Trend Watch: New Price Models of E-Learning
By Tom Barron
Pricing models for e-learning are changing dramatically as vendors move from software licensing to service offerings--and learning content becomes a jumble of objects and events.
The past year's explosion in e-learning offerings has brought with it a concomitant broadening of pricing schemes. The CBT era's method of charging for content or technology--the software license--is giving way to a variety of new payment methods that reflect the shift to Web-based e-learning services.
Off-the-shelf courseware can still be purchased the old-fashioned way, and CD-ROM-based titles are a significant revenue stream for content vendors. But a growing volume of content is being offered in a hosted format through vendor Websites--in packages that can appeal to both the Fortune 500 multinational and the free agent learner.
If that were the only way pricing models are changing, it might be a relatively straightforward adjustment for buyers. But rare is the stand-alone content offering these days as e-learning vendors partner or acquire their way toward bundled content and management capabilities. In doing so, they seek to entice buyers with a "comprehensive solution"--one that captures buyers with a contract and an ongoing service fee.
At the same time, e-learning content is becoming more diverse in form, moving beyond self-paced titles to encompass synchronous e-learning classes, asynchronous collaborative methods, online mentors, and other components. Content is also becoming less linear as vendors wade into assessment-driven, object-based learning approaches that spare learners from slogging through a full course to acquire needed skills and knowledge.
All told, managers charged with buying e-learning are finding a new and confusing landscape--and no small amount of pressure to make the right decision. By many accounts, vendors aren't helping matters by varying their pricing schedules in ways that make it difficult to compare prices directly with their competitors.
"I knew there was a lot of confusion and uncertainty, but it was greater than I expected," says e-learning consultant Nancy Bartlett, who served as lead researcher on a report from brandon-hall.com that surveyed vendors on pricing of off-the-shelf content. The report identified seven distinct pricing models and a wide range of prices for off-the-shelf content. "We were surprised to see that some companies use three or four different pricing models" for content, says Bartlett. "To be a buyer trying to compare prices while at the same time looking to find the right fit--not just a researcher gathering basic pricing information--I can imagine just how overwhelming it must be." (See related story.)
Off-the-shelf pricing
The way vendors price content reflects their history in the market, and many content development veterans have moved into e-learning using the same "title and library" model that dominated the CD-ROM era. Under that system, a library of titles is licensed to buyers for a specified period at a fixed price, during which time it can be accessed an unlimited number of times by an unlimited number of client employees. Many off-the-shelf content vendors continue to present their titles in libraries, mini-libraries, or curriculums; many also provide individual titles or à la carte package deals that offer discounts based on the number of titles and users.
Library-based pricing looks great on paper, says Bartlett, but it presents two problems for buyers. For one, the number of courses in a library is based on how vendors divvy up content, and one vendor's library of 100 courses may cover no more learning than 10 courses by another provider. The second problem is that the per-user or per-course pricing that vendors use to price content libraries isn't an accurate reflection of actual usage. "You see price points as low as 11 cents per-user or per-course, but that's based on 5,000 people, each of them taking all 300 courses in a one-year period, which isn't realistic," she says. The approach also puts the onus on the customer to ensure they use the content they've paid for.
Increasingly common are pricing models based on a per-usage formula. The approach--favored by newer technology-oriented providers and as part of integrated content and service offerings--goes hand-in-hand with the hosting model that has quickly come to rival in-house learning technology implementations, particularly in midsize and smaller businesses. In general, the vendor tracks usage, whether it's the number of enrollments in e-learning courses or the amount of time spent by learners in an e-learning environment. The latter, which Bartlett says is the most accurate way to price e-learning, is still rare--only one vendor surveyed in the brandon-hall.com study uses it. But she predicts more vendors will pursue per-usage models as the hosting model grows.
Paying for portals
A new industry phenomenon not covered in the Bartlett-Hall study is the bundling of content and services by large vendors and third-party portal sites into comprehensive "solutions." The offerings are provided in a hosted application service provider (ASP) format, meaning the vendor manages the IT infrastructure, including the servers and learning management system (LMS) that drive the system. The customer's learning audience accesses the e-learning at a customized Website outside the company firewall, or for less sophisticated implementations, through the vendor's public Website. Some portal vendors also offer their hosted services as an intranet application inside the corporate firewall for additional setup and maintenance fees.
The packaged approach puts pricing in a new framework, one in which e-learning becomes a billable monthly service like a utility. Portal purveyors say it provides the benefits of integrated capabilities without the risks entailed in trying to build an e-learning platform in-house.
