Why Your Education Business Isn’t Sellable | Ep 877
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We have to answer what problem are we solving? If people are churning and you have an education business, well, unless you're doing continued education, that is the nature of the business and you probably miss price on the back and probably miss price on the front end. This is where service businesses start to sprout off of education because they're not coming for the education, they're coming for the service. They come for the service, they'll keep paying for the service if it's good.

Back streets, back, all right. Or is it let's go? I don't know. I actually don't know the words to the song. Don't know the words to any song, believe it or not, except for one that I did for poetry class in seventh grade because I actually had to like write it down. So I'm very visual learner. Literally can't remember any song lyrics. Anyways, that's not why you're here. I am on a little bit of a roll this morning because I've had a lot of things that have been percolating and haven't done one of these in a minute. I've just had a lot of backlog of like consistent questions that I get around the same themes. And I wanted to make stuff to like

just put a nail, you know, drive a nail into the coffin, like not have to basically, it's like, I want you to not like this, like this is solved. Like you don't have to think about this one again. Like this is, this is the, this is, I won't say the answer, but I'll do my very best. So here's the issue. Many people have education businesses. And so that means books, courses, you know, media, speaking, coaching, all of that stuff. Right. And they want to make sellable businesses. Right.

And they also want their customers to never leave. And so they have these problems, which is that customers are leaving and their business isn't sellable. And they think there's something wrong with their business. And the answer is maybe.

So let's dive into this. Number one, what makes Harvard Harvard? Like why is Harvard different from whatever one, two, three, you know, coaching education business? Okay. Well, number one is that Harvard has standards. So they have many people apply and only a few get in. If you accept everybody who has a credit card, that's not a very high standard. Right. And so if you want to create a brand around education, you can't let everybody in. Thing number one.

Thing number two, Harvard makes no promises. They don't say, hey, you're going to make this much money and you're making this many days. So they've completely gone away from that. Instead, it's just it costs this much money to get in and you might not get a result. Now, here's the craziest part. Number

Number three, not everyone passes. So not only does not everyone get in and everyone pays with no promise, not everyone passes. And so if you just look at those three criteria, there's more. But if you just look at those three criteria, you'd be like, oh, that's why they're different from 99% of

of other education businesses in general. They also do education. Now, what else is different about their thing? Well, it's in person versus remote, which is probably, again, another big differentiation for the vast majority of these businesses. On top of that, the network of the quality of the people is probably the most valuable thing that they give on top of the brand.

And so they just curate an experience for very smart people and they slap their brand on top of them. And fundamentally, that's actually what they sell. Now, what's the next issue that comes up for most people of like, why is my business not a Harvard? They will then get into, well, my customers leave. So do Harvard's.

They leave after four years. Now, they also have an extended time horizon in terms of the promise of when someone might get to the end of this thing, right? Yours is six weeks. Theirs might be six years. Now, what is continuity in the form of education? Well, every quarter,

or every trimester, semester, or whatever they work on, right? You have new courses and you have a curriculum. And so a lot of people who are in the education space are like, I want to teach this one thing and I want people to pay me for it forever. And the reason for that is because people in the education space mistake a payment plan for continuity. So if you sell something that costs $12,000 and you give them access to it for a year and people pay $1,000 a month, you don't have churn, people have grad

graduated. You have a payment plan, not continuity. If you're trying to solve for continuity or solve for sellability, let's go into those. Why not? We're partying, right? A business that has enterprise value has reliability of future cash flow, meaning there's a high likelihood that this business will continue to make money in the future. And so typically, like a Harvard has a brand. And so because of that brand, they're not worried about demand, right? They can demonstrate the fact that they have a certain number of people who are applying every year and

and a certain number of slots available. And so because of that supply-demand discrepancy, because of the brand that they built, they were able to likely, if it were a private enterprise, well, it is private, but it's not a nonprofit. Sorry, it's not a for-profit institution. It's a nonprofit, technically. Let's not get into that. But the point is that for your business to have value, you're going to have to build a brand around it that guarantees demand in the future.

