How to Price Online Learning

Whether you are wondering how to price an online course or are concerned with elearning pricing models more generally, knowing how to price online learning effectively is more important in the current competitive landscape for adult lifelong learning than ever before. This article covers the four major elements that must be addressed as part of pricing online learning or – for that matter – just about anything else.

The article draws on a framework laid out years ago in just two sentences by consultant Alan Weiss. Namely:

There are only a few really vital aspects of pricing: The perceived value of your offering, the price point, the margin of profit, and the volume of sales. You can materially affect all of them unilaterally. From Balancing Act: The Newsletter (No. 94)

What follow are brief thoughts on how these “vital aspects” apply to pricing online learning in the current learning business landscape. You can also get a link to download a nicely formatted PDF version of this article by using the form below to sign up for our e-mail list.

The Perceived Value of Your Offerings

What you are able to charge for your e-learning offerings – or anything else, for that matter – is dependent upon the value your prospective customers place upon them. It is essential to recognize that this value is a dynamic phenomenon. It changes over time and from customer to customer, and most importantly, you have the power to impact it through your product strategy, marketing efforts, and ongoing interaction with prospects and customers.

When attempting to assess the value that prospective customers might place on your e-learning offerings (e.g., through surveys, competitive analysis, etc.), it is important to lay aside any biases you may have – or assume your customers have – about the delivery method or how online offerings relate to any classroom-based education you may offer. If, for example, you start with the assumption that education delivered online is inherently of lower value than classroom-based education that is almost certainly where you will end up with your customers.

Instead, when pricing online learning, consider the qualities your prospects are likely to value across any of the educational experiences you offer – regardless of delivery method – and then determine where each e-learning product fits within your full range of educational offerings.

As a general rule, perceived value of an educational product tends to be lower when:

the product is highly generic, designed for the largest possible audience
the product offers users limited or no ability to get input specific to their individual needs
the intellectual content of the product is produced by an unknown or little known expert
free or lower cost alternatives to the product are widely known and easy to find

Note also that convenience as a value driver for an educational product – the driver I most often see learning businesses use for e-learning – almost always correlates with lower perceived value. The reason for this is that convenience is nearly always based on a transactional relationship with a customer rather than a deeper, more nuanced exchange of value.

Convenience as a value driver for an educational product almost always correlates with lower perceived value.

The bottom line is that e-learning is not an inherently low-value offering.

You have control over all of the factors above, and the strategic decisions you make about each will drive the perceived value of your offerings up or down. Determine where it makes most sense for e-learning to play a role across the spectrum of educational value your organization offers, and then plan and implement accordingly when pricing online learning. (Note: The Tagoras Value Ramp is a highly useful tool for making this determination.)

The Margin of Profit

Margin is the spread between what you charge for a product or service and what it costs you to provide the product or service. (You may want to see How much does it cost to create e-learning.) It is critical to understand how value is perceived and constructed because it is a key factor in determining the top end of this spread. On the bottom end is cost.

A key factor that makes e-learning so attractive for associations and other organizations that sell education is that, in theory, it offers an opportunity for driving down costs substantially, thus creating the possibility of higher margins by managing the bottom end of the spread. In practice, many organizations do not actually have a good gauge on their underlying costs for creating and delivering e-learning. Many also make the decision to price e-learning significantly lower than their place-based offerings without considering the value factors discussed above or the overall impact on margins. The result is that the full net revenue potential of e-learning is often not realized.

While organizations do not have complete control over value perception, they do have the ability to influence value perception significantly. And certainly they should have control over the amount they invest to construct a desired level of value. In other words, any organization that pursues e-learning strategically and plans properly should be able to achieve and maintain healthy margins. (Or possibly determine that healthy margins cannot be achieved and thus make the strategic decision to stay out of e-learning.)

There is no magic number or percentage for what your margins should be, but whether you operate on a for-profit or a nonprofit basis, my bias is always to try to maximize margins when pricing online learning. There will nearly always be downward pressure on prices in the future and you will need to continue to invest in your e-learning offerings. Your margins give you the funds to do that, and the more cushion you can create, the better.

The Volume of Sales

Value is one key factor in determining the top end of your margin spread. Volume is another. High perceived value doesn’t get you very far if the size of the market you are targeting isn’t large enough to cover your total costs.

Put another way, if your total product costs are $100, finding two people who value the product at $40 per unit won’t do you much good (you’ll lose $20), but finding 5 people who value it at $25 will (you’ll make $25).

