The Freemium Model and Digital Higher Education

by Keith Hampson

Free and Higher Ed?

Offering customers something for free in order to generate sales may be as old as commerce itself. However, in his 2010 book, Free : The Future of a Radical Price (as well as in an earlier set of articles), Chris Anderson argued that the Internet and the rise of digitally dependent businesses was remaking the possibilities for and scope of “free”.

The change he observed is the result of the rapidly declining costs of bandwidth, storage, and processing power – core elements of the digital industries. The markets most influenced by the changes are those in which the products and services are primarily in the digital format: web services and software, and certain kinds of content.

I’m interested in better understanding how the changes highlighted in Anderson’s work relate to digital higher education. As more of what constitutes higher education moves into the realm of digital networks, the theory may help us identify new ways of improving the quality and cost structures of higher education. The notes that follow are my first attempt to begin unpacking the theory in the context of digital higher ed.

Freemium

Anderson distinguished between three common uses of “free” in industry.

Type 1: The customer is offered something free of cost if they purchase a second, related product. If you use a coffee service at your office, for example, the vendor likely lets the office use the coffee machine free-of-charge, but charges for each coffee sachet.

Type 2: Here, the core product or service is offered free of charge. Revenue is generated by selling access to the customers of the core product to other companies. This is the basis of advertising-sponsored mass media such as radio and television.

Type 3: The third variety, the “freemium” model”, is the focus of Anderson’s work, and is a by-product of the Internet and digitally dependent industries.

The “freemium” model . . .

“. . . enabled by digital markets where the marginal cost of production and distribution is close to zero. This is the one that allows the “freemium” business model, where 90% of the users get the basic product for free and 10% chose to pay for a premium version. In economics this is called “versioning” and is a form of using price discrimination (where the main price is zero) to maximize both the consumer utility and the profit in a market. In this model, charging a small percentage of a large user base beats charging a large percentage of a small user base. Obviously best for consumer products with potentially large appeal, it’s the main Web 2.0 business model and can be found everywhere from Flickr and Flickr Pro to open source’s “support included” commercial versions of Linux.”

Possibly the best examples of the freemium model are the web-based file storage services like DropBox and Box.Net. Each allow customers to store and share files free of charge up to a certain volume (e.g. 2GB). Revenue is generated from sales to high need or “premium” customers that require more storage space and other special features. Evernote, a note-management application, has a similar business model. The goal of the company, of course, is to convert as many non-paying customers to premium, paying customers as possible. But the majority of their customers will never pay for the service.

Price in Higher Education

Many higher ed institutions use differential pricing. Tuition levels are manipulated, and scholarships allocated, in order to attract a desirable mix of students (e.g. student-athletes, promising scholars, race/ethnicity). As with the freemium model, some customers are absorbing a greater share of costs.

Secondly, tuition levels in higher education have a somewhat unique relationship to value. In most industries, lower prices increases value (value: balance of cost and quality). However, because it is difficult to measure value in education (and the sector has been reluctant to get serious about outcome measurement), stakeholders have had to rely on surrogates of quality to measure value. Surrogates include the institution’s research success, “name” academics on the faculty, exclusivity (admissions), and notably, tuition levels. Here, higher tuition levels are often used as a symptom of quality; the assumption being that the higher the tuition, the greater the quality. And, of course, as the tuition increases, so too does the degree of exclusivity, which in turn, increases the ability of the institution to charge higher tuition levels.

In higher education, digital and otherwise, the most frequent reference to “free” is with respect to OER – open educational resources. On the surface, OER doesn’t appear related to Anderson’s concept of freemium; certainly advocates of OER don’t think of it in these terms. Nevertheless, like “freemium”, OER content is paid for by premium customers – albeit indirectly. The institutions and their individual faculty produce OER materials are supported by “premium” customers – those that pay tuition. This may not always the case. There may come a time when academics and their institutions see the broader, global public as their audience and/or the funding for this content comes from some sort of supra-national body.

As noted above, the freemium model assumes that some of the users of the free products or services can be converted to premium, paying customers. While individual academics that support OER do not routinely consider the promotion of their institution as their motivation for distributing free instructional materials, this is not the case at the institutional level. For senior academic and IT leaders in universities, OER seems like an opportunity to both “do good” and generate positive public relations. Taylor Walsh touched on this function for OER in her recent book Unlocking the Gates, (see, also my interview with the author) and I’ve been in meetings where university management have imagined that by putting their school’s best lectures on iTunesU, Merlot or Connexions that they may be able to build the institution’s brand. I suspect there’s little promotional impact from such efforts – but that university management would see OER as a means of “converting leads”, however indirectly, puts it in alignment with the freemium model.

Examples of Freemium in Higher Education

A great example of the freemium model in higher education is Flat World Knowledge (FWK). In fact, Flat World was highlighted in Chris Anderson’s book. FWK emerged out of a recognition of the limits of the traditional textbook industry that has resulted in rapidly climbing book prices, awkward customization options, and virtually no opportunity for students to define their own needs. FWK produces high quality digital textbooks across a range of disciplines. The basics of the business model are:

  • FWK content is licensed under creative commons.
  • Students have full access to a free web-based version of the book.
  • Instructors that adopt the titles for their courses, can modify the book as they wish; changing text, adding components, reordering the content, adding third-party content (e.g. Youtube videos).
  • If they choose, students can order additional versions of the textbook including black & white or colour print versions, audio versions, study aids, tablet version, and so on. All of these are sold at prices well below industry standards.

This particular use of “free” ensures that all students have access to their course textbook – which is an increasingly important issue as higher education serves an ever-broadening range of socio-economic groups, increases the learner’s control over how they learn, places more control in the hands of the academic running the course, and, of course, it addresses the issue of price.

It seems to be working. After only two years in operation, there are now more than 1600 academics using textbooks by Flat World Knowledge.

Another instance of the freemium model in higher education is the recently launched Test Drive College. As the percentage of the population that wishes to attend higher education climbs, so does the number of prospective students that are unsure of their true interests, and whether they are adequately prepared for college. TDC offers students free online college courses. If successful, students can apply the credits earned through TDC to college programs that are affiliated with TDC.

In this business model, then, the colleges that form affiliations with TDC are the premium customers that generate the revenue. The benefit to the college is the stream of students that begin their college careers better prepared, having already demonstrated their capacity to learn and commitment to complete college courses. TDC is compensated by the admitting college.

We are at the very earliest stage of testing new business models in higher education. The above models – FWK and TDC – have found ways to leverage the changing economics of digital learning. It will interesting to see how other companies employ new variations of the freemium model in higher education.

Note: I am on the Advisory Team at Flat World Knowledge.