Because, and this is the big one, because education does not lead to continuity except under one circumstance. So let me explain. So if you teach someone to do a thing, they usually learn the thing if you're good, and then they graduate from the thing. And they should do that. But a lot of people are like, man, I want to have recurring revenue. But the thing is, is that you have to break up the deliverable that you have into two different columns. All right? So this is a good exercise for you to think through. Column A is what's the stuff that

that someone uses one time, gets the value, and then after they get the value, it's no longer valuable. So if I teach you how to sell and then you know how to sell, I don't need to teach you again. You already have the value. If I teach you how to generate leads for yourself, as soon as you learn the skill, the skill now continues to provide value, but I no longer provide value to you in teaching it.

Right? Right. So there are education components which are typically one-time value. People are on a, like for a Harvard, for example, they teach you, you know, communication 101. Okay, after that semester, you don't take communication 101 again. And it would be weird if they tried to charge you again for communication 101 because you're like, well, I already know it. Right? But we do this. And as we as entrepreneurs who do education stuff, like try and do this stuff all the time. Now you're like, wait a second. Then how did gym launch...

sell for a lot of money if there was enterprise value? Ah, because most people mistakenly think gym launch was an education business. And that's because the people who profit from education businesses try to sell you on that. As the owner of gym launch, I can tell you the vast majority of the enterprise value in that business was not from education because there's other things. So I said column A is one-time value. Column B is consumables, things that continue to provide value again and again and again. Now, if you look at your service, which I like to think about it from that perspective,

What are the other things that you have in the business that someone must use again and again and again? Examples. Forge and Launch, one of the primary things that we do there is that we go and test ads in representative markets. We spend our own money.

to get ads that we know work. And then once we have that ad, we then sell it at a margin, basically, to everyone else. And it's 100% gross margins for us after we've incurred the initial cost of, one, filming the ads, editing the ads, and then displaying the ads, actually running them, putting the money behind it to see which ones are the winners. But once we scoop up the four or five winners, we can just hand them to 1,000 or 10,000 locations, and they are valuable to each of those locations because within those local markets, they are new ads. But what do you need next month? More new ads.

And so it is a consumable that has 100% gross margins that can be sold again and again and again. What else do you think someone could have that is consumable? There's a great school community, for example, where they do 3D printing. So the guy teaches 3D printing. How do you do it? How do you set it up? Whatever. One time value. And then after that, every month, he scours the internet for new products that are hot and trending right now so that you could set up with your 3D printing business.

And so people stay every month because they can get this list, the hot list, and then they grab the things off that list and they stay in there. And for him, he just had to do the one-time work of creating the list and then he can sell it over and over and over again. But people stay because they don't want to lose it. I'll give you a different business. There's a real estate business that has a school community and they have super low churn. And one of the reasons they have low churn is because every month he has bird dogs. So basically when people go out and scout for, uh,

scuffle properties, and he puts a list out of properties that meet his criteria for his way of doing wholesaling.

And so then people pay to be in this community in order to have access to this list of fresh properties. So he does the one-time work and then he basically licensed that or fractionalizes the sale of that to many people. These are the consumable consumables. What other ones are common? Let's think through them, all right? So one of them is you've got community. Community in and of itself is actually a consumable thing. You use it this month, you use it next month, right? These are things that you can do. These are fundamentally why network effects exist. If you can build a valuable enough network, people don't want to leave that network. And fundamentally, that's what communities are. It's on a micro level, right?

And so community is something that you use. Now, what are other things that you might use? You use traditional services. So if you have a marketing agency, you might pay monthly. If you do SEO, you might pay monthly. If you do accountability, which is a service for some people, that is something that people use month after month after month. If you solve a new problem on a monthly basis because a new problem emerges, then that would be something that is consumable.

And so we have to look at our deliverables and think, what are the things that are one-time and what are the things that are consumable? And then, here's the key part, we have to price them appropriately. And so the reality is that education is extremely valuable. There's a reason that Harvard can charge $60,000 a year or $70,000 or whatever it is now. It's because that is very valuable. To educate someone gives them, they basically pay today to increase their skill set so they can increase their future earnings. That's what education is about, is literally increasing someone's future earnings. That's why people learn shit.

Or if they want to learn how to paint, then they could obviously monetize that too. But some people just want to learn how to paint. They want to learn how to do music. They want to learn how to sing. Whatever the skill is. But they pay today because they know that they're basically paying a discount over the long haul as long as they learn the skill. In this context, how do we get customers to stick? One is with the pricing, we want to price the one-time value as high as we possibly can relative to what people are willing to pay. On the consumable part, we price it where people are also willing to pay if the other piece didn't exist.

