Modeling the Financials of Online Courses and Programs: A Primer and Roadmap by UCBerkeleyOnline

Modeling the Financials of Online Courses and Programs: A Primer and Roadmap

June 2014 Office of the Vice Chancellor of Adminstration and Finance Berkeley Resource Center for Online Education 1

INTRODUCTION In addition to furthering Berkeley’s core mission of access and excellence, online education programs offer the potential for a new source of funding for Schools, Colleges and Departments. In many cases, the scale of these opportunities may be large, but so are the financial risks. Getting the economics right is a critical challenge and needs to be an important focus early in the design of online programs—we shouldn’t allow what are, in some cases, once-‐in-‐a-‐generation opportunities to slip through our fingers. The focus of this primer is to distill much of what we know as a campus about the economics of online programs, to assist academic leaders with the design of robust financial models (in our experience, robust is not equivalent to complex—in many cases it’s a set of simple but critical assumptions that matter), and to provide a roadmap for the review and refinement of the model. The Berkeley Resource Center for Online Education and the Office of the Vice Chancellor for Administration and Finance are eager to work with academic units to review and refine financial models early in the process of online program design. In the preparation of this primer and roadmap, we would like to acknowledge the leaders on campus who have been early experimenters with the financial modeling of online education programs, including the members of Berkeley’s Online Steering Committee, as well as Scott Shireman and the staff at the Berkeley Resource Center for Online Education (BRCOE). Sincerely Diana Wu Executive Director of the Berkeley Resource Center for Online Education (BRCOE) John Wilton Vice Chancellor for Administration and Finance

Berkeley’s Strategy for Online Education and the Berkeley Resource Center for Online Education (BRCOE) In the spring of 2012, EVCP George Breslauer and VCAF John Wilton convened the first meeting of the Online Steering Committee, a group of campus leaders charged with defining and helping to support a set of fundamental principles for online education. From the outset, that group recognized that a “one-‐size fits all” campus strategy to online education would not be appropriate given the very different pedagogical needs, discipline-‐specific differences, and educational aspirations of Berkeley’s Faculty, Schools and Colleges. Instead, the Online Steering Committee embraced the notion of providing Schools and Colleges with the autonomy to embrace online education in different ways in support of Berkeley’s mission of Access and Excellence, with the caveat that effective financial management of online efforts would be critical, given the potential scale of online education in Berkeley’s future. At the time, many for-‐profit vendors were reaching out to individuals at Berkeley with proposals that involved significant financial issues and risks. We had the potential that Berkeley’s online offerings would be fragmented with an array of different financial terms with outside parties and proprietary systems and solutions. In the summer of 2012, the Steering Committee formed the Berkeley Resource Center for Online Education (BRCOE) to build a set of support capabilities competitive with what outside parties were offering, both to provide academic units with supportive and objective advice, and to offer a range of services in instructional design, production, and hosting appropriate for a wide range of online offerings. In the time since its inception, BRCOE has grown significantly and now serves a number of Faculty and Schools and Colleges on a range of online offerings ranging from MOOCs to hybrid courses, to fully online graduate degree programs. Universities across the country have recognized BRCOE as a strong model for providing in-‐house resources while maintaining the autonomy of Faculty, Schools and Colleges to design and implement online offerings aligned with their individual aspirations.

Many Types of Online Offerings We recognize that there are many different kinds of online offerings that units may wish to develop over time. They include online degree programs, hybrid programs (i.e., includes an on-‐campus component), fee-‐based courses, free courses , free courses offered with a fee-‐for-‐certificate, and contracted online educational offerings (such as corporate training programs). The financial aspects vary widely, both in terms of costs and potential revenues, and we are continuing to learn as different units experiment with various models. We look forward to working with you not only to help ensure the success of your program, but to add to our collective knowledge as a campus. When building a financial model for an online offering, the first question to answer is whether the offering is intended to be free or revenue generating. Revenues can be in the form of tuition, fees charged for a particular course or module, fees charged to third parties (e.g., corporations or other academic institutions), fees for content licensing, or fees for a certificate or grade upon completion. Examples of non-‐revenue-‐generating offerings would be courses that are offered to already-‐ matriculated Berkeley students, and courses made available as a public good. In revenue and non-‐ revenue cases, a robust cost model should be developed that addresses both the up-‐front and ongoing costs of an offering. The up-‐front costs include things like instructional design, royalties, faculty 2

compensation, testing, and initial marketing. The ongoing costs include the costs to deliver the offering, including things like faculty and GSI compensation, administration, admissions, technical support, and periodic refreshes of the content. The cost model should differentiate between fixed and variable costs, that is, costs that are incurred regardless of how many students use the offering, and costs, which vary, based on the number of students served. In the case of revenue-‐generating offerings, the financial model must also take into consideration the revenue side of the equation, including: • • • •

How many students will be paying, given a reasonable estimate of the overall market? Is the amount they would be paying reasonable, given alternatives? How do we anticipate these revenues will develop over time? In the case of complex offerings, to what degree will early revenues offset some of the development costs?

