The most exciting thing about Income Share Agreements is how effectively they align the incentives of a student with a school. This realignment of incentives presents new challenges for any company offering ISAs. Companies unprepared to meet these challenges will find it hard to remain profitable.
This essay is the second of a three part series exploring the impact of ISAs on customers, companies, and day-to-day operations on product teams. The other essays can be found here:
- The customer perspective – How demand for ISAs will evolve
- The company perspective – How ISAs shift company strategy
- The operator perspective – Key metrics for ISA product teams
The good news
Offering ISAs as a payment option benefits a company in two ways:
- Serves as a guarantee of quality
- Scales prices with the value the customer receives
We saw in Part 1 that ISAs are most appealing to consumers when uncertainty is high: uncertainty about a product’s quality, uncertainty about their individual ability to succeed, etc. For a major investment like a coding bootcamp (typical price $10,000-$20,000), removing this downside risk vastly increases the addressable market by making a product accessible to customers who could not otherwise consider it.
Additionally, if you offer a product that is significantly more valuable than your target market realizes , then offering an ISA is a way to offer a fair price to a consumer who otherwise doesn’t know how to value your offering. E.g. offering a coding bootcamp to someone who has never even met a software engineer, or offering negotiation coaching to someone who is unaware of how much flexibility companies have in designing comp packages.
“Your education is free if you don’t get employed in your field of study” is a really, really powerful sales message to someone who might on day one have very literally never met anyone in their field of study.— Patrick McKenzie (@patio11) April 10, 2019
So ISAs not only increase a company’s total addressable market, but also increase what that market is willing to pay. Their uplifting success stories are inherently viral. Success drives growth, creating a self-compounding flywheel. It seems like an amazing deal for a company. So what are the downsides?
The downsides are new and significant execution challenges.
A tale of two payment models
Payment models have a major impact on the companies’ incentives, priorities, and org structures. Consider two schools with the exact same course and curriculum that only differ on payment methods. Because profit margins rely on students being successful, ISA schools have to care about two additional factors: Effectiveness and Selectiveness.
Effectiveness is straightforward and uncontroversial. If an ISA school can improve their curriculum and teaching methods, they can make their students more compelling candidates and increase their chances of success.
The point is trivial but the ramifications are huge. Without ISAs, school success is primarily a result of the strength of their marketing engine. With ISAs, “course quality” must become one of the company’s core competencies.
Whatever the traits are that contribute to a student’s success (grit, motivation, strengths, experience?), an ISA-based school must screen for only those students that can be successful. For example, Lambda School says they generally won’t admit students who can’t commit to attending all the classes, which seems reasonable. Because an ISA school doesn’t get paid if its students don’t find jobs, it simply can’t afford to admit students that it can’t set up for success. Once its curriculum/effectiveness improves, then a school can widen its funnel.
Contrast this with Upfront University, a coding academy which charges its fees up front. For Upfront U, the business model is well-understood. Drive as many students as possible into the top of the funnel, and then maximize conversion. The quality of the product (education) primarily matters for the purposes of brand building.
This model also applies to things like games (e.g. Steam), on-demand courses (e.g. Udemy), and information products (e.g. internet marketing). Sales, promotions, and other merchandising tactics to drive conversion are effective tools because what matters most is closing the sale.
Actual engagement with the products is less critical. If a Steam Sale user ends up buying a library of unplayed games, it’s no big deal. Actually, it’s arguably better, as a user can only finish classes/games at a certain rate, while there is no limit on how rapidly they can fill their library.
For these companies, marketing and checkout experience are their core competencies. When profit margins aren’t directly tied to product quality, there is no motivation to strive for product excellence. The products themselves can be outsourced to third parties (games), users (online courses), or low-wage contractors (info products).
For schools that have been primarily marketing engines, executing against Effectiveness and Selectiveness will be a serious operational challenge. Not only will they have to execute against these new competencies, but when issues arise, their interdependence makes it even more difficult to diagnose root causes when issues arise.
If hire rates drop for a given cohort, was that a result of a problem with the admissions process? The course content? How can you tell?
Nearly every success metric (progression through course material, graduation rates, distribution of outcomes, etc) that is affected by the quality of admissions is also affected by the quality of education, so how can you tease apart their effects? These new dimensions are much more challenging to isolate, than say, conversion and retention in traditional software products.
I address this challenge in PART 3.