Everyone Wins with the Institutional Model

Published March 16, 2016

At the beginning of each semester, my social timeline is filled with articles, blogs, and tweets about the skyrocketing prices of course materials in higher education. In the last month, my Twitter feed included a series of tweets from 2020 presidential candidate, Mr. Kanye West.

We have to lower the price of textbooks…

— KANYE WEST (@kanyewest) February 16, 2016

I’d rather teachers got paid more and books cost less … #2020

— KANYE WEST (@kanyewest) February 16, 2016

[Sidenote: Kanye, while I agree with your sentiment that college textbooks should not cost so much, I’m not sure that trading lower prices for higher faculty salaries will accomplish your goal of making college more affordable…]

As you know,
there is no shortage of concern and consternation over the price of higher education content. Given that context, let’s talk about textbooks and how Unizin is leading the way in lowering costs while increasing benefits.

The Problem

Here’s a task: Set up a search on Twitter for the word “textbooks” during the month of August (or January) and observe the results. You will find no shortage of students, student newspapers, or websites who will “colorfully” articulate the problem with textbook prices as it relates to the evil publishers, the terrible bookstores, and the monster faculty who wantonly require obscenely priced content knowing that the materials won’t actually be used within the course. The popular narrative is that publishers, bookstores, and faculty authors make billions while the rest of us toil.

In reality, I think the dramatic rise of textbook prices can be attributed to two basic economic principles: supply and demand and economies of scale.

Supply & Demand. At some point, books containing professional knowledge from subject matter experts shifted from a product with a unique value proposition to a commodity. As more students sought to distance themselves from books without a perceived long term value, businesses and marketplaces popped up to capitalize on this growing practice. Demand for publishers’ content has remained relatively level; however the market has become saturated with products due to expanded markets for used books, rental books, and pirated eTexts.

The creation and success of these markets is natural. Consumers gravitate to a solution that delivers the same product for a lower price and entrepreneurs recognize a chance to monetize these new markets. However, as with many opportunities, there are unintended consequences. Two points stand out when I look at the graphic below.

The first is in the late 90’s. This coincides with the rise of the Internet and its ability to take small local markets and create one international market for used books. I personally learned to bypass the campus bookstore and publisher back in 1999 when I purchased my first used book online. Since then the number of competitive virtual bookstores has grown exponentially as well as students’ desire to acquire content for as little as possible. As students have learned (and developed) new ways to avoid purchasing new textbooks, publishers have also learned to adapt by raising prices, releasing new editions, and selling supplemental content to faculty (e.g., study guides, quiz platforms, adaptive learning platforms, etc.).

The second sharp uptick was in the mid to late 2000s. This coincides with the founding of Chegg and other pioneers in the textbook rental business. Further, bookstores (physical and virtual) created massive rental programs saturating the market with publishers’ content. As these programs continued to remove publishers from the transaction, publishers continued with the practice of raising prices, releasing slightly modified new editions, and further expanding their portfolio of supplemental and ancillary materials.

Economies of Scale. All products have fixed costs and publishers take on the risk and investment when identifying, acquiring, and creating content. In the case of a textbook, author royalties, editorial services, peer reviews, marketing and sales, production, warehousing, and anti-piracy/copyright protection efforts tend to be fixed costs that remain whether one copy or a million copies are sold.

Though the total market for a title might be 40,000 units over a two-year period, the publisher likely will actually sell 10,000 units due to the supply of books in the secondary market after the initial semester. So they price the content with sales of 10K in mind rather than 40K, thus pricing the book higher than what the total demand might indicate. The price for the new book also dictates the price for the used and rental books, extenuating the problem.

Let’s say that the total cost for producing Title X is $500,000 and the anticipated market is 10,000 units. In this scenario, you would need to charge $50 per copy to break even. But if you could guarantee sales of 40,000, you could sell the same title at $12.50 and break even.

The Solution

What the industry needs is a solution to this downward spiral. A solution that allows publishers to realize fair compensation for their contributions and yet offers a reasonable price for end users. It would be even better if this solution could also deliver pedagogical advantages to faculty and analytical advantages to administrators. This is something that Unizin is working on and we call it the Institutional Model.

The idea is simple. When a piece of publisher content is adopted for a section or course, the negotiated price for that piece of content is added to the student’s bursar account upon registration. This fee is added for all enrolled students in the respective section.

Publishers Win. In my experience in working onsite in college bookstores, publishers typically realize revenue on sales from 20-30% of the enrollment of a given course. Through the Institutional Model, they realize 100%. This allows them to balance deeper discounts with higher revenue. The more copies sold through this model, the larger the potential discount. This model also reduces, if not eliminates, the supply of pirated and second-hand content.

Students Win. Unizin is a non-profit consortium, which means we don’t have venture capitalists or stockholders demanding profits. We can afford to pass the wholesale price of content directly to students unlike most distributors who have to add markups. Students benefit from the lowest prices available, paid for with applicable financial aid, reducing out of pocket expenses. The procurement process is straightforward, reducing stress on students at the beginning of each semester.

Universities Win. Nothing is more challenging to faculty than teaching a course to students who are unprepared. With the Institutional Model, students have access to the course materials from the start of class and professors have access to the rich data sets collected for use in personalized learning, predictive analysis, remediation & retention efforts, content effectiveness, and countless other applications.

Most importantly, as the Institutional Model grows it offers more benefits, effectively reversing the downward spiral outlined earlier and providing a sustainable balance to the eco-system of higher education content.