So think about this. This is the big mistake, right? This is the big mistake, is that people will price their consumable at a payment plan price of their one-time upfront value. And so, for example, if something's worth $30,000, then they say, cool, you can pay $2,500 a month for 12 months, and you're going to get this one-time value and this consumable value. But then once people have kind of drained that one-time value, and sometimes it takes less time than a year,

then people exit because the consumable value is not worth the $2,500. This is why I'm a big advocate of the big head, long tail model, which is maybe the upfront thing is worth really $10,000. And your consumable thing might be worth 100. It might be worth 200, maybe worth 500. I don't know what that is. But if you only sold that, so this is a good mental frame is if you only sold this thing,

What do you think would be a price that people would not want to leave? That's the price you have for your continuity because that is the price that people are willing to stay at. And typically, it's significantly lower than a spread out version of the upfront value of whatever the educational skill is. And so you have to differentiate those things. Now, beyond that, you might be like, well, shoot, my consumables aren't worth that much. Fine.

then structure your pricing so that you always have a value discrepancy in what you charge and what you deliver. Now, the other piece of this is, okay, well, I want to have enterprise value in the business, which means that I should have a reliability of future revenue. So sure, we have a little bit of our consumables that will stack up over time. Great. We have our upfront, which typically serves to liquidate the acquisition cost, at least how I like to structure things for the high, high margin continuity that goes on the backend. But what else can we do? Well, what does Harvard do?

They sell you more courses. They sell you more degrees. You want to have a bachelor's? Guess what you have now? You want to get a master's? Get a master's. After a master's, what do you get? You get a PhD. Well, after a PhD, what do you get? You get a double PhD. You get a super-duper PhD, right? They'll keep selling you, but the thing is that's the continuity. That's the ladder is just with the higher-level version, but they also know that it's a fraction of that, right? If 100 kids go to get a bachelor's, it might only be 10%.

10% or 20%. I don't know the numbers. 20% that they get a master's. Of the masters, maybe it's only 10% of them that get a PhD. And so also the pricing also reflects that. Interesting, right? Real quick, guys. I have a special, special gift for you for being loyal listeners of the podcast.

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Back to the stickiness of the business. A piece of advice. Don't start an education business and then say, I'm going to make it a SaaS company. Famous last words. Now, if you're white labeling somebody's tool, whatever. It's not really yours and fine. That's really just you being an affiliate of someone else's thing. Whatever. But if you're like, I'm going to start something from scratch, the likelihood that you succeed is...

basically zero. And when I say succeed, it's like actually have a true software exit. I have yet to see, literally yet to see, and I look at a lot of businesses and I kind of sit in this space. Like I understand pretty well. I have yet to see a business that has successfully done this. And the likelihood that you were the special snowflake is probably not a bet that I'd be willing to make. Now you might feel like a special snowflake. Your mama might've told you your special snowflake. Your father, well, hopefully he didn't tell you your special snowflake.

You should hopefully have you proof it. But the point is, is that it's unlikely. And I prefer to make bets that where if I wait, I win.

And if I look around and look at the marketplace and no one's won using this path, it's probably because it's a flawed path. And it is because when you attract them with education, then you try to keep them with software. It typically doesn't work unless it's a core function of the business and you're fully focused on it, which you probably aren't. If you want something that is super sellable, then you want something that's sticky.

If you want something that's sticky, then make the business about the sticky thing. A lot of stickiness here, right? Now, the trade that most people in education and even media companies make is that instead of having something that is inherently valuable as an asset, they tend to just make more money than they otherwise would with a similar scale business in just about any other space. And I see that as the trade of future value or future money for today's dollars. And so I'll give you a story. So a buddy of mine had a business. He worked on it for between 8 and 12 years, if I can remember, a while.

And he took a salary of $70,000 a year. And at the end of that period of time, he sold the business, software company, for $250 million. So $70,000 a year for 8 years, 10 years, 12 years. He lived on Dave Ramsey style, paid his house off, lived on that. And then, boom, $250 million. He could have done an education business and maybe made $10 million a year for that whole time. He's skilled enough as an entrepreneur. And so the question is, how do you want to make money?