Differences in Scope The budget for an online offering can range from less than a few thousand dollars (e.g., to create a video of an existing lecture to an existing sharing platform, like YouTube) to millions of dollars per year to develop and administer an online professional degree program. Examples of questions that affect costs include: • How much new development of course materials and content-‐-‐ will you be designing new course materials, including things like interactive simulations, etc.? • What video production standard is required (e.g., are the normal pauses and “ums” of a live lecture acceptable, or will you need multiple takes and extensive editing?) • How will students be interacting with Faculty and GSIs? Will there be separate sections that GSIs teach? • What kind of online peer learning/ collaboration is envisioned (e.g., interactive discussions online, online student projects)? • What kind of capabilities will you need with respect to grading online work? • What kind of content organization issues does your course involve? • What kind of student supports will be necessary, both in terms of academic support and technical support? • What kinds of data collection do you need, in terms of learning outcomes, how students engage with the offering, and feedback? • How frequently will the offering need to be refreshed? • How complex will the management system be to admit, matriculate, and graduate students? • How much marketing will be necessary to drive students to the offering?

Rough budget ranges for different kinds of online offerings: Type of offering Budget Video and upload of an existing lecture to a free <$10,000 sharing platform, some editing, no marketing Development of online materials used in $10,000-‐$80,000 for video production of mini-‐ conjunction with a traditional in-‐person course lectures, upload of existing materials in document (e.g., online modules or “flipped classrooms” (i.e., form with minimal customization, and online where traditional lecture content is delivered content organization online, allowing classroom time to be used for Potentially $100,000 or more for development of discussion, etc.) customized simulations, virtual “labs”, etc. Development of EdX-‐quality MOOCs $75,000-‐$100,000 for faculty and instructional designer time to develop online course materials, high-‐quality video production, grading, etc. Development of an online professional degree Potentially $1,500,000—depending on number of program (heavily-‐online hybrid or fully-‐online courses, teaching costs (e.g., GSIs), marketing costs, etc. BRCOE offers consultation to Faculty and Deans interested in developing online offerings and would be happy to work with you to understand the budget implications of different kinds of online offerings. Given the rapid pace of innovation, features that were once expensive to integrate (even a year ago), may now be practical to integrate even in low-‐budget offerings. Conversely, there are certain design choices that can meaningfully increase cost. A consultation with BRCOE can help you understand and optimize your choices.

Common Misconceptions about the Financial Aspects of Online Education In our experience so far, there are four common misconceptions surrounding the financial modeling of Berkeley-‐caliber online education. 1. Online education is intrinsically a lower-‐cost way of educating students. Because many of the early adopters of online education were in the for-‐profit arena, and because so much of the promise of online commerce has been focused around delivering services at a lower cost, there has continued to be a belief that there’s an intrinsic opportunity to educate students more cheaply online. Delivering a Berkeley-‐caliber educational experience is costly, whether online or on campus. We want our programs to be at the forefront of experiences and outcomes, so

we know they’ll be costlier than some other online offerings. However, we must also avoid unnecessary costs where we can—such as performing certain activities “in-‐house” instead of paying for-‐profit vendors for services that earn them a large financial return. 2. The campus does not have the capacity to invest. Developing online programs requires investment, and many academic units lack the up-‐front capital to make these investments. We must approach these investments in the same way we’d approach our other high-‐priority financial needs—with creative use of campus resources and the full engagement of Berkeley’s donor community, etc. In many cases, the risk and payback potential of an investment in online education is very strong. We shouldn’t resort either to cutting back our aspirations or partnering with for-‐profit institutions in ways that provide us with access to near-‐term capital at a high long-‐term cost. That’s one reason why it’s so important to build financial models early in the process—so there’s plenty of time to develop options for making these investments. 3. The primary cost of online programs is technology-‐related. For many of us, the most unfamiliar part of online education is the technology, whether that’s the technology involved in content production, the platform through which content is organized and offered, or the tools necessary to administer the program. Technology-‐related costs are declining at an extremely rapid rate. The most significant—and often under-‐recognized—costs are the costs associated with marketing and student support. Although Berkeley has an extremely strong brand, the level of marketing required to attract highly-‐qualified online students may be quite different than for an on-‐campus program. 4. Developing an online program is a one-‐time cost. Investments required to refresh courses, as well as investments to improve the quality of content and outcomes and incorporate new learning technologies, etc. should be built into financial models as a significant and continuing expense.

