What Revenue Models Work Best for EdTech Startups?
From a channel sales model to Udemy’s marketplace, here are 11 answers to the question, “What revenue models work the best for EdTech startups?”
- Channel Sales
- Semester-based Subscription Plans
- Revenue Goal-aligned
- Advertising and Subscription With No Ads
- Freemium Saas, Free for Teachers, Paid for Institutions
- Pay-per-Course Plus Subscription
- Prepaid Multi-year Licenses
- Udemy’s Marketplace
In my experience, channel sales models work the best. Specifically, channel sales is when an organization focuses its efforts on reselling its product through third parties such as educational suppliers or bookstores.
Channel sales models help EdTech startups cut back on research and development costs while broadening their reach in the market. Additionally, it takes some of the burdens off the team in terms of essential business functions like customer support or marketing campaigns.
Channel sales has become a reliable model for EdTech startups looking for a stable source of income and growth with fewer resources.
As an EdTech company that has experimented with a couple of different revenue models, I can tell you from firsthand experience that the most effective framework is the freemium model.
The issue with the EdTech space is demographic: students don’t have money, and their parents are generally unenthusiastic about paying enormous sums for products they believe should be free as part of their child’s public school curriculum.
Higher education degrees are a different story, but for SaaS tools and other products in the EdTech space, people are very cost-sensitive. Onetime purchase products with large price tags simply don’t move.
Look at the most successful EdTech company on Earth, Duolingo; they have built their entire business on the freemium model, and with brilliant success. Similarly, look at the proportion of EdTech companies currently using the freemium model. The proof is in the pudding: freemium just works.
Semester-based Subscription Plans
Most EdTech services are used to enhance the learning experience of upper-level students and professionals. It only makes sense to design revenue models that sync with the educational calendar.
Consider offering semester-long subscriptions that students can use to accompany their in-person learning. You could also offer a discounted year-long payment option for students who may wish to continue their studies during breaks.
I’ve seen this revenue model work well for EdTech startups in the health niche, where medical students use the extra time over the breaks to review virtual labs and practicals.
Primarily, we always design our revenue models around the needs of our customers. As we serve them, we study how our products and services benefit them without causing inconvenience to them, as well. In addition, we also keep in mind our vision that includes them and the growth and direction of our company’s purpose.
These key factors are among the top considerations in deciding on a revenue model for an EdTech startup. If you have a digital product that may be purchased, then a freemium model would work to guide your customers with an option to upsell, while for an innovative system that you have designed, a pay-per-use model may be applicable. It could also be a transaction-based model as you make direct sales from your various active channels.
Advertising and Subscription With No Ads
Duolingo chose a totally different business strategy, intending to offer the service for free to all users and charge businesses for messages that users translated.
Early on, the company focused on expanding its user base. As usage increased steadily, the firm was losing money. Over the following few years, Duolingo developed the TinyCards flashcard software and introduced paid language testing, which now makes up around 20% of the company’s revenue.
Yet, these sources of income were inadequate for the app to become sustainable. The founders returned to the original vision, to offer free learning rather than concentrating on the B2B business that was generating revenue. Towards the conclusion of a class, they started displaying advertising with a payment option for an ad-free experience.
Together, this brought in roughly $180 million for the business in 2020. Making your advertisements as inconspicuous as possible is essential if you want to succeed with an ad-based business plan.
One way that revenue models can make money is by employing an institutional revenue model. This means selling your products or services to schools, colleges, and district administrators.
This should be done in the initial stages of the startup; all you need to do is pitch your product to decision-makers and wait for their approval. If your EdTech startup is more beneficial to the organization than to the individual, institutions will continue to use your services.
Be sure to bring your own touch to the table when designing the user interface of the app.
Freemium Saas, Free for Teachers, Paid for Institutions
At Codific, we have a portfolio of Ed-Tech solutions, and for the different products, we have experimented with different revenue models. The one thing that is for sure is that you want to license it as Software as a Service (SaaS).
The customer is typically an educational institution, in our case mostly universities. The challenge is convincing these rather large, sometimes bureaucratic organizations to commit to the application before they have really experienced the added value it creates.
For Videolab, we provide free pilots, and for Attendance Radar, we provide a free application for individual professors. Either way, the objective is to create broad support for the application across the organization so that the internal champions push for the necessary bureaucratic steps and budget approvals. Without internal champions, your chances are slim.
An advertising model is one of the finest income models for EdTech firms. In this business model, the EdTech startup would charge customers for ad space that will be displayed on their devices.
By doing this, the EdTech business will be able to monetize its website through banner ads, sponsored content, and other ad formats. As it enables companies to commercialize their platform or content without charging customers for access, this model can be highly useful for EdTech startups.
Pay-per-Course Plus Subscription
EdTech startups can benefit in a lot of ways from combining a pay-per-course and subscription-based revenue model. It can help them offer more flexibility to their customers at the start and retain those customers for the long term.
A pay-per-course model can help startups lower barriers to entry for new customers. New customers are sometimes reluctant to pay for a full subscription over the long term if they only want to try one or two courses. Thus, in the early stages of a startup, a pay-per-course model can help generate some revenue while focusing on building a customer base.
The pay-per-course model is also very effective. I personally spent over $200 on courses at Udemy and Masterclass last year. The subscription model, then, should be aimed at existing customers. It can be a form of upselling by providing better features, unlocking all courses, and offering additional exclusive content. It is also a good way to retain the startup’s customer base for longer terms.
Prepaid Multi-year Licenses
Educational institutions are tricky, but sticky customers. Although getting those initial sales can be difficult, once they have implemented your software, they often become deeply loyal evangelists.
EdTech pricing must, therefore, match these realities. Due to the nature of budgeting in institutions, monthly or even single-year subscriptions are unlikely to be effective. Naturally, procurement wants to avoid getting approval every single month and would rather negotiate a longer contract, ideally for several years.
Multi-year licenses give educational institutions time to properly adopt your solution, keeping pricing predictable by locking in a preferable rate. By the end of this multi-year contract, your solution will be deeply ingrained into their processes, almost guaranteeing repeated business.
One revenue model that has been successful for EdTech startups is the marketplace model, which allows educators to create and sell courses on a platform while the platform takes a percentage of the revenue.
Udemy is an excellent example of a company that has thrived using this model. Udemy is a global online learning platform that offers over 155,000 courses taught by subject-matter experts. The platform operates on a marketplace model, where instructors can create courses and sell them on the platform.
Udemy takes a percentage of the revenue, with the rest going to the instructor. This model has been successful for Udemy as it allows the platform to offer a vast array of courses to a global audience while also providing a platform for instructors to reach a broader audience. Instructors benefit from the platform’s marketing and reach, while Udemy benefits from the commission it earns from course sales.