It's Time to Unbundle!

As America’s long-established colleges face increasing competition from online education and feisty upstarts, they are learning about the implications of “unbundling.” Colleges are modular institutions. They are part “sage on a stage” traditional academics, of course. But they are also part hotel and food service. Part online learning and research. And part sports and entertainment. With tuition as the blood supply, a college survives by cross-subsidizing the one-class-a-week tenured professor, or the out-of-date library, with “profits” from huge first year classes, overworked adjuncts or a pricy semester abroad.

But online education and other forms of new competition break up the economics of cross-subsidy by unbundling the product – offering parts of the education service at a price that’s closer to actual cost and undercuts the once-cozy business model. As many now-defunct newspapers discovered – with internet news stealing many of their readers and Craig’s List destroying revenue from classifieds – competition and unbundling can be a fatal mix.

To survive in this environment, today’s colleges and universities will have to learn to do two things well.

First, they are going to have to learn to “price discriminate,” charging different prices for parts of what they offer, and different levels of service, that are closer to the actual cost and the prices of competitors. Airlines do that already, as do hotels and other services. That’s why the business traveler who wants complete flexibility and some pampering pays far more than the family booking weeks ahead.

In higher education, not everyone wants the same. Some students want to rub shoulders with elite academics in small seminars. Some would happily have most of their classes online and get out quickly and cheaply. Some want to build lasting networks in college clubs and dorms. Others are fine with Facebook. Just as some physicians now offer “concierge” service to patients willing to pay more for more attentive service, colleges will have to learn much better how to customize degrees for different students and price accordingly.

Second, in order to survive, today’s colleges will have to focus on their true competitive advantage, and concede some parts of the bundle to their competitors. If it is small seminars with top-flight academics, then maybe they need to embrace the fact that online educators or community colleges can take care of the basic courses and they will become a two-year institution offering advanced courses to complete a degree.

It’s a tough and compettive world out there. 

Posted by: Stuart Butler

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