Using business model innovation to stand out from the crowd

“Instead of technology innovation being the driver for startups, it is more frequently business model innovation.” — David Skok, Matrix Partners

I recently did a workshop for a wonderful organization called The Lean Lab, which supports entrepreneurs creating innovations for K12 schools, and it got me thinking more about business models in education.

As the number of education-focused startups continues to grow (more than 15K currently operating in the U.S.), it’s harder and harder to stand out of from the crowd in many markets within education. Understandably, entrepreneurs focus on technology innovation as a way to differentiate themselves from competitors. But what if technology innovation is hard to come by? There may still be a powerful opportunity to breakthrough in the market — possibly through business model innovation. There are a number of well-established business models in education including Software-as-a-Service (SaaS), Licensing, and Fee-for-Service, but there are some newer approaches that are starting to get traction in education. Here are several recent examples.

1. Freemium or “Reverse Freemium”

As mobile devices have become omnipresent and broadband has proliferated to 95%+ schools in the U.S., freemium has gained popularity with edtech entrepreneurs. The idea behind freemium (or its cousin, “free trial”) is to give something of value away with the hopes of building a large audience that will pay you for something. There are numerous examples of freemium business models in edtech. Companies employing this model include Class Dojo, Remind, Kahoot, Quizlet, and many others. While freemium can be valuable in building a large user base, it’s hard to find something where customers are willing to pay. Some freemium providers are struggling with monetization, while others are finding revenue streams. Newsela is one standout company that’s succeeding with a freemium model. Personally, I’m a fan of “reverse freemium.” With this model, an entrepreneur first nails a product that customers are willing to pay for and then creates a freemium product to build a pool of prospects that can be upsold.

ThinkCERCA is one company that’s done this well. They first sold dozens of customers with a SaaS platform designed for schools and, in doing so, validated a path to monetization. Then, they launched a free version of the product that’s been effective in filling the top of the funnel with prospects and accelerated adopted of their paid product.

2. Pay-Per-Use

In the pay-per-use model, the use of a product or service is metered and customers are charged when they use the service. This is not an altogether new concept, but one that’s gaining traction in education.

Swing Education is having success with this model in the substitute teacher market. Schools and districts can try it for free and they don’t pay until they find a substitute match. This enables a school or district to onboard Swing and start working with the company with just a single substitute for a hard-to-fill position (e.g., a math or science teacher). As trust and credibility build, schools and districts grow their use of the service as needed. The incumbent substitute and absence management providers are SaaS CRM providers who cost thousands or tens of thousands of dollars. They still require schools to do the work of building and managing substitute teacher pools. Schools can also pay expensive staffing consultants ($100K+ is not uncommon) to build substitute teacher pools, but this price tag is out of reach for many schools and districts. Through their pay-use-use model and some innovative technology, Swing is disrupting the way schools and districts fill absences with substitute teachers.

3. B2B2C

This model involves delivering a product or service to a school or district (the B2B part of the model) at no cost or a very low cost. Teachers and/or students use the product or service in class, then the school partner encourages parents or students to purchase (the B2C part of the model) or kids and/or parents want additional value so are willing to spring for the pro version.

Both of my kids started using Prodigy Math at their elementary school this year and got hooked on the game, which is offered free to them through school. My kids started using it in the classroom and loved it — enough to lobby mom and dad to upgrade to the premium version (think Pokémon Go-style gaming features). They both purchased the game this week for $60 annually using their allowance money. With 30 million students on the platform and a student/parent audience willing to pay for the additional gaming features, Prodigy Math is growing very quickly using a business model that includes freemium and a B2B2C channel.

4. Income Share Agreements (ISAs)

The Income Share Agreement or “ISA” model currently fronts payments to students to complete their education (e.g., a college degree, coding bootcamp, etc.) in exchange for students “sharing” or paying back the program with a portion of their income for a specific period of time after program completion. These programs fill needed gaps in funding for students who can’t afford the program while also sharing risk with the educational institution. The education provider doesn’t get paid unless the student lands a job, thus reinforcing the notion that the education program should deliver a successful employment outcome for the student. There are concerns with ISAs, including taking advantage of students with unfair payback rates and reinforcing existing power imbalances in the labor market (think indentured servitude). Even with these concerns, ISAs are a creative way to address college affordability issues.

Purdue University is one high profile institution that is experimenting with this model. The verdict is out as to how successful they’ll be with this approach, but it has potential. Will this model find its way into education technology in some form? We’ll see.

These business models are becoming more popular and companies are using them to gain a competitive advantage in their respective markets. What are the other ways that edtech companies are innovating with their business models? How else are they differentiating in a crowded market? I’d love to hear your thoughts.