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Multi-Program Financial Model for Online Learning

by Dr. Scott Moore

This paper describes how a financial model that I have built can provide your school with insights into the flow of inflows and outflows over 5 years up to 5 separate programs. Based on a conversation with you, I would provide you with a Google Sheet-based model that starts with your values but which would then allow you to change it and iterate with it as much as you would like. Submit the form at the bottom of this page to receive your own analysis.

 

The evolution of the market

A few years ago academic leadership frequently talked with me about their interest in taking a certificate or single degree program online. They were interested in exploring what could be done in online learning.

My how times have changed!

The questions I receive now revolve around looking at the whole of a school’s online efforts. Leaders looking at the usual Online Program Management (OPM) options are struck by three significant problems:

Financial

The OPMs demand 35-60% of the program’s tuition revenue.

Organizational learning

During their time under contract with the OPM, school leadership would not get better at designing, creating, and growing online learning programs.

Marketing

The school would neither get better at marketing its online programs nor would it learn about prospects that come through the funnel because the OPM owns the relationships with those prospects.

Many academic leaders know that these problems related to finances, organizational learning, and marketing exist but they don’t know how they might avoid them.

 

Taking control of your finances

Clearly, the best way of avoiding the negatives of working with an OPM is to not work with an OPM. However, for the school this means that it has to come up with some way of delivering the services that the OPM would otherwise provide.

In order to be in a position to do so, the school has to take control of its finances. It will no longer be able to rely on the OPM to provide the start-up capital that is necessary to launch an online program. Why do I say that start-up capital is necessary? While there are many costs of creating an online program, the following are significant:

 
Marketing

For each program, you need a plan for how you’re going to attract students, and then you need to attract them. The more generic your program is, the more you’re going to have to pay for marketing. Similarly, the more your program is differentiated from the crowd (and the smaller the crowd is), the less you’ll have to pay. But, no matter what, you’re going to have to pay.

Course creation

At some point, the spend rate on this cost will slow down, but at the beginning, you’re having to pay to create courses before you have any tuition coming in. So you’ll need a plan for which courses to create in what order and on what timeline, but you are definitely going to have to create courses before you have put any money in the bank from this program.  

Technological

This is a hugely important decision. (We can work with you no matter what your decision is, and we can guide your decision-making, but it is hugely important to your overall online effort.) It determines the degrees of freedom that you have to shape your online programs --- how you present yourself to your prospects and learners, how you enable (or interfere with) community building, how you enable coaching, how flexible you can be at integrating new pedagogical approaches, and how effectively you can integrate coaching and mentoring into the program. Enabling these degrees of freedom can involve a wide-ranging level of investment into the learner experience platform. And this investment sometimes has to be front-loaded, though sometimes it can be staggered over a period of years.

Again, the above list is by no means exhaustive but does help solidify the idea that start-up costs cannot be ignored. 

Beyond the start-up costs, online programs also have a wide range of ongoing operating costs that are easily overlooked when planning to create an online learning program. This is to be expected since so few academic leaders have any experience designing, running, and growing an online program outside of what they might have done when working with an OPM.

Okay, so we’ve established that online learning has a significant up-front cost and a complicated set of ongoing operating costs. However, given the problems associated with finances, organizational learning, and marketing highlighted above, it’s clearly worthwhile to take a deep and careful look at the finances when not using a revenue-sharing OPM. 

In order to be able to make an intelligent decision about how your school should move forward with its online learning efforts, you need to create a fairly robust financial model that gives you insight into how much money you might need to begin and then when you might be able to think about breaking even and making a profit. The model should also help you to think about the organizational changes that you will have to make as you move forward with your efforts. 

It might all turn out that working with a traditional OPM is all that you can afford to do, but going through this analysis will at least increase your understanding of what you need to do in order to not mortgage your financial future in that way.

Receive your own analysis

Based on a conversation with you, I would provide you with a Google Sheet-based model that starts with your values but which would then allow you to change it and iterate with it as much as you would like.

Use the form at the bottom of this page to connect with me.

