume.You want to sell as much as possible at thehighest possible margin, but adjusting

margin up or down assuming costsremain constant can impact the volumeyou are able to sell. This trade-off isreflected in the final and most visible factorin pricing the price point.

The Price Point

Although Alan listed the price point secondas an aspect of pricing you can affect, I thinkit is important to understand value, margin,and volume before attempting to establish

the price point. When you have reallyunderstood these factors and assessed themin your market, you will have the clearestpossible understanding of the rightproducts to create (value), the appropriaterange of investment for creating them(value plus desired margin), and the size ofyour potential market (volume). The pricepoint is the synthesis of all of these factorsand it should strike a balance between themthat maximizes your net revenue.

In truth, it is likely that you will not

establish a single price point for an e-learning product. Because your product will

be valued in different ways by differentaudiences, or segments, within your overallmarket, it makes sense to vary pricing forthese different audiences. This doesnt meanfavoring one group with a lower price whilepulling the wool over the eyes of another inorder to charge a higher price. Rather,

because you will have an understanding ofvalue, you can add or remove value basedon audience preferences and adjust priceaccordingly.

For example, a portion of your audience is

likely to value receiving credit or someother form of validation for successfullycompleting an e-learning program. Thismight be a feature for which you chargeextra. So, too, might getting access to arecorded version of a Webinar. And it iscertainly fair to give discounts toindividuals or organizations that purchasecourses or other learning events in highquantities.

What then are typical price points for e-learning in the association market? I am

tempted not to cite any because the onlyother price points that should matter to anorganization are potentially those ofcompetitors. (And as Apple, for example,has demonstrated so well, even competitorpricing should be given only so muchweight.) Additionally, our research suggeststhat only 20 percent of associations haveany sort of formal process for setting price which makes me wonder how muchthought is being put into value, margins,and volume.

Still, it can be helpful to have some sort ofbenchmark, however, general, againstwhich to gauge your organizations pricing.We go into much more detail about pricingin our Association E-learning: State of theSector report, but the average price per e-learning content hour in the associationsector based on our survey of nearly 500organizations is $56.79. Per credit hour theaverage is $73.97. So, for example, based onthese figures, the average fee for a 90-minute Webinar that offers CE credit would

be around $110.

Conclusion

I began this discussion by focusing onvalue, and it seems important to note as Iconclude it that the price point is not onlydependent upon perceived value, it helpsdrive perceived value. Part of what gives a
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Mercedes or a Louis Vuitton handbag itssheen of value is the high price pointassociated with each. To a certain extent, ofcourse, the price is driven by underlyingcost. But it is also true that these companiessimply have the audacity the

organizational self-esteem, you might argue to set a premium price. And people gladlypay it.

Few associations, I find, are willing to takesuch an approach with pricing their e-learning, and perhaps few would succeed ifthey did. But my suspicion is that mostorganizations are pricing at a lower levelthan they need to simply because they havenot fully assessed the value volume -margin relationship. And this is not a trivialmatter: it is well established that an increase

in price is one of the most effective ways toincrease profit. A study by the consultingfirm McKinsey & Co. way back in the 1990sshowed that a 1% increase in pricetranslates into an 11% increase in profits. Onthe other hand, increasing volume by thesame amount resulted in only a 3.3%increase. Cutting variable costs by 1%resulted in a 7.8% increase and cutting fixedcosts only a 2.3% increase.2

Given the need that most organizationshave right now for finding new revenuesources and getting more revenue out ofexisting sources, putting some effort intosetting the best possible pricing for e-learning offerings seems certain to be timewell spent.!

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Copyright

2010 Tagoras, Inc. All rights reserved, including the right of reproduction in whole or in part

in any form.

About the Author

Jeff Cobb serves as the managing director of Tagoras, where he heads up the companysconsulting and education services. He is an experienced Web entrepreneur who writes andspeaks frequently on topics related to social media and the strategic implementation of Web 2.0and learning technologies for engaging customers and members. More information about hisspeaking is available on his personal Web site at jeffthomascobb.com.

About Tagoras

Tagoras is a research and consulting firm that helps clients use educational content andcommunity to dramatically increase revenue and create loyal, engaged customers. To find outmore about our services and our research products as well as to access a variety of freeresources, please visit our Web site at www.tagoras.com.
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pricing online learning v1

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