Why A Financial Model Is Important For many Schools and Departments, an online program may represent a significant expense and significant potential source of revenue. A good financial model is important whether the program is revenue-‐generating or not. Choices made around program design and delivery can impact the financial performance of the program for many years, either by making them more costly, impacting the number of students that can be enrolled, or changing the potential demand for the program. Higher up-‐front costs, a delay in reaching projected enrollment numbers, or a higher-‐than-‐expected student support costs can be the difference between a program that supports itself and brings much-‐ needed additional revenues to a unit and an endeavor which could profoundly damage a unit’s budget, forcing it to reduce expenses or forego growth in other areas. Given online education is a relatively recent phenomenon, we do not yet have enough experience to intuitively make program design 5

decisions and know the financial consequences—a model really is required to understand program economics. In addition, a good financial model will be critical to any kind of engagement with potential donors who might we willing to fund or underwrite all or part of an online program’s expenses. The online education landscape is continuing to change and grow, and we must be particularly cautious with models that involve a long-‐term financial payback. Over time, we must assume there will be increasing competition, and that higher competition will most likely result in greater pressure on tuition pricing and higher student expectations, likely resulting in the need to raise program costs. A good financial model allows you to modify assumptions, see the results, and communicate those impacts to support a full understanding of tradeoffs and potentials.

When to Start the Process of Financial Modeling and Who Should Be Involved Financial modeling should be an iterative process throughout the design of an online offering. There are a number of people who should be involved early in the design process: BRCOE -‐-‐Preliminary financial models should be shared with the Berkeley Resource Center for Online Education as soon as practical to ensure the models are consistent with unit financial capacity, campus and system policies and practices regarding revenue-‐generating programs, and policies regarding contracting with outside vendors. BRCOE may be helpful when considering different investment scenarios and sources and can also help you develop these models Campus Legal-‐-‐The campus legal department already has significant experience working on contracts and other issues related to online education, and they should be involved early in the design of an online program. They can be helpful in understanding various potential risks and options, which may have implications on your financial model. You should not wait until you have draft contracts in hand to begin engaging with the legal department. Academic Committees/Reviewers-‐-‐ Academic approvals are designed in part to ensure new programs can be delivered in ways that are realistic and executable, and that programs will not compromise reputation, resources, or delivery in other areas. Questions related to program expenditures, financial sustainability, risk mitigation and other finance-‐related issues will likely be part of the academic review and approval processes, and you’ll need the financial model to respond to those questions. Leadership from other Departments/Schools-‐-‐ Sharing financial models with leaders from other departments and Schools may be helpful for at least two reasons. First, they may have experience with some of the assumptions you’ll be making in your model. Second, we believe there may be mutually beneficial opportunities in many cases for smaller units to pool or share costs when developing online programs.

What the Financial Model Should Look Like Appropriate revenue models can be done in Microsoft Excel or a similar standalone spreadsheet. BRCOE has developed several templates that are available for your use. It is not typically necessary to use any central financial data or systems. The critical aspects of effective financial spreadsheet modeling are: • Providing an easy way to flex assumptions, and see the impact on the financial model. Key assumptions include enrollment, revenue per student, course development expense (including faculty and GSI expense), and marketing expense. Later in this document, we will provide some benchmarks and questions to use to generate these assumptions. • Providing a year-‐by-‐year revenue and cost projection that begins with the initial year of investments and extends sufficiently far out into the future to provide a good window into the long-‐term impacts of the program economics on the unit and campus. • Providing a few select outputs in chart and tabular form that can be used to communicate the program economics in a simple way (discussed below) The three most critical outputs of the financial model are: 1. Understanding the timing of costs (and revenue when revenue-‐generating), which is dependent on the scale of the program, projected enrollment, etc. The timing chart should clearly show the point at which breakeven occurs (i.e., revenues from enrollments begin to exceed costs). This output is critical to setting expectations regarding the magnitude of surpluses, and the amount of time required before surpluses will appear. It is also the key output for discussing whether assumptions around enrollment, costs, and revenue per student are appropriate. 2. Understanding the total up-‐front investment required. The total up-‐front investment is the sum of investments required prior to any student revenue, and the sum of costs less revenues (the accumulated deficit) after student revenues begin, but prior to the point where the program is at break-‐even. This output is critical to begin discussions around potential sources of investment. 3. Enrollment sensitivity analysis. The costs of delivering an online offering are a combination of fixed and variable costs—that is, costs that vary with enrollment. The primary risk of a revenue-‐ generating offering is that enrollment does not materialize as expected, either due to a lack of demand for the program or an unexpected inability to serve the number of students envisioned. Understanding how the economics of the online offering change under lower enrollment assumptions is the most critical element for assessing the potential financial risk of the offering. For larger efforts, such as online degree programs, it is important for academic units to fully understand the magnitude of potential deficits that could be created if enrollment projections do not materialize and costs become a drag on unit budgets—the potential budget impact on units could be severe.