And I want to be clear. I don't think there's anything wrong with saying, I have a business that makes me $10 million a year that I'll never be able to sell. Well, you get to enjoy the $10 million every single year. So, I mean, life's only going in one direction. It's getting shorter. So, I mean, I don't think there's anything inherently wrong with that. There's this kind of mantra of what I call the three marshmallow problem. So there's the typical story of the child who gets put into a room, he gets one marshmallow now, and if he doesn't eat the marshmallow, he gets two marshmallows.

The problem with that for those of you who learn how to delay gratification is that once you learn that skill, you then want to delay gratification forever. And then you hope for this third marshmallow that might never come. And so think about different versions of this experiment. If we were to say, hey, you get one marshmallow now, and if you wait a year, you can get a second marshmallow. Is it worth waiting a year for a second marshmallow? Like, is the payoff of a second marshmallow worth it?

Maybe, maybe not. Is it worth it at 10 years? Is it worth it at the end of your life? You get the second marshmallow? Maybe, maybe not. And so I think a lot of people mistake

delaying gratification with maximizing gratification. And so, yes, it's true. Delaying gratification in general tends to, especially at the beginning, increase your reward. But at some point, there is a diminishing return, in my opinion, beyond which you should just get your reward. And also, there's this misconception, I think, that by taking the reward,

unlike the experiment, that it prevents you or precludes you from getting another marshmallow again later, which oftentimes it doesn't. And so I think there's a sweet spot, and that's like most things, is that the magic is in the middle, is being able to balance both extremes. And what many people will do, strivers especially, will just suffer for extended periods of time, and then sometimes they don't even get the second marshmallow and the first marshmallow is stale. So

I don't see an issue with the fact that the business that you have might just generate more cash flow and not really be that sellable. That's okay. It's a trade you make. And I think it's a reasonable trade. But if you want to have your cake and eat it too, then there is one specific type of education that does have continuity. And so that's what I'll dive into. So obviously all the components that I talked about that are consumable, those will drive continuity. But there is one specific type of education that drives continuity, which is continued education.

So there are professions where you have to stay up to date with technology. You have to stay up to date with new practices, where if you can build a business where you recertify people on new skills or new technologies that come out on a consistent basis, then that membership, which is really what the business is, that membership business can over time continue to compound and you can demonstrate that people will stay with you for an entire career.

If you can demonstrate that, then you have a business that is very valuable and is in education and can sell at almost a tech multiple. And fundamentally, inherently, technology businesses aren't

They don't get these multiples because it's not like, oh, I have a software, therefore I get a software exit. No one gets this. And the thing is that people will preach this because they want to sell you on that idea. But it's not how an investor sees it. The things that make a software valuable are the things that make a business valuable, which is that there is revenue retention. There's high gross margin. There's high incremental margin. There's less operational drag at scale. These are all the things that make software companies valuable.

at scale, more valuable. It's not that the fact that they use code that makes them valuable. If you sell people into a software and they churn out every six months, that's not valuable. It's basically the same as a service. And you're going to be valued based on the fact that you have customers that come in and out all the time. And the thing that you'd have to establish is a brand that would improve out the fact that you're going to continue to have demand like Harvard for years to come. And so if you're not doing this,

Then you're basically just building something that generates cash flow, which to be fair, I'm not saying there's anything wrong with that. But the big misconception is the idea that number one, there's something wrong with it. Number two, that I have to add software or something to make my company valuable, which it won't make it valuable. It'll likely make it a distraction and decrease the size of the business. Number three, we're cranking. You're charging too much for the consumption and too little for the education. You probably need to do this.

charge more for the upfront thing because it is life-transforming value, and then charge less for the thing that's ongoing because it probably is less valuable than the other one. And if you're like, I'm not sure if mine is less valuable, well, just look at your churn. People are telling you if it's less valuable. And if you don't have something that is consumption-based, think about what components of whatever it is that you sell, someone must consume on a monthly basis. They use and reuse so that you can get them to buy again and again. So these are my qualms.

With education done right, this is how I think about it. And hopefully that should put to rest. One, how do I sell my education business? Well, it's not about an education business. It's about keeping a business that keeps customers for a long time and having high gross margins. I gave you one model that does work. The other model is having a stack of consumables. Continued education is also a method that works there. But again, that's the new thing. That's the PhD. That's the master's. It's certification level 1, 2, 3, 4, 5, 6. It's the extra thing that you're doing. And you have to understand that there's going to be a trade-off or drop-off

at each level. Now, if you sell only continued education on the front end, then you have people already have a prerequisite. So then the issue there, it's going to be finding the people already have the prerequisite that matches your continued education demands.