Seems simple enough, but of course, there is more than a little guesswork involved in determining how many potential purchasers value your product and at what level. This is an area in which organizations selling e-learning can benefit greatly from two essential practices of successful Internet marketers:

Test (and re-test) your market before producing
To the greatest extent possible, pre-sell before producing

Covering these two items fully is beyond the scope of this article, but you can, for example, test a product’s viability by creating a variety of different promotions for it that ask people to take an action – like, for example, handing over their e-mail address in exchange for additional, valuable information.[1] The response rates to these promotions gives you an idea of how many people are actually interested in the product. Based on the size of this group, you can then run an introductory offer at a price designed to at least cover your fixed production costs.

I work with many groups that are in a position to all but skip the first step simply by going to a member or customer with the ability to make a reasonably large purchase and setting a per unit price that covers total fixed costs for launching the product. This is the essence of pre-selling.

Even in these cases, though, I still recommend doing broader market testing: you may have your downside covered, but you also want to know what your upside might be (i.e., how large your overall market it) to help you gauge how much you should invest in promotion and assess the level of gross margin you may ultimately have available to apply against operational costs.

I noted above that my bias in pricing online learning is to try always to maximize margins, but of course this has to be done within the context of volume. You want to sell as much as possible at the highest possible margin, but adjusting margin up or down – assuming costs remain constant – can impact the volume you are able to sell. This trade-off is reflected in the final and most visible factor in pricing online learning – the price point.

The Price Point

Although Alan listed the price point second as an aspect of pricing you can affect, I think it is important to understand value, margin, and volume before attempting to establish the price point. When you have really understood these factors and assessed them in your market, you will have the clearest possible understanding of:

the right products to create (value)
the appropriate range of investment for creating them (value plus desired margin)
the size of your potential market (volume)

The price point is the synthesis of all of these factors and it should strike a balance between them that maximizes your net revenue.

In truth, it is likely that you will not establish a single price point for an e-learning product. Because your product will be valued in different ways by different audiences, or segments, within your overall market, it makes sense to vary pricing for these different audiences.

This doesn’t mean favoring one group with a lower price while pulling the wool over the eyes of another in order to charge a higher price. Rather, because you will have an understanding of value, you can add or remove value based on audience preferences and adjust price accordingly.

For example, a portion of your audience is likely to value receiving credit or some other form of validation for successfully completing an online learning program. This might be a feature for which you charge extra. So, too, might getting access to a recorded version of a Webinar.

And it is certainly fair to give discounts to individuals or organizations that purchase courses or other learning events in high quantities. In my experience, many more learning businesses need to be actively pursuing these kinds of bulk sales as part of their strategy. (The key here is “actively.” You will rarely make many of these types of sales through e-commerce. You need business development.)

While I often encounter learning businesses that want simply to be told what the right price for a particular offering is – or who will simply copy the competition’s pricing – I hope the above points make it clear that there is no generic “right price.” You simply have to do the homework necessary to arrive at a logical price for your offering – and, inevitably, you will end up making adjustments once you see how the offering actually performs in the market.

Conclusion

I began this discussion by focusing on value, and it seems important to note as I conclude it that the price point is not only dependent upon perceived value, it helps drive perceived value. Part of what gives a Mercedes or a Louis Vuitton handbag its sheen of value is the high price point associated with each. To a certain extent, of course, the price is driven by underlying cost. But it is also true that these companies simply have the audacity – the organizational self-esteem, you might argue – to set a premium price. And people gladly pay it.

Few learning businesses, I find, are willing to take such an approach with pricing online learning, and perhaps few would succeed if they did. But my suspicion is that most organizations are pricing at a lower level than they need to simply because they have not fully assessed the value – volume – margin relationship.

And this is not a trivial matter: it is well established that an increase in price is one of the most effective ways to increase profit. A study by the consulting firm McKinsey & Co. way back in the 1990s showed that a 1% increase in price translates into an 11% increase in profits. On the other hand, increasing volume by the same amount resulted in only a 3.3% increase. Cutting variable costs by 1% resulted in a 7.8% increase and cutting fixed costs – only a 2.3% increase.[2]

Given the need that most organizations have right now for finding new revenue sources and getting more revenue out of existing sources, putting some effort into more effectively pricing online learning seems certain to be time well spent.

Additional Resources

Jeff

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[1] It is relatively common for organizations to send out a survey asking people about their interest in a particular course topic or set of topics, but this is rarely a sufficient gauge of actual behavior.

[2] This study has been cited in a wide range of places, but I came across it most recently in Todd Sattersten’s excellent eBook Fixed to Flexible.

The original version of this article was published on the Tagoras blog in 2010.