Modeling Costs Their four broad categories of costs in an online offering are:

Content development and production

Designing the course, developing/producing learning materials, designing online grading mechanisms, teaching the course, etc.

Marketing

Student supports

Conducting market research, Identifying potential learners, conducting outreach as n ecessary to attract interested, qualified students Create mechanisms for supporting online students academically, administratively, and with technical questions

Platform

Customize and integrate the tools necessary to manage and deliver content, enable interaction and collaboration, and host student work

Content Development and Production Costs Content development and production costs can be broadly grouped in three categories. The first category is the “up front” costs required to design courses and develop/produce learning materials. Typically these costs include compensating the faculty member(s) developing the course as well as an instructional designer (such as the ones employed by BRCOE) who can work closely with the faculty member(s) on the production of the content. The second category is the costs required to teach the course, including faculty time and various improvements and “tweaks” to the materials that may take place during the course. The third category includes the costs to periodically refresh the course. Based on our experience so far, significant new production and development costs will be incurred every three years or so. The instructional designer can play a key role in determining the costs required to develop online courses. The role of the instructional designer is to help the faculty member understand the unique pedagogical issues associated with online learning, to be knowledgeable about the tools and techniques that could be potentially be applied to the online learning experience, and to be able to implement those tools and techniques to create the appropriate online educational materials. Content development can vary from simple video production of existing lectures, to a wholesale redesign of the learning experience for the online offering, involving simulations, virtual student projects, and online grading technologies which may represent the state-‐of-‐the-‐art in online learning. In the first consultation with an instructional designer, key issues to be discussed would include:

• • • • • • • • • • • • • •

How does the online offering differ from traditional courses that the Faculty member(s) have already taught? Are the desired learning outcomes significantly different? To what degree is the method of teaching different (e.g., lectures vs. project-‐based)? Is this a hybrid or a fully online experience? To what degree is peer learning expected to be different? To what degree will student work and grading be different (e.g., for a MOOC, with potentially thousands of students to evaluate?) How much of the content is already developed (and potentially even digitized)? What are the production standards required (e.g., do lectures need to be “polished” performances vs. more informal live recordings)? Given all of the above, how much experimentation will be involved to get the materials right? Will we need to test the materials on a group prior to offering them? Will the materials being developed be leveraged for multiple purposes, and potentially across multiple online offerings running on different systems? How often will content need to be refreshed? To what degree will GSIs be customizing materials for their sections? How many modules/courses will we need to develop for this offering, and to what degree can we sequence the development of those modules/courses over time? What kind of data gathering and analysis will be required on learning outcomes, online experience, etc.?

Marketing Costs Marketing costs can be a significant expense in online offerings. Many Faculty (and even Schools and Colleges) may have limited experience in issues related to marketing, particularly if they’re associated with well-‐established academic programs at Berkeley. Online marketing has proven tricky even for those experienced in it; many e-‐commerce companies have fallen prey to a “build it and they will come” mindset, mistakenly assuming if great content was offered online, consumers would naturally find their way to it and begin using it. Thinking through how prospective students will find and select the offering is important, even when the offering is being delivered through an existing platform that may draw enormous amounts of traffic. A useful framework when thinking about marketing challenges is the “marketing funnel”, which lays out the sequence of steps that a prospective customer (or in this case a prospective student) goes through from initial awareness to use. Each step may require unique strategies and support, depending on the nature of the online offering being envisioned.

Awareness

Selection

Trial

Loyalty

How do people become aware that the offering exists?

How do they decide this is the right offering for them?

What compels them to try the offering (vs. inaction?)

What compels them to use it again, or encourages them to recommend it to others?

Given the “funnel” concept above, the kinds of questions worth asking with respect to an online offering include: • How will prospective students find this online offering, and what kind of outreach will be required to make them aware of the offering? • Are prospective students part of relatively cohesive, easy-‐to-‐target populations (e.g., a particular occupation that might be members of a professional society, etc.)? • To what degree are there other alternatives to get a similar education online or through a traditional in-‐person learning format? • What will be the primary selection criteria for prospective students (e.g., Berkeley/Faculty reputation vs. course scope vs. way the content is being offered online?) • To what degree are there important issues that prospective students need to be aware of and weigh in their selection decision (e.g., prerequisites, or the opportunity to take the course for a certificate, for example)? • What kinds of support will be required to support decision-‐making by prospective students (e.g., virtual brochure, in-‐person admissions sessions, online course syllabus, trial brochure, etc.?) • How will the questions of prospective students be answered (e.g., calling the School/College, call-‐center, online FAQ) For large-‐scale revenue-‐generating offerings, such as online academic degree programs, we would strongly encourage units to conduct formal market development studies. Given the questions above, the market development studies should include not only an analysis of the revenue-‐generating potential of the program, but also the marketing strategies necessary to attract prospective students. BRCOE is ready to assist with market research and development studies. For additional information, please contact BRCOE.

