A Business School's ROI for Online Education

An analysis of how business schools will profit from online programs.
EVEN AS STUDENT INTEREST IN ONLINE PROGRAMS GROWS, some business school deans and administrators might wonder if it’s worth the effort to launch an online program or ramp up their online offerings. After completing an analysis of the earnings potential generated by distance learning programs, I believe that it is.

To begin my analysis, I looked at U.S. Department of Education (DOE) figures that quantify how many students have taken online courses between the 2003-2004 school year and the fall of 2013. During that time, the percentage of undergraduate students taking at least one online course increased from 15.6 percent to 26.6 percent, while the percent of graduate students taking at least one online course rose from 16.5 percent to 30.9 percent. Between fall 2012 and fall 2013, according to the DOE, the number of all students enrolled in Title IV institutions—those schools eligible for federal student funding—went down by 1 percent. At the same time, the number of those enrolled exclusively in online courses rose by 4 percent, and those enrolled in one or more online courses went up by 3 percent. I’ve used these figures to hypothesize how much money traditional schools could make by bulking up their distance learning programs.

Suppose a business school in the U.S. has 20,000 students. According to the DOE’s data about all students enrolled in the fall of 2013, 85.7 percent are undergraduates, which would be 17,140 students for our sample school; the remaining 2,860 would be grad students.

I wanted to predict how many students this school might expect to enroll in an online program the very first year it offered one. Therefore, I analyzed the DOE data to see which schools offered no online programs in the fall of 2012, but did in the fall of 2013; then I looked at what percentage of their students were enrolled exclusively in those online programs. From these numbers I inferred that a school could expect 2 percent of its undergraduates and 6 percent of its grad students to enroll in online classes the first year such classes are offered.

Using these numbers, I determined that 2 percent of our sample school’s 17,140 undergraduates—or 343 students—would enroll in online courses. Now, they add no value if they’re just transferring in from the traditional program. But according to DOE figures, 41.2 percent of online undergrads come from out-of-state. For our school, this means 141 students will come from the outside. If they take six three-credit courses a year at a tuition fee of $3,200 for each course, the school will generate a total of $2,707,200 from them—just in the first year.

What if they complete a 120-credit degree program? I’ll assume a retention rate of 78 percent, which is what we experience at my school, St. John’s University. In that case, the school will retain 110 of these 141 students in the second year, 86 in the third year, and progressively fewer students every year after that. Over a seven-year period, this group will generate an additional $7,238,400 in income, for a total of $9,945,600 during those seven years. Since the school already has fixed costs for serving its student populations, the additional cost of serving these online students will be small.

Now, let’s see how much income a school can generate from its graduate programs. As I mentioned above, I’m calculating that, when a school launches an online program, 6 percent of its grad students will enroll exclusively online. For our sample school, that translates to 172 students. Of those, 55.2 percent—or 95 students—will come from out of state. If each student takes four courses a year and pays $3,480 per course, the school will generate $1,322,400 in the first year. For a degree program consisting of 30 credit hours, and assuming a year-over-year retention rate of 78 percent, the school will realize a total of $2,756,160 from its online graduate program over three years.

While these figures are impressive, they’re actually conservative. First, my calculations take into account only those students who enroll exclusively in online courses. But online offerings also will attract students taking hybrid courses, which will increase the revenue. Second, these figures only include out-of-state students. But if online courses are available, even local students will enroll in them when such courses suit them best.

CAPITALIZING ON THE ONLINE MARKET

Schools that want to launch or expand online programs might wonder where to concentrate their energies. Although graduate students are more likely to enroll in such programs, the base of undergraduates is much bigger and has the potential for generating more revenue. In addition, both undergrads and grad students tend to take more online courses during the summer, so schools would do well to expand their offerings at that time. Schools also might want to consider how big their markets are for working adults and professionals who need continuing education programs. Many of these students would be happy to take more courses online.

U.S. business schools should also market their online programs to students in other countries, because according to the DOE, these students constitute 1 percent of the total for undergraduates and 2.1 percent for graduate students.

In addition, all schools should carefully select which courses to offer in online formats because not all fields are equally productive. According to DOE figures, the most attractive online courses for undergraduates are in computer/information systems, business/management, education, and health sciences. For graduate students, the most attractive fields for online education are education, business/management, social/behavioral sciences, and health.

In short, business schools that offer limited online programs, or none at all, are overlooking untapped markets. If they carefully choose what courses to offer, when to offer them, and which students to target, they could enhance their programs with substantial new revenue streams and broader student populations.
Chaman L. Jain is a professor of economics and finance at the Tobin College of Business at St. John’s University in Jamaica, New York. He can be contacted at JAINC@stjohns.edu.