Sunday, September 04, 2011

How Does For-Profit Higher Ed Turn A Profit?

The more I look at the For-Profit Education industry's business model, it seems that the industry is only profitable within a narrow band of course offerings, notably in Accountancy, Law, Business Administration, Hospitality, Computing and Fashion, but not in much else. I would have loved to add design or Engineering, but numbers don't seem to add up there. Besides, in most cases, For-Profit Education's profits have come from regulatory lapses, as the recent experiences in United States show, and are bound to fall once the regulators tighten their act. In a way, For-Profit Education sector has been innovative and ahead of the industry, but mostly in an unsavory way, which gives the sector as a whole quite a bad name. In Britain, for example, For Profit Education has been taken over by operators running fraudulent immigration schemes, so much so that the Government has imposed harsh legislation particularly for the sector. 

With all this, the obvious question that needs to be answered is whether For-Profit Education industry can actually turn a profit under an effective regulatory regime. Indeed, the Public Higher Education can barely generate a surplus as a whole, and the costs of education delivery, salaries of tutors, cost of journals and resources, real estate costs, marketing and advertising costs are all going up at the same time as the student loan burdens are skyrocketing. If there is a surplus to be generated, where would that surplus come from?

Indeed, the answer is quite straightforward and can be seen from the examples of highly successful Not-for-Profit schools: The surplus comes from reputation premiums. Under an effective regulatory regime and a competitive environment, it is hard to make money just by offering access to education to an underserved segment, which most For-Profit companies set out to do. The real money can only come from people who are ready to pay a little extra for being in a particular school.

This is common knowledge, surely, and all we are talking about is the value of brand etc., which creates differentiation where there may be none and create a monopoly space within a competitive framework. However, this means that there is no money to be made in commoditizing education. This is important because most For-Profit Education companies are set out just to do that: Their mission is to serve people who are turned down by the better schools or those who can't afford a proper university. The mantra of For-Profit is ACCESS and this is about making available a path to degree to everyone. While this may be a worthwhile goal, there is not much profit to be made there unless there is a regulatory lapse, and even then such opportunity may only be temporary.

This also means that the right investors for a For-Profit Education company should be those who are more interested in brand equity and value than those who are keen on quarterly trading profits. Indeed, when setting up a start-up, compromises have to be made in terms of securing investment, and we may end up combining elements of different business models, a combination of short term building blocks based on immediate opportunities linked to the long term pursuit of value and brand equity. Surely, one has to get the investors right in such ventures, so that the objectives can remain fixed on long term value even when immediate revenue opportunities are grabbed, as this will invariably mean choices have to be made at every step and some revenue opportunities have to be let go. This, as I can see, is the only way a For-Profit can turn a profit - not from expansion, but from reputation.

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