Student Support Costs Student support costs include the full range of expenses required to meet the academic, administrative and technical support needs that online students have. Depending on the offering, this may include components such as academic advising, tutoring, virtual “office hours”, admissions and registrar functions, career support, access to libraries and data sources, opportunities for student interaction outside the virtual classroom, and technical support (i.e., questions and issues relating to the use of the online platform itself). Certain needs, such as technical support, can often be provided at a relatively modest cost from outside vendors, with the benefit that these vendors are capable of supporting students across all time zones. However, even in cases where these functions are outsourced, the time and staffing required to assist with the design of student support procedures, and interfacing those functions with campus functions (e.g., registrar, admissions) can be more extensive than expected. It is important to consider what resources will be required to ensure that a full set of student support processes are designed and implemented, to monitor those processes, and offer channels for “escalation” if students can’t get the support they need. Unexpected strains on existing support systems are very likely to occur unless student expectations are well defined and internal processes are designed and implemented well. It is particularly important when units are designing large-‐scale online programs that they do not simply assume that students will use the channels designed for them. For example, if an online student taking a MOOC with thousands of other online students uses the telephone to call a School/College or Faculty member directly, how will they be received? Other questions to consider when thinking through the costs required to support the offering include: 1. How are we managing the overall online program development and online program once it is up and running (e.g., how much time of an Assistant Dean, dedicated support staff?) 2. Are there innovative ways we would reduce these costs (e.g., pooling resources with other Schools?) 3. How will our staff be trained to deal with inquiries or student support issues relating to the online program that come to them? If students to go other campus units (e.g., Libraries), are those units prepared to receive them or know what level of assistance to provide? 4. How are we planning to provide academic support to students in online programs (e.g., GSIs)? What will be the ratio of GSIs to students? 5. How will we handle administrative functions (e.g., admissions, registration, etc.)? 6. How will we handle technical inquiries about how to use the learning platform, etc.? 7. Will we be serving students in different time zones, and will we need to be able to provide technical support 24x7? 8. Is there a hybrid (e.g., residency) component to the program? If so, what will be the costs associated with having those students on campus? 9. How will we be assessing learning outcomes and program performance? Will we have dedicated staff to do that?

10. How much of an issue do we anticipate with attrition—and will we need resources to provide academic counseling to students? 11. Are their ways we intend to integrate the online program with our on-‐campus students—if so, what kinds of resources do we envision will be necessary to accomplish that objective?

Platform Costs The costs associated with learning platforms are decreasing quickly and dramatically. There are now numerous learning platforms available that allow learning content to be presented and managed, with a range of features for content organization, collaboration, managing student data, student evaluation and support, etc. BRCOE primarily provides support to two platforms—Canvas and edX. Both Canvas and edX are adding new features and functionality on a regular basis, and the industry as a whole appears to be migrating toward more open standards. These new features are also helping to “round out” the platforms to reflect the diverse needs of different academic disciplines. Unlike several years ago, the costs associated with the platform are more related to the use of particular features, which may increase content development expense and complexity. 1. Are there requirements for our learning platform that will be atypical (e.g., unusual collaboration features, student data management issues, etc.)? To what degree will new software need to be written or customized? 2. How much of the offering will be customized to a particular platform? If we wanted to offer the course on another platform (e.g., moving a Canvas course to edX, to example), how much work would be necessary? 3. How much will we need to invest in training to get our Faculty, GSIs and staff fluent in the platform? 4. Who will be hosting the platform, and do they charge for their services? After considering the cost categories above, a preliminary cost model can be developed. Below is a cost model for an example online course, developed by BRCOE:

Example Cost Calculation—Fully-‐Online Course Line Assumptions A B C D E F G H I J

Item Refresh cycle (years) Sections/year Students/Section Course units Students/GSI Refresh cost Instructional design Faculty development expense/Course unit Teaching cost/GSI Faculty teaching cost/Course unit

Value 3 2 200 3 50 20% $35,000 $2,500 $10,000 $2,000

Source Assumption Assumption Assumption Assumption Assumption Assumption Assumption Assumption Assumption Assumption 12

K Development L M N O P Q R Teaching S T U V W X Y Z AA Total BB CC

Support Cost/Student Instructional design Faculty costs Initial development costs Refresh costs Total Sections offered (before refresh) Total Refresh costs Total Development Costs Total Sections offered (before refresh) Faculty Cost/section Total Faculty costs GSIs/Section Total GSIs Required Total GSI Costs Total Student Taught Total Support Costs Total Teaching Costs Total Cost Cost/Students Taught

