Developing a meaningful business plan may be the hardest part of getting started with an online learning initiative. At many institutions, the idea of using technology to deliver complete degree programs to new groups of students who may never set foot on campus is a truly unique idea. In that case, there may be no financial models to follow. Here are some ideas.
1. Treat the online initiative as a new cost center. That is, identify all costs associated with the initiative, with the goal that these costs will be recovered through tuition and fees. The online initiative should be expected, when it matures, to recover all of these costs through tuition and fees. Revenue from traditional programs should not be expected to cover costs of the online program; nor should students in the online program be expected to pay for services that they do not use.
2. Identify all new costs that will be incurred as a result of the online initiative:
- Technical Infrastructure—This would include the learning management system and other computer-based resources. If this infrastructure is to be shared with other functions (i.e., online activities for on-campus students and faculty), then calculate a share of that institution-wide infrastructure that should be borne by the online initiative.
- New Demand on Existing Units—This might include the increased demand on core services such as the Registrar, Financial Aid, library, the central IT unit, marketing, etc. Estimate the specific new demands that the online initiative will place on these units. In some cases, the best solution will be to fund new positions in these units.
- New Costs Directly Tied to the Online Learning Unit – This includes all costs that will assigned to the central unit that is coordinating the initiative.
- Academic Unit Costs – This would include all new costs incurred by the academic units that develop and offer courses through the online initiative. In some cases, these costs will be covered by the central online learning unit; in other cases, the academic units will bear these costs but will expect to recover them through tuition and fees.
2. Understand how achieving scale over time will affect cost efficiency and revenue distribution. Different kinds of costs contribute differently to achieving scale. For instance:
- Infrastructure costs—technology, website management, licenses, library services, “brand” marketing, faculty professional development, etc. – will be recovered through each enrollment.
- Program costs – the cost of developing and offering degree and certificate programs (program design, faculty leadership, program-specific marketing, academic advising, etc.)—will be recovered through enrollments in those particular programs.
- Course development and maintenance (faculty and instructional design costs, etc.) are incurred every time a course is developed or updated and will be recovered through enrollments in those particular courses
- Student services (registration, pre-enrollment counseling, financial aid, etc.) occur for each enrollment, regardless of the program or course involved.
3. Using the above, estimate how many programs, courses, and student enrollments you will need to break even. Also, decide how after-cost revenue will be used. For instance, to what extent should after-cost revenue be reinvested in new program development, new student services or co-curricular services; returned to the academic units that offer the programs for their own use; or returned to central administration?
4. A revenue sharing formula, based on the above considerations, should be developed early and shared widely with the administrative and academic units that will be involved in the initiative. It is important that everyone have a common understanding of how costs will be handled—who will take the financial risk if a program does not succeed—and how financial returns will be distributed. My own experience was that it was best to share gross revenue—ensuring that sponsoring academic units will receive a percentage of gross tuition in addition to cost recovery--rather to wait until all costs are covered and share whatever remains. Risk should be with the central online learning administrative unit rather than with each individual teaching or support unit.
The business plan should be treated as new institutional policy and applied uniformly across all units.
Ultimately, each institution’s revenue and cost model will reflect the organizational culture and needs of that institution. There is no single model. However, I hope these principles will help guide the discussion at institutions that are beginning new online learning initiatives.