When Cash Cows Cave

In my last post, I noted how Kodak, Motorola, and Xerox delayed introducing new market offerings in order to avoid cannibalizing their existing offerings – film, analog cell phones, and paper copiers.  They wanted to milk their cash cows as long as possible. Now these companies are shadows of their former selves.  Their cash cows caved.

I see a similar story playing out in higher education.   Online degree programs, particularly for professional masters degrees, are cash cows that enable subsidizing undergraduate costs, research programs, and continually increasing administrative costs.  These programs, as well as on campus programs offered to foreign students whose tuitions are not discounted, may be the only segments of many universities’ offerings that are cash positive.

Both of these sources of cash are at risk.  Foreign enrollments are at risk due to increasingly better value propositions in other countries, as well as immigration worries of prospective students.  If the emerging trade war with China results in the banning of their students from attending US universities, this cash cow could shrivel quickly, as graduate enrollments are decimated.

Online education has steadily improved, in part due to investments by top ranked universities.  Major corporations have invested in developing top-notch offerings at their partner universities.  These corporations are sending droves of employees to these programs, with tuitions of 20-30% of traditional masters degree offerings.  These offerings are still cash positive at these reduced prices, although the surpluses cannot subsidize as many things as before.

Many universities have not followed suit, but maintain prices for online offerings equal to on-campus offerings.  They have reduced the costs of their offerings by steadily increasing use of non-tenure track and adjunct faculty members.   This has reduced labor costs to 10% or less.  However, if they cut prices to 20% of former tuitions, these reduced labor costs would become 50% of revenue, drastically cutting cash cow surpluses.

Increasing volume in terms of number of students per course could compensate for this.  However, there are not sufficient numbers of potential students to populate each graduate course with hundreds of learners.  The name brand universities will attract the numbers needed.  Those with lower brand images will see their former cash cows continue to wither.

As their cash cows cave, they will cut programs, employ only adjunct faculty members, eliminate research subsidies, and eventually cut administrative costs. At some point, universities more successful with this changing business model may acquire them.  The acquiring universities will want their location and buildings, but not their programs and faculty.  In a recent case, 100% of the faculty and staff of the acquired university were fired.

The way to succeed in such a turbulent marketplace is to continually wean the enterprise off cash cows.  Take advantage of the surpluses but recognize that large profits inevitably attract competitors, not for all of your business but just the highly profitable parts.  Creatively cannibalize yourself.  This requires taking risks and being good at managing these risks.  Unfortunately, this is not natural for many university leaders.  They hope the current cash cows will not cave until well after their turns at the helm.

 

Leave a Reply