$150 $35,000 $7,500 $42,500 $8,500 6 $51,000 $93,500 6 $6,000 $36,000 4 24 $240,000 1,200 $180,000 $456,000 $549,000 $458

Assumption =G =D*H =L+M =N*F =A*B =O*P =N+Q =A*B =D*J =S*T =C/E =S*V =W*I =S*C =K*Y =U+X+Z =R+AA =BB/Y

Modeling Revenues Online offerings represent an important and long-‐term revenue opportunity for the campus. At present, there are four basic revenue models that are being widely considered: •

• • •

Traditional student tuition and fees— Depending on the nature of the offering, these tuition and fees may be similar to what is being charged for equivalent units/courses delivered through traditional on-‐campus programs. Financial aid might be offered. Institutional pricing—A price charged to a third party, such as a corporation, to provide access to the online offering to its employees, for example Content pricing— Revenues derived from licensing of content to other academic users (e.g., embedding an online module in a course offered by another academic institution) Charging for certificates—Allowing students to experience the offering for free (e.g., as in “auditing” a course), but charging for a certificate of completion. This models may require mechanisms for student tracking, evaluation and proctoring that may be different from what is required for students using the offering for free

Modeling revenues requires setting realistic expectations both for the number of students that can be attracted and supported, as well as what the appropriate pricing would be. Also, a platform needs to be selected that can manage revenue (e.g., payments, accounting, etc.), including revenues potentially coming from international sources and international currencies.

As mentioned previously, units considering large-‐scale revenue-‐generating offering should consider commissioning a market study to determine the appropriate market and pricing potential, and meet early with BRCOE to discuss how incoming revenue streams will translate to unit budgets, given existing University and campus policies. Key questions for modeling revenues are: 1. How much insight do we have into the demand for the proposed online offering? Are there clear, addressable segments that would be interested in the offering? How large are those segments? 2. How many of these addressable segments can we realistically market to given the marketing resources we’re envisioning? 3. Of the addressable segments, what portion would likely choose our offering vs. an on-‐campus alternative? Of that group, which would be interested in our offering vs. competing online alternatives? 4. If admitting students, what portion of students interested in the program would meet our academic qualifications? To what degree would we expect the yield to be different than the yield for existing on-‐campus programs? 5. How confident are we in our internal capacity to handle a certain level of enrollment? What are the chances that we’d need to scale down our enrollment assumptions based on our capacity? 6. How much insight do we have into what an appropriate price would be? Would the value of the degree be similar to the tuition charged for an on-‐campus program? Are there lower cost alternatives available? 7. If we’re not charging tuition, but charging for a certificate of completion or something else, how much confidence do we have in our estimates of what portion of students would opt for the fee vs. free option? 8. If sizeable portions of revenues are coming from international sources, to what degree does pricing align with affordability in those countries? 9. How sizeable are the revenue risks? Is this the type of offering where external factors (e.g., a downturn in the economy, or additional offerings from other academic institutions) could result in sudden, large changes in revenue?

The Timing of Revenues and Costs in Revenue-‐Generating Offerings Financial models for online revenue-‐generating offerings have a typical shape (Fig. 1). They are typically characterized by a period of up-‐front investment prior to any student enrollment. For an online program consisting of many courses delivered over multiple semesters, the up-‐front investment mostly consists of the costs required to produce the initial semester of courses. Thereafter, the cost to develop courses can be offset (at least partially) with revenues from the initial student cohort, which greatly reduces the total up-‐front investment required to deliver the program. Over time, there is a gradual ramp up in the number of students as the program grows. Many programs want to start with a

relatively small first cohort, so that they can experiment and learn. However, the smaller the initial cohort, the less revenue will be available to offset continued investments in course development. Units should thoughtfully consider what the appropriate rate of increase in student enrollments should be. On one hand, an excessively fast rate can produce significant operational strain on Schools and departments. On the other hand, an excessively conservative rate of increase over multiple years may be excessive for the purposes of “working out the bugs”. The maximum enrollment level will depend on many factors, including School/department/Faculty capacity and aspirations, reputational issues, and whether or not competitive programs exist. As the number of enrollments increases, the costs associated with developing the program gradually decrease to a steady-‐state required for refreshes and improvements, while the variable costs required to serve the increasing enrollment increases. At some clear point (hopefully) revenues begin to exceed costs and the program is generating surpluses thereafter. Course development and production costs generally begin 1-‐2 years prior to initial enrollment. As previously mentioned, in some cases only the initial semester(s) of courses may need to be produced prior to initial enrollment; the balance of program courses can be developed and produced while the initial cohort is taking the first set of courses, thereby lowering the amount of up-‐front investment required prior to first enrollments. Marketing investments may need to precede initial enrollment by a significant amount of time (e.g., 1-‐2 years). Advertising/recruiting investments may occur 12+ months prior to launch, however PR, branding, website design, research, and other costs may need to be incurred as early 2 years prior to launch. Depending on the program, there may be ample applicants to fill the initial cohorts that can be reached with minimal up-‐front marketing expense, further reducing the amount of up-‐front investment required prior to offsetting student revenue.

