
The Amazing Power of Deflationary Economics for Startups - DanielRibeiro
http://www.bothsidesofthetable.com/2011/12/22/the-amazing-power-of-deflationary-economics-for-startups/
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padwiki
This is a fantastic article, and really hit home with our project. The rules
of deflationary economics has become common knowledge in most product and
service industries, but in my industry (higher education), the opposite seems
to be true. Every single legitimate competitor raises prices year after year,
much faster than the rate of inflation. The few that don't (Khan, MITx,
Stanford, Udemy, etc...) do so by scaling back the user experience, reducing
difficulty and removing credentialing. This means the value proposition to the
student, even at no cost, will not match the entrenched system. There is a
market for this new class of product, but it is defining a new market rather
than competing in the existing one.

I actually think the reason more companies don't follow the strategy he
outlines is that it is just too damn tempting to take the quick cash. For
example, the current market value of our product is in the $500-$2500 per
credit hour ($2,000-$10,000 per class) range. We could charge in this range
and be extremely profitable. Instead, we price our classes at $100 per credit
hour, pay our professors a much higher percentage and choose to take a slimmer
margin. In classical "next quarter" business terms, this is a very bad
business decision. Doing so, however, opens up a number of opportunities that
our competitors can't exploit. For instance:

We had to develop technology and workflow that dropped the cost of high
quality interactive content down from $10,000 per hour (or more) to around
$120 per hour. Now that we have that option, we can scale our course offerings
extremely rapidly while keeping costs at a minimum.

Being able to offer a bachelors degree for less than $10k (masters less than
half that) gives us options for creative financing of education that again,
our much higher priced competition just don't have. Student loans no longer
become necessary, even without subsidies. State and federal subsidies could
easily cover the entire cost of tuition (California currently spends more than
$12,000 per student per year just at the community college level). Also, as
our first program is CS/SE, there are many companies with a vested interest in
increasing the number of graduates and having access after they graduate. The
point is, we expect to be able to offer most of our programs at no cost to the
student within a few years.

Since our largest cost saving was in not having any buildings, we are not
limited by a physical infrastructure when it comes to scaling. We also
designed our system to benefit from having more students, which means the
quality of our program will increase as we grow...something that can't be said
about many physical campuses.

TL:DR; Higher education is about to enter the tornado.