All businesses have problems. Now, if I wanted to go use my marketing skills on something, because you probably, if you sell education, you have to get good at marketing and sales. It's one of the parts of the business. If you have to, if you want to build something like that, then let me give you the easiest hack in the world to build something that's really valuable. Find stuff people already don't stop buying. Then use your marketing and sales skills on that, which is fundamentally what we did with private equity. So what do I put in my feature set to make it stickier?

So number one is I would add as few things as possible and you likely can delete things. This is big. This is very big. How many education businesses do you know that include calls, accountability, some sort of resource library, library of all past, you know, Q&A calls or one-on-one calls? Probably a lot of them. Have any of them solved churn? No. If you want to have a feature set, the way that I think about feature sets is that I want each feature to be

on its own valuable enough to more than justify three or four times the price. If someone can't just say it's worth it for this alone, then I don't want it in the stack. And that may mean you only have three or four things or two things or one thing and you just do it really well. That's fine. So that's in terms of how I'm thinking through it. In terms of what things should I add and when, we have to answer what problem are we solving?

If people are churning and you have an education business, well, unless you're doing continued education, that is the nature of the business and you probably mispriced on the back and probably mispriced on the front. In terms of when to add it, it would be when I know that this particular service is something that people consume again and again and again. So if you get repeated questions month after month after month of a problem that needs to get solved, this is where service businesses start to sprout off of education. Now, what you'll realize is

If you do the service well, the service business itself will be more valuable than the education business because they're not coming for the education, they're coming for the service. They come for the service, they'll keep paying for the service if it's good. Part of the reason that sometimes service businesses, even if the service should be sticky, they aren't sticky, is because of the nature of the customers. So let me explain that. So if you have...

customers that are inherently volatile, then their volatility will reflect on the volatility of your product or service. And so if you're dealing with VSMBs, so very small business owners, or prosumers, people who just, you know, they have a job and they kind of upgrade, those people are notoriously volatile. They're going in and out all the time. They, you know, get passionate, get unpassionate, they get whatever, right? And so it doesn't matter how good the thing is, you're going to have churn that's going to be there. And so you have to make sure that you're comparing what churn, what you're expected churn, what you want to get to. Like Facebook has super high churn.

If you think about churn as people who stop using the product, now I'm going to say super high relative to Salesforce, but way better than every other social media platform. And so you look at Shopify. Shopify, I think, is considered best in class. I think they have 55% or 60% renewal on an annual basis, meaning they lose 40% of customers every year. But the people who stick after that year stick for the long haul. And so they're going to have involuntary churn the lower on the...

axis you go. What you want to make sure is that after people reach a milestone, they never leave. So that's what you're really going for. So if you have some period of time, let's call it 12 months, where people turn in and out, and then after 12 months, no one ever leaves because they reach certain benchmarks or certain activation points. If you get there, then you have a valuable business because those people, you just have this year up front that doesn't matter. It doesn't really factor into the value of the business, but

But the valuable part of the business is you do this functionally as a sales motion in order to generate this reliable recurring revenue stack. And you're just filtering through to find the diamonds. So the question was, what kind of churn benchmarks exist so I know if I'm doing good or bad?

So I can tell you on school, because we have a lot of metrics there, 18% monthly churn is the average school community churn. So if you're doing 10%, you're doing basically about half that. So that's decent good. If you're above that, you probably have some things that you can improve on. If you're at 5%, so that means that you have 20-month LTVs. If you're like, how did you do that math? All you do is you just take one divided by your monthly churn. So one divided 10%.

By 10% monthly churn means 10 months of average stay. If it's five months, then one divided by five. You know, if you have 1% churn, then you have 100, right? 100 months. And so what's good, what's bad? Well, the lower, the better. But the piece that I would really care about is M12. So the 12-month retention. How many people get to month 12? And of those people, what's my churn on them? If my churn on them is zero, then I'm very excited.