Fig. 1 Revenue and Costs by Year Revenues

Costs

Initial investments prior to any student enrollments

Initial cohorts and continued investments

Increasing costs to serve as enrollment increases-‐-‐break even and surpluses

The Breakeven or net surplus chart (Fig. 2) is simply revenue net of costs:

Fig. 2 Net Surplus by Year

The total investment calculation is the sum of deficits in the net surplus chart prior to breakeven. This includes the up-‐front investment required prior to any student enrollments plus the years in which student revenues are below total costs.

Sensitivity Analysis A revenue sensitivity analysis should be performed as part of the initial financial modeling. The revenue sensitivity should reflect a moderate downside (e.g., 20%-‐-‐ not quite the demand or capacity envisioned, or enrollment growth that’s slower to ramp up than anticipated) and sharp downside case (e.g., 50%-‐-‐ many other prestigious universities launch similar programs, economic downturn) and show how the net surplus changes taking into consideration which costs could (and would be) varied if enrollments didn’t evolve as planned (Table 1). We believe there are a number of reasons why it is important to model downside revenue cases (both enrollment and tuition levels): •

•

There are still not a large number of “data points” that enable confident validation of what tuition levels will be appropriate for different kinds of programs (e.g., fully-‐online, various types of hybrids, etc.) across different disciplines, at Berkeley’s reputational tier, and across a global student population. We highly recommend modeling a conservative tuition level and ensuring that program economics work at that level. The program may involve fixed costs, which could lead to severe financial stress for Schools if enrollments do not materialize as expected 16

• •

Some costs, such as student support costs, may be higher than expected and may only become apparent once the program is up and running Some programs may be sensitive to global economic cycles or other exogenous factors—expect that over a 10 year period there may be a recession or other events that impact demand for the program The competitive landscape is still evolving—and so there may be additional entrants at Berkeley’s tier, or with more attractive program offerings-‐-‐-‐ this is still a rapidly evolving arena There are reputational risks—not only to the School, but to the campus itself—if enrollments do not materialize as planned and units may face a strong incentive to even marginally reduce standards

Note that it is easy in an Excel model to make a cost vary with a variable like enrollment using a cell formula (e.g., $10 per student). The sensitivity analysis is more than just that kind of hard coding, and should include some thoughtful contingency planning. For example, if you had a true downside case scenario, are there certain investments or other costs that you’d remove or shift out to protect your budget from an excessive deficit? At what point would you discontinue the program, and if that occurred, what would be the costs and liabilities associated with shuttering the program, for example any vendor contracts that have a termination penalty. Obviously, if the revenue model you’re considering is not a program up-‐front tuition model (e.g., fee for certificate or other revenue model), the enrollment sensitivity analysis may need to take into consideration factors such as student attrition/completion rates, percentage of students that opt for the fee-‐based option, etc. The goal is to accurately assess the true risk that an academic unit would face from a “real world” downside enrollment scenario.

Table 1—Enrollment Sensitivity Analysis Year

Base case enrollment

Per year

1 2 3 4 5 6 7

Downside case enrollment

Sharp downside case enrollment Costs removed: Costs removed: • XX • XX • XX • XX • XX • XX Resulting Per year Resulting Per year Resulting program net program net program net surplus surplus surplus

