Parthenon Perspectives

S e p t e m b e r 2 01 2

THE PARtHENON GROUp

Are the Sleeping Giants Awake? Non-Prot Universities Enter Online Education at Scale
by Chris Ross, Partner

w w w. p a r t h e n o n . c o m

Parthenon Perspectives
Are the Sleeping Giants Awake? www.parthenon.com

INTRODUCTION

For a decade, for-prot universities like the University of Phoenix, DeVry University, Ashford University, and Capella University took share from traditional higher education. The for-prot share of post-secondary enrollments doubled from 2004 to 2010, going from 6% to 12%. Recently, however, for-prot institutions have experienced enrollment declines while traditional non-prot universities capture headlines with new online programs, enrollments gains, and growth initiatives that include open courseware such as Coursera and EdX. With several non-prot schools surpassing 20,000 online-only enrollments and even more signing partnerships with online enablers like Embanet, Bisk, 2Tor, and Deltak the sleeping giants are undeniably awake. Building on the successes and lessons learned from the for-prot sector, non-prot institutions are taking advantage of strong reputations and rapidly scaling online programs. Although non-prot institutions have historically served a different demographic, recent surveys reveal that their online programs target the same working adult population that has been the bread and butter of the for-prot sector for over a decade. What does this mean for the sector? In pure economic terms, the consequences could not be simpler. New market entrants targeting the same student can only mean one thing: increased competition. What is the basis of competition? Ten years ago, the average online applicant could choose from only a handful of similarly priced online offerings; todays students have a far greater number of choices. This increased variety means that institutions must compete on three dimensions: Brand, Price, and Outcomes. The tactics and strategies that enabled institutions to scale over the past decade are no longer applicable. Successful institutions will need to understand the importance of Brand, Price, and Outcomes as they compete for an increasingly well-informed and price-conscious consumer.

New market entrants targeting the same student can only mean one thing: increased competition.
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Parthenon Perspectives
Are the Sleeping Giants Awake? www.parthenon.com

New Market Entrants

For-prot institutions were the rst to recognize the adult learner market opportunity, developing and marketing online programs designed specically for working adults who had previously ruled out the possibility of a post-secondary degree. Apollos University of Phoenix and several other for-prot institutions blazed a trail in online, post-secondary education. Today, Apollo (APOL) singlehandedly enrolls more students in the U.S. than the ten largest non-prots institutions combined (Figure 1). Recently, however, a small but expanding group of non-prot universities has also achieved competitive scale. Figure 1 outlines the major players, currently comprised of 11 non-prots that each enroll over 10,000 students annually. To date, these non-prot players have been primarily inclusive universities that accept most students who apply. As the right-hand side of Figure 1 indicates, most selective non-prot universities have thus far chosen to not enter the online learning space. While these institutions make up almost half of the approximately 18M annual post-secondary enrollments, they currently represent less than 20% of all online enrollments. Despite the recent growth in online enrollment, signicant growth opportunities still exist for online learning at non-prot institutions, particularly selective and highly selective universities. What has sparked this increase in online enrollment at non-prot institutions? Choosing not to reinvent the wheel, many non-prot institutions have partnered with online enablers like Embanet, Bisk, Deltak, and Pearson that provide institutions the blueprint and support to transition into online learning. More importantly, these companies offer schools a full value chain of services (e.g., course development, IT support, recruiting/marketing, processes, and cycle times) that are quite different from traditional non-prot strategies. At least ten different online enablers offer services to approximately 100 non-prot universities, helping them target online students by leveraging the same lead generating techniques as the successful for-prot schools. Although these businesses have expanded very rapidly over the last decade (Figure 2), with over 2,000 higher education institutions in the United States, there is plenty of white space left for these online enablers. Figure 3 highlights these relevant companies and select partnerships for each provider.

Figure 1: Which Are the Largest Online Schools; How Selective Are They?
Online Only Enrollments (2011)
1,000K 800 600 400 200 0
CPLA DV COCO STRA SNHU Penn State WC UMass Online UMUC Park U. Thomas Edison State U. Central Texas College WGU Excelsior College Rio Salado Community College

Enrollment by Institution Type (2011)

100% 80
Selective

n=~1,000
More Selective

~18M
More Selective

818K
EDMC CECO

Selective

Walden WPO

LOPE

60
Inclusive

BPI APEI

40 20

Inclusive Community College For-Profit

280K

APOL
Liberty U.