If they're also just slowly churning out as well, then I just have this very long tail and I have to always keep selling people, which of course every business has to keep selling people. The percentage is going to matter based on the industry and who you serve by a wide margin. If you're serving high-end enterprise, then you should be 80% annual renewal or higher. If you're serving beginners, then it's going to be high. And that's also a feature, not a bug. It's just part of selling to that customer. For me, what I care about fundamentally is

is the cost and the return of a permanent customer. So let me break this down. This is probably the most important concept. All we care about in any business is how many permanent customers do we have. So let's say that you have, you know, for every 10 people who buy your education, one of them transferred, or you know, three of them transfer over to your service, and of the three that transfer your service, one of them never leaves. Then we just have to know, okay, it cost me 10 times my current cost to acquire a customer to get one

Person who never leaves. So what's that LTV to crack ratio? What's that LTV to crack ratio, right? If you're having just your LTV to crack ratio for front-end business, that's different than LTV to permanent, right?

right? What's my permanent CAC to a permanent LTV? They just never leave. And if you're like, well, I don't really have that yet. Well, yeah. And that's because that's the hard part of business. Once you figure out the product market fit of what's my feature stack, what type of customer is that feature stack better served for so that 12 months from now, these people never want to leave. Once you solve that part, that is the hard part of business. That is the hardest question to solve. Once you solve that, then everything else is basically just math of

How do I find more of those people? And if I have to go through five to get to one, then my cost, but this is one permanent customer. And then it should be able to cashflow question, which is why people raise money and then they get really aggressive. But then you want to see like, okay, is there a way that I can either select better on the front end or is there a way that I can increase activation? So it becomes one out of four instead of one out of five.

But we have to get to that one point you have a permanent customer and then build backwards from there. Okay, so when do you upsell other feature stacks? Well, it's going to be based on their need. So if someone comes in and has all of these needs, then you'd sell it naturally at that point. If someone has one problem solved, then it creates another problem. A simple example would be like, hey, I teach people how to do DM setting or whatever. So you teach people how to reach out to people and create appointments. Okay.

well, once they learn how to do it themselves, what's the next thing they're going to want? They're going to want other people to do it for them. And so if you want to sell a service of placement for those people or sell some sort of like fractionalized service where you have a pool of people that works for many people, or you say, hey, I'll employ them myself so you don't have to deal with the liability or risk, but I charge 20% above and I pre-train them and that's the ongoing rate, fine. Like these are all different business models you could have there, but you can't sell the GM center

I don't think, well, you could upfront, but likely they would have to have the business model and understanding first, and then you would upsell them and back in. So we always set like offer timing matters just as much, if not more than the offer itself. Like sometimes you have the absolute right offer and you're just offering at the wrong time. So people say, Hey, I really want to start a business that has enterprise value. They'll say, I want a real business. I don't think they're like fundamentally, if you exchange good and services for money, then you have a real business. So you've got some, you've got to deal with your own head trash on that.

But if you define real business as a business that becomes an asset that's sellable to somebody else, fine. I understand that. Don't let anyone make you believe that there's something inherently wrong about the business you have. If you follow the law and you exchange goods and services for money and you make a profit, then in the eyes of Alex, there's nothing wrong with what you do. You use the skills you got to provide for your family. I don't think there's any shame in that. I would die on that hill.

Now, beyond that, if you're like, I would just prefer to have a different business or I'd rather have a business that doesn't rely on me, I'd rather have a business that could sell someday because I have whatever goals that I have, fine. I have yet to see the, I'm going to use my cash flow for my education thing to feed my software or service business and then let that take off.

Usually what ends up happening is that both businesses end up taking your attention and the service business doesn't put as much cash flow out, neither does the software company. And your lifestyle has already accustomed to the higher income level that you've generated from your high cash flow business. And so you never really want to give it up because you don't want to take a lifestyle cut, which most people can't. And so they end up not being able to pursue it. If you do make the jump, you can win. So I want to be clear.

Sam Ovens from school had consulting.com, sold and shut down consulting.com, went all in on school. Alex Becker with Hyros had Market Hero, which is an education business, sold and shut that down, started Hyros, went all in on Hyros, made it work. And both have succeeded exceptionally well. If you want to do it, do it. But no half measures. Well, hopefully that puts the nail in that coffin for those of you who are unsure about that. I get that question probably twice a month. And hopefully that just resolves that.

Keep being awesome. Love you all.