8 9

Note on Outside Vendors and “Turnkey” Solutions In recent years, a number of for-‐profit entities have converged on higher education as a profitable market for services and solutions related to online education. Many of these entities are backed with significant amount of venture capital, in other words, with investors that have a high confidence and expectation that this will be a lucrative industry. These vendors typically seek a split in student revenues. They typically divide responsibilities between the higher education client and themselves. Often the college or university is responsible for content, teaching, and admissions criteria, and the vendor will provide services such as course production, platform, and marketing. In exchange for the revenue split and long-‐term commitment, they often will provide much of the up-‐front investment required for the program. There are a number of reasons why colleges and universities are attracted to these vendors, including a lack of capital resources to invest in developing online programs, a lack of technical resources and know-‐how on campus to develop online programs, or a less prominent institutional brand and reputation. The individual costs of different services provided by these vendors are often bundled in ways that make it difficult to understand what the costs of individual services are, and whether those costs are as low as they could be. The contracts required to appropriately divide responsibility between the academic entity and vendor are typically complex, and fraught with potential issues and risks, given the interdependencies required. The revenue split required by the vendors can often be well north of 50%, and vendors argue that this reflects the fact that the majority of the costs are associated with items not provided by the academic institution. We fundamentally believe this is not a good model for Berkeley. We believe that our teaching and academic experience is the lion’s share of the value that we provide. We believe we have a responsibility over the long term to be independent and capable of delivering online programs, just as we do on campus. And we believe that giving a fixed portion of student tuition—for a large number of years—and regardless of how much profit has been generated, or what return on investments made has been achieved—is fundamentally not the right model for an institution committed to the public good. We must be careful about any vendor commitments that would make it difficult to modify the design or delivery of a program, or make it costly to discontinue a program. New online programs are essentially entrepreneurial ventures, and like any entrepreneurial venture, maintaining the flexibility to experiment, redesign as conditions change, and modify even basic parameters of the delivery model are critical not only to ensure financial performance, but to ensure that the program remains academically excellent. We believe that over time, a more vibrant and flexible set of vendors will emerge that will work with universities like Berkeley on selected parts of delivering online education, and in a fixed-‐price model consistent with the way Berkeley and other universities typically procure services. In the meantime, there may be valuable ways for Schools and Colleges to work with external vendors on specific

capabilities that would be difficult for Berkeley to support today, such as 24/7 technical support, specific types of learning experiences (e.g., simulations) or international marketing. But we would ask that Colleges and Schools that are considering working with external vendors—and particularly those that might be considering working with a vendor providing comprehensive or turnkey solutions—develop strong financial models that clearly show the risks and opportunity costs of these types of solutions, and inform BRCOE and VCAF early in the project, so that the terms, risks and economic consequences of these types of vendor arrangements can be thoroughly considered at a campus level. It should also be noted that the vendor contracts required for large-‐scale support of online programs are very complex and require significant time for legal review and approval.

Roadmap For Input and Approval on Financial Models Step

With Whom

When

Preliminary conversation

BRCOE

As early as possible

BRCOE

Rough assumptions, potential work with outside vendors

Draft financial model

BRCOE

Prior to seeking academic or other approvals

Preliminary model showing the three outputs described in this paper

Draft financial model

Approving bodies as necessary (e.g., Senate) EVCP, VCAF

Preliminary model shared with VCAF

Normal annual deadlines

Include financial model and investment requirements

BRCOE, VCAF, campus legal counsel

Prior to seeking academic or other approvals

Terms of contract discussed with outside vendor

Annual budget submission/strategic plan/capital investment plan If significant vendor contracts, preliminary legal review (if significant vendor contracts) and financial review of

What kind of financial model to have Preliminary intuition as to size of program (enrollment), revenue model, and scope of program (e.g., how many courses, etc.)

Purpose Get BRCOE’s assistance with assumptions, recommendations of other leaders on campus with experience in similar programs Begin to consider budget options, revenue issues, and vendor issues Understanding of program economics , risks and investment requirements Understanding of program economics and risks Ensure the economic model into the regular campus annual financial review process Allow sufficient time for contract review

vendor terms Thorough legal review BRCOE, VCAF, and financial review of campus legal vendor terms counsel

Simultaneous with securing academic or other approvals

Draft contract and refined financial model

Understanding risk exposure, financial value ceded to outside vendor, potential for sub optimized program economics

Assistance with Development and Teaching Costs for Revenue-‐Generating Online Offerings Given the potential for online offerings to generate revenue for Berkeley, mechanisms are being developed to assist with the costs required to establish these offerings, including: 1. MOOC development funding. At the time of writing, the campus has made available some funding to Faculty for the development of courses on the edX platform. Please check with BRCOE regarding the status of this funding for future MOOCs 2. Financing from BRCOE. BRCOE has put in place mechanisms—similar to those offered by for-‐ profit outside vendors without the same profit motive that offer funding to cover the up-‐front development of revenue-‐generating online offerings in exchange for a portion of the revenue earned as the program is offered. Please check with BRCOE regarding this funding.

Other Guides Over time, we aspire to offer a library of guides and other materials to assist academic leaders with planning and implementation of online education, including • • •

Academic approvals and granting of credit and degrees Thinking through intellectual property issues Thinking through audit and advisory issues

Please do not hesitate to reach out to us for the latest ideas, best practices, and information regarding online programs—we’re here to help. To reach BRCOE, please e-‐mail: online@berkeley.edu COO Scott Shireman, scottshireman@berkeley.edu or call 510-‐642-‐3708 Director of Marketing Chris Van Nostrand, chrisvannostrand@berkeley.edu or call 510-‐664-‐4151 Executive Director Diana Wu, diana.wu@berkeley.edu or call 510-‐642-‐4181