"You're not having to fork over hundreds of thousands of dollars with a substantial risk of failure," says Randy Eckels, vice president of sales for KnowledgePlanet.com, an e-learning portal provider based in Reston, Virginia. Eckels cites a recent GartnerGroup study that documents the risks of in-house IT initiatives; the study found a majority of them fail or are obsolete by the time they're completed.
"If you look at where pricing models have been in the past, they've been in the low risk-sharing, low-reward quadrant," says Eckels. "What we've constructed is a risk-sharing approach where we're handling the IT issues and the customer can focus on getting results."
KnowledgePlanet.com bases its fees on the number of e-learning users, with discounts for progressively larger audiences. Its preferred account is a hosted, full-service contract--typically one year or more--that gives customers the full range of content, performance management, and LMS functions available through the portal. Customers can opt for a customized version of the portal, and the company still provides software licenses for customers who want to take its LMS in-house. But that's not where the action is, says Eckels.
"Hosting has merits for all-sized customers, and we're up to [having] 70 to 80 percent of our customers hosted, compared with 50 percent last year," he says. KnowledgePlanet CEO Alan Todd proclaimed the dawn of the "e-learning utility" age in a recent company newsletter, writing that hosting will become the norm for e-learning contracts and e-learning providers will be seen as the learning equivalent of the phone company. A May report by market research firm IDC backs that assertion, documenting the rapid growth of the ASP hosting model and the shifts it represents in how e-learning is offered by vendors.
"Nearly all vendors will need to participate in some form of ASP solution to maintain a presence in the industry," said IDC learning services program manager Cushing Anderson in announcing the report. "The success of the ASP model in the learning industry will come from partnership networks that are built to include learning delivery vendors, content vendors, and learning service providers."
Some analysts predict that larger companies with more robust IT capabilities--and politically powerful IT departments--will continue to manage their e-learning technology internally. And the most ambitious efforts to integrate e-learning with enterprise information systems will call for in-house implementations, some argue. Major LMS vendors continue to offer their systems as stand-alone applications for license by customers, though many are hedging their bets by offering portals or partnering with hosted portal services.
For midsize and smaller companies that lack the IT sophistication to manage an e-learning platform internally--or as is often the case, are too overwhelmed with other IT initiatives--a hosted portal is a compelling offering. "The total cost of a portal is generally lower than other e-learning solutions because the customer doesn't have to pay for custom-developed content, complex installations on an intranet, or additional labor for network administration and maintenance," writes W.R. Hambrecht + Company market analyst Cornelia Weggen in a September Learning Circuits article on the value of hosted portals.
The hosted approach also allows fast deployment, an issue that has put some LMS vendors specializing in in-house implementations on the defensive in recent months. "VPs are saying, 'Yes we have skill gaps, but I want something that I can get up and running in 60 to 90 days max,'" says one sales executive who has worked for two major e-learning providers. There's something of a backlash afoot among large organizations over both the costs and the time it takes to implement in-house enterprise e-learning systems, the executive maintains.
But large organizations that want the fullest integration of their e-learning with existing enterprise management systems will continue to opt for in-house implementations, others maintain. And in some cases, IT executives are unwilling to outsource e-learning to a vendor. "There are some [corporate information officers] who won't play that way," says Tom Graunke, CEO of e-learning provider KnowledgeNet. "Sometimes they were burned by a past outsourcing arrangement that didn't work out--or it's simply part of a strategy of control," he says. Graunke, whose privately held firm specializes in IT content offered in either hosted or intranet arrangements, predicts that one-fifth to one-third of the market will continue to prefer in-house implementations.
Content disintegration
Hand-in-hand with the growth of hosted offerings has come a revision of what constitutes learning content. No longer is the term limited to self-paced courseware as more vendors combine that format with other electronic components or events to bolster learning. There's no industry-wide term for such content add-ons as electronic bulletin boards, online mentoring, and synchronous classes--some call them "surrounds," while others prefer "learning events"--but some people say they're as important as courseware in fostering a learning environment. Content itself is being transformed from linear learning sessions into smaller components by companies pursuing learning object methodologies, which they say allows mass customization of content based on learner needs. The effect of both trends is a further diminishment of stand-alone content as a price point in vendor offerings.
