Does Yuanfudao have a chance to become a giant in the online education industry?

According to the resource, on August 31, Chinese online education platform Yuanfudao is set to raise $1.2 billion in its Series G from investors including Tencent, Hillhouse Capital, Boyu Capital, and so on. After the financing, its valuation will exceed $13 billion, making it one of the most valuable ed-tech companies in China.

It can be seen that the capitals are extremely optimistic about the online education industry, but will there really be a giant like BAT (Baidu, Alibaba,Tencent) in the online education industry?

Looking back at the development of the industry over the years, it can be found that the development of online education is similar to the competition in 9 years ago.

In 2010, the group-buying model was introduced to China from abroad. A year later, the number of Chinese group-buying websites once exceeded 5,000.

At that time, Baidu invested in Nuomituan, Alibaba invested in Meituan, and Tencent invested in Dianping. With the support of the capital force, these group-buying websites started to focus on cash-burning model, and the starting threshold for advertising was raised to 200 million yuan.

Groupon.cn was once the first group-buying site to introduce the Groupon model in China, which invested 550 million yuan in advertising. However, in June 2013, it closed down.

There are many companies like Groupon.cn, which either sold out or went bankrupt. Nowadays, the situation of online education industry is just like the situation of group-buying websites.

 

Will cash-burning marketing model support the long-term development of online education enterprises?

China's online education industry emerged in 2012, initially was widely preferred by all parties. Among them, the giants like BAT, and New Oriental Education, the well-known offline training institution all joined the online education entrepreneurial army. By 2015, the size of Chinese online education market had reached 117.1 billion yuan. By the end of 2015, there were about 9,500 online education companies in China.

However, according to a survey from 400 online education enterprises in 2015, only 5% of them were profitable, about 10% broke even, 70% lost money and 15% went out of business.

Since 2018, most of the online education companies such as Hujiang, Sunlands and 51Talk are all in the loss-making stage, and even some institutions such as gogokid, and VIPKid have successively burst the news of massive layoffs. In 2019, the number of education companies shutting down reached 12,000.

The reason is that most online education companies have no positive cash flow. The only way for online education companies to gain customers is to invest heavily in marketing campaigns. When the expenses far exceeded the revenue, the enterprise will be unable to continue, walking on the edge of closure.

In 2020, a sudden epidemic has injected some vitality into the industry. Chinese universities, schools and colleges have shifted their classroom education to online. According to some statistics, in the first seven months of 2020, there were 175 new online education enterprises in China every day on average, and the scale of Chinese online education users reached 351 million. In the first half of this year, Yuanfudao completed $1 billion financing; Zuoyebang completed $750 million financing in its E round.

However, most online education companies are still following the old way of burning money in marketing. In the past few years, their offline advertising has taken over airports, bus stops, building elevators and other occasions. Nowadays, they invest a considerable amount of money in online integrated marketing, and most of them choose expensive app open screen ads, search engine information flow ads, variety title, short video platform ads and so on.

According to the financial data: in the second quarter of 2020, NetEase Q2 sales and marketing expenses were $450 million, up 364% year-on-year. TAL Education also reported Q2 marketing expenses of $219 million, up 41% year-over-year.

According to another industry report, online education companies spent between 500 and 700 yuan on advertising for promotional courses this summer, with an average conversion rate of 15 to 30 percent, and the cost of customer acquisition for users of regular-priced Fall classes was between 1,500 and 3,500 yuan.

It's easy to see that although the epidemic has given online education a good opportunity, online education providers are still taking a cash-burning approach to marketing if they want to find gold in a market with many rivals. The question is, how much money do they actually have to burn with?

 

There are more segmented needs for online education users

It's hard to go it alone in this industry, but there are differences between online education and group buying sites.

The group-buying business is rooted in local lifestyle services. Once a company has survived the war, it will have the time and energy to focus on the local life track, and continue to develop new business, group buying winner Meituan is following this idea.

In its early days, Meituan entered local life services through group-buying