Simplifying a complex analysis

As I said, most academic leaders these days are looking for ways that they can undertake significant online learning efforts while avoiding the option of working with an OPM. So many leaders have talked with me about it that I have created a Google Sheet-based financial model that you can use as your starting point for completing this analysis. At the end of our collaboration, you will have access to this Google Sheet and will be able to manipulate and change the model in it without limit.

The underlying idea of this model is that most schools have basically the same financial structures, inputs, and ways of measuring success so that a standard financial model actually makes sense. This model calculates revenues and costs over a seven-year period. Certainly, it will be the case that each school will want to modify the standard model so that additional costs are captured or that standard costs are manipulated or calculated in some way that differs from the standard approach. However, the benefit of going through this exercise will help your school’s CFO be more confident in the analysis that he/she puts together in the end. 

Here are a few details.

The inputs to the model

The inputs to this model are fairly extensive. I have filled in reasonable values that you can use to start for many of the inputs, but you will still have to set the values for many others. College-level costs related to calculating the costs of student advising and the cost of admitting a student have to be determined, but these are relatively insignificant. 

The major complexity that you will have to address relate to program-specific costs. The model can incorporate up to ten separate online programs, each with its own revenue and cost assumptions:

Courses: How many courses, sections offered per course per semester

Program: Semesters/year that it runs,

Timeline: How many courses developed and then revised annually, year that first course will start being created, year that students can begin the program

Faculty: cost to create a course, cost to revise a course, cost to deliver a section of a course, cost to evaluate/grade a section of a course

Students: intakes/year, average years to graduate, number of students admitted in first year, goal for the ultimate size of the admitted student body, year in which the goal is assumed to be reached

Financial: Net tuition per student

Administration: program management cost

Learner acquisition: cost to develop a learner acquisition strategy, target per student marketing spend, marketing automation costs

The tools included in the model

Again, this model is a 4-sheet workbook within Google Sheets. (I taught spreadsheet analysis for business beginning in (get this) 1985 (using Lotus 1-2-3!) so I can state fairly confidently that it is structured using an industry-standard approach. The four sheets each provide a tool for your toolkit when you’re thinking about the finances of your online program:

Listing of inputs: To begin using the model (as described above), you had to come up with some answers related to costs (derived, of course, from your understanding of how the program will be run). Merely providing one place where these decisions are gathered is of value when multiple people are involved in decisions related to the school’s online direction.

Single course: This tool provides a way to look at whether an individual course (offered multiple times) contributes positively (or negatively!) to the bottom line. Costing for a course cannot merely be looked at on a yearly basis since a huge investment is needed.

Single program: This tool provides a detailed income statement for one of the programs that are included in the model for years 0-6. It allows you to see details behind the calculations and determine if they make sense to you (while also allowing you to explain the model to others and gain confidence in the analysis).

Summary: This tool provides a summary income statement for all of the programs included in the model for years 0-5. (Year 6 isn’t included in the summary because some calculations in the model depend on values in the following year; thus, it shouldn’t be included in the overall analysis.) The rate of return and the net present value for the overall financial summary are also calculated.

It is likely that this financial model does not fully reflect the reality at your school; this is why I provide you with the Google Sheet. You can change it and add to it as much as you want. You can reach out to me at any time to learn more about the analysis you receive and the changes that you are thinking of making; I will help you and provide feedback so that it’s as easy for you as possible.

 

Questions & answers about the financial model

I will be writing a series of blog posts related to this financial model in the upcoming months that will be shared with those who subscribe to the topic. You can receive these emails by subscribing on this page.

I will also be responding to questions posed by higher education leaders. You can view the questions and answers on the page below, you can also submit questions to be answered on the page.

Q&A

Receive your own analysis

 

To see what a financial model looks like for your institution if you were to work with Extension Engine (under a fee-for-service model and a build-your-capacity ethos), I suggest that you reach out to me to see what this might look like.

I’ll send you a Google Sheet with space for all of the inputs that you have to provide, and then I’ll transfer that information to the model (and tweak the model it your requirements call for it). This model can be used in your discussions around campus and can ultimately help you make the right decision for your online program.

Use the form to connect with me.