"In the e-learning space, the idea of a course title will cease to exist," predicts Brian Witchger, senior director of client resources for e-learning provider SmartForce. The world's largest e-learning vendor, with about 4.5 percent of a still-fragmented market, SmartForce built its business on IT-related courseware shipped to customers on diskettes and CD-ROMs. But Witchger says the Redwood City, California, company, which reinvented itself as a Web-based training provider last fall, is in the midst of shifting to a learning object model and is redefining content and various delivery and support services in terms of "learning events." They include asynchronous content objects, collaborative tools, online events, online experts, and other components, he says.
"The real value isn't in any one learning event, but in the combination and bundling of various learning events," Witchger explains. Learning events fall into four broad categories: instruction, collaboration, assessment, and practice, which are balanced using instructional design principles. A collection of learning events makes up a learning path, and a group of learning paths make up a learning portfolio, which might comprise a topic area such as "Using Microsoft Office" or "Cross-Functional Teams."
The new approach relies on SmartForce's hosted offering, MySmartForce, to integrate the various components, meaning that customers using the company's legacy intranet-based systems will need to upgrade to the hosted service to take full advantage of integrated learning events. An intranet version of MySmartForce that makes use of the Docent LMS (see Newsbytes for a related report) is expected to be released "in the near term," Witchger says.
Rival DigitalThink, whose business model as a purely Web-based service dates to the company's 1996 inception, also stresses the value created by services that accompany off-the-shelf or custom-developed content. "We believe the buy-and-tie approach--the model of bringing software in-house and trying to tie all these capabilities together--is not going to survive," says vice president for learning solutions Todd Clyde. The company bases its contract fees on the size of a customer's learning audience and on actual enrollments in e-learning classes, which he says yields a more accurate fee than mere head counts. "Because e-learning is now a service industry, we're seeing a move away from unlimited licensing toward some sort of bounded marginal cost exposure," says Clyde.
Meanwhile, suppliers of LMS-type applications are adding collaborative capabilities to systems they offer in the buy-and-implement tradition. E-learning portal provider gForce, in announcing a system upgrade in August, stressed customization and knowledge management capabilities of its system to bolster off-the-shelf or custom-developed content. "We're using XML to add relevance and context to the overall experience by surrounding the learner with related features, reference material, and access to experts," said gForce vice president Shailesh Agarwal in announcing the upgrade (for more on XML, see the August Learning Circuits). The application is offered by license to customers, similar to other enterprise LMS vendors, but gForce also offers a hosted service. Another learning management provider, Saba Software, says its partnerships with content and synchronous delivery vendors allow customers to integrate collaborative capabilities in their implementations of its LMS system. Saba added hosting as an option for customers earlier this year.
Contractual issues
One upshot of the shift from software sales to ongoing e-learning services is the corresponding change in contracts, with clients of hosted services seeing monthly bills rather than lump-sum transactions. Major vendors have up-front contract fees that cover initial setup and customization services, followed by monthly fees based on usage and the degree of ongoing technical support. Most have contract minimums of one year and incentives for buyers to opt for longer-term arrangements.
But the torrid pace of technology development and shifting alliances in the e-learning field makes a long-term contract a perilous bargain, say some analysts. "The rapid market changes make inadvisable any vendor contract longer than two years," states GartnerGroup research director Clark Aldrich in an August report to the market research firm's customers. Aldrich also advises buyers to pay more attention to vendor alliances than to emerging interoperability standards to ensure cross-functionality, at least in the near term.
Some vendors acknowledge the growing pressure they face from buyers for shorter contract terms. "We're seeing more customers wanting to do six-month commitments," says Graunke of KnowledgeNet, whose Scottsdale, Arizona-based firm allows terms of less than one year, depending on customer size and expected usage. Other providers say their standard contract is one year but make exceptions in certain instances.
The broad array of pricing options--and vendor willingness to tailor those options almost limitlessly--isn't likely to abate anytime soon. But competition among vendors is heating up as the market enters a period of consolidation. Some see the possibility of price wars on the horizon as a multitude of vendors compete for large contracts. "With e-learning, everybody is competing with everybody," says Graunke. "We're in Phoenix, and right now we're competing with a vendor in Chicago over a customer in the Southeast [United States]."
Others say price will continue to be trumped by brand awareness as the key issue for buyers. "I don't see any pricing pressure in the market," says Hambrecht's Weggen. "We are strong believers that the competition will take place on the basis of brand for some time." Others agree that the insecurity felt by buyers in the burgeoning arena will steer many toward recognized brands, but content quality will begin to play a larger role in purchasing decisions.
Managers in the market for e-learning should approach vendors with plenty of details about their learning needs and their IT infrastructure--and have plenty of patience to sort through myriad pricing models.
Published: October 2000