For-Profit

Non-Profit

Survey Respondents

Nationwide PostSecondary Enrollees

Figure 2: Who is Helping Traditional Universities Move Online?

Online Enabler Market, 2003 2011
$400M
Colloquy

$360M
Other
2Tor, Inc.

CAGR '03-'11 17%

Learning House

300

Altius

Academic Partnerships

Deltak 200
Deltak Compass

31% 12%

$183M
Deltak
Other

Embanet

Compass

100

$105M Embanet Bisk

Embanet Bisk 2007 Bisk 2011 10%

2003
Source: Expert interviews; Parthenon analysis

Figure 3: Which Universities Use Enablers?

For-Profit

# of Partners 35 26 14 12 10 7 5 4 4 1

Non-Profit

Parthenon Perspectives
Are the Sleeping Giants Awake?
Figure 4: Who Is the Online Student?

www.parthenon.com

Competing for the Same Student

With some scale universities already established and more
and are likely to have children n=500 n=300 100%
80 60 40 Children 20 0 Children No Children No Children

The majority of online enrollees are 25-49 year olds they earn under $60K n=800 n=373 n=734 n=350 100% 100% More than $100K 50 or Older 50 or Older
$40K - $60K
$80K - $100K

coming online every month the question is not whether the non-prots will ever make the jump to online, but rather whether they are targeting the same student demographic. Are non-prot institutions simply cannibalizing existing 18-24 year old students? Or are they targeting a new student segment that was previously served by for-prots? To answer these questions, Parthenon conducted a July 2012 survey of 800 for-prot and 400 non-prot college students, all of whom attended programs fully online. Most students surveyed were enrolled in bachelors programs that mirror the larger postsecondary enrollment picture.

80 60 40 20 0

40 49 35 39 30 34 25 29
20 24 18 19 Private Sector

40 49 35 39 30 34 25 29
20 24 18 19 Non-Profit

80 $25K - $40K 60 $15K - $25K 40 20 0

$60K - $80K $40K - $60K $25K - $40K $15K - $25K

Less than $15K

I am a dependent

Less than $15K

I am a dependent

For-Profit

Non-Profit

For-Profit

Non-Profit

Source: Parthenon Higher Education Survey (n=1,057)

Figure 5: How Academically Qualied Are Online Students?

Parthenons survey collected data about demographics, academic performance, shopping behavior, and customer satisfaction. Again and again, data showed that the student proles are nearly identical across for- and non-prot institutions (Figure 4). Across both types of institutions, students have similar ages, incomes, and attendance patterns. These students do not t the prole of typical college enrollees (18-24 years old and living as a dependent). Instead, these students tend to be older and more likely to have children themselves, with the average nonprot enrollee skewing both slightly wealthier and more likely to have children. Data also showed substantial similarities when comparing academic performance by institution type (Figure 5). Similar patterns were also found when examining high school GPA, SAT scores, and college attendance of enrollee parents by institution types. Non-prot enrollees are slightly more likely to have at least one parent who attended college, and students showed slightly higher GPA and SAT scores. Additionally, student motivations for attending school were extremely similar (Figure 6). Finally, four of the top ve responses cited by both students

The majority of online enrollees and likely had parents had a HS GPA above 3.0 an SAT under 1,300 (out of 1,600) who did not attend college n=500 n=300 n=150 n=60 n=500 n=300 100% 100% 100% Both attended Both 3.5 and 3.5 and attended 1,300 and 1,300 and above above up up 80 80 One parent 80
attended

60 40 20 0

3.0 - 3.49

60
3.0 - 3.49

1,100 1,300

60
1,100 1,300

One parent attended

40
Below 3.0

40 20 0

Below 3.0

20 0

Less than 1,000

Parents did not attend college

Less than 1,000

Parents did not attend college

For-Profit

Non-Profit

For-Profit

Non-Profit

For-Profit

Non-Profit

Source: Parthenon Higher Education Survey (n=1,057)

Figure 6: Why Do Online Students Enroll?

Q. What are your reasons for wanting to attend college?

For-Profit 1) To fulfill a personal goal 2) To make more money 3) To gain skills for the job market 4) Opportunity to change careers 5) Employers require a degree
Source: Parthenon Higher Education Survey (n=1,057)

groups related to employment concerns. Regardless of sector, students go back to school as working adults for a very clear reason: to improve employment prospects. Surprisingly, despite attracting similar students, non-prot and for-prot institutions utilize different marketing strategies. The forprot sector tends to be more aggressive in using push advertising to generate student enrollments (Figure 7) the majority of students at for-prot sectors schools heard about their school through advertising of some form (e.g., TV, radio, or magazine ads; Google Ad Words; paid search; third-party lead generators; etc.). Conversely, non-prot institutions still rely on an equal mix of push and pull advertising, including referrals and word of mouth. 4

Non-Profit 1) To fulfill a personal goal 2) To make more money 3) To gain skills for the job market 4) For the sake of learning 5) Employers require a degree

Parthenon Perspectives
Are the Sleeping Giants Awake? www.parthenon.com

Means More Competition

In many ways, todays prospective online students are not particularly discerning consumers, likely because they tend to be working adults focused on obtaining a degree to improve their job prospects. As Figure 7 indicates, almost 50% of online students are not comparison shoppers, opting to apply only to a single school. Less than one in ve students applies to a minimum of three schools.

Figure 7: How Are Online Students Finding Their School?

Q. How did you first learn about your school?

100% 80 60 40
n=600 Other A friend or colleague recommended it I was called by a recruiter An online banner ad
Google paid ad

n=300 Other
Pull Marketing Push Marketing

A friend or colleague recommended it

I was called by a recruiter

Furthermore, the average online student selects a school based primarily on programmatic offerings, not surprising given their focus on improving employment options. Students select programs rst and only later, if at all, do they make a decision based on institutional brand. (Most universities, however, still focus on the university brand above specic programs of study, leaving the door open for schools that choose to focus on scaling their program and program-specic branding.) Despite the realities of the current online student, heightened competition virtually assures the emergence of a more sophisticated student consumer. Online education has historically experienced minimal cost competition, but the emergence of nonprot institutions in the online space will almost certainly change that. Virtually all for-prot institutions examined (17 of 19) price individual credits within the same $400-$600 per-credit band (Figure 9). By comparison, new entrant non-prot institutions have begun to introduce variation into the marketplace, with several offerings below $400 or above $600 per credit hour. Furthermore, students appear willing to pay a price premium for stronger brands. Student responses regarding acceptable annual cost of tuition were sorted by institution type (Figure 9), and highlight an interesting contrast. Students attending selective universities, on average, identied an annual price point almost $5,000 dollars higher than students attending inclusive universities. Dawn Hudson, Vice Chairman of Parthenon and former CEO of Pepsis North American beverage business, says, We see this dynamic again and again in consumer markets. Strong brands attract applicants, keep students at your school, and attract the kind of students that reinforce your brand after they graduate. The role of brand and marketing in general is under-leveraged broadly in education today. Ultimately, institutional reputation will continue to be an important factor in student price sensitivity. Based on these ndings, it is a strong likelihood that increased price competition is on the horizon, as more selective institutions offer competing programs.

A Google search

20
TV, Radio, Magazine ad

An online banner ad Google paid ad A Google search TV, Radio, Magazine ad

For-Profit

Non-Profit

Figure 8: How Do Online Students Shop?

Q. When you applied to college, how many other schools did you apply to?
100% 80 60 40 20 0 n=550
3 2 1

n=300
More than 5 3 2 1

Q. Which of the following describes how you made the decision about what school to attend? n=550 n=300 100% I found the I found the school I liked school I liked most first most first 80
60 40

0 I didnt apply to any other schools

0 I didnt apply to any other schools

I knew the program I wanted to study first

I knew the program I wanted to study first

20 0

For-Profit

Non-Profit

For-Profit

Non-Profit

Figure 9: How Are the Programs Priced; What Might the Future Hold?
Fully Loaded Cost Per Credit (Excludes books & materials)
100% 80 60 40 20 0 Below $400 For-Profit Between $400 - $600 5,000 Below $400 Attending Inclusive University Between $400 - $600 10,000 $9,000 Attending Selective University n=19 Above $600 n=14 Above $600 $15,000

Q. What annual cost of tuition would you consider to be acceptable?

$14,000

Non-Profit

Parthenon Perspectives
Are the Sleeping Giants Awake?
Figure 10: How Satised Are Online Students?
Q. How likely would you be to recommend your school to a friend or colleague? (Net Promoter Score)
100% 80 60 40 20 0 80%

www.parthenon.com

As online programs continue to scale, students will naturally gravitate towards the largest and best-known programs in given elds. Breadth and programmatic variety are quickly becoming less meaningful, as program-specic enrollments are the new metric of success. Program-specic branding that highlights employment
63% 57% 56% 54% Net Promoter Score

Non-Profit Responses

100% 80

For-Profit Responses

76%

74% 61% 42% Net Promoter Score

64% 60 40 20 0

opportunities. Todays online applicants have one priority: to increase employment opportunities. Successful online programs must make a compelling ROI argument to new applicants both implicitly and explicitly while demonstrating the connection between enrollment and increased employment opportunities. Outcomes, outcomes, outcomes. As students become more sophisticated consumers and costs begin to uctuate, student success (retention, graduation, job placement, etc.) become the keys to driving referrals and attaining the virtuous circle. Successful institutions will recognize that the path to scale begins with quality at all costs. A decade ago, online programs stood out because they increased student access. Today, the 20th entrant into the online MBA market must differentiate itself or perish. The largest programs will nd cheaper means to attract students and can pass along those savings by offering lower tuition. Whether for-prot or nonprot, the winners over the next decade will inevitably be those who can expand enrollment quickly while maintaining quality. The sleeping giants are indeed awake, and the race to scale is on.

Western Liberty Southern Tiffin University of Governors University New University Maryland University Hampshire University University College

Kaplan Ashford University Everest Grand University University of Phoenix University Canyon University

Many non-prot institutions are poised to take advantage of more sophisticated and discerning student consumers. When asked how likely they would be to recommend their current school to a friend, students rated select non-prots at the head of the class (Figure 10), although some also scored near the bottom in customer satisfaction. Despite being late entrants, non-prot institutions (including less well-known brands such as Western Governors University, Liberty University, and Southern New Hampshire University) are quickly earning a reputation for providing a quality product to students.

So Who Will Win?

With the sleeping giants fully awake and the for-prot stranglehold decreasing daily, the question remains: who will win? Likely, a small number of rapidly expanding institutions will ultimately emerge from the pack and be able to leverage increased revenue and brand awareness to attract faculty, improve the student experience, and build new relationships with employers. The race is on to scale as quickly as possible, and the winners will almost certainly be those institutions that can differentiate themselves in the eyes of students, faculty, and accreditors. Post-secondary institutions non- and for-prot alike will soon compete across Brand, Price, and Outcomes in new and different ways. But what does this mean for the sector? How can schools adapt to a constantly changing landscape? Ultimately, for institutions in both sectors, top-line growth will be fueled by the following new drivers: Scale at the degree/program level. Todays online applicants consider program rst, followed by a specic institutions brand.

Parthenon Perspectives
Are the Sleeping Giants Awake? www.parthenon.com

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About The Parthenon Group

The Parthenon Group is a leading advisory rm focused on strategy consulting, with ofces in Boston, London, Mumbai, San Francisco, and Shanghai. Since its inception in 1991, the rm has embraced a unique approach to strategic advisory services built on long-term client relationships, a willingness to share risk, an entrepreneurial spirit, and customized insights. This unique approach has established the rm as the strategic advisor of choice for CEOs and business leaders of Global 1000 corporations, high-potential growth companies, private equity rms, educational institutions, and healthcare organizations.

Chris Ross
Partner chrisr@parthenon.com +1 617 478 4679

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Parthenon Perspectives
Are the Sleeping Giants Awake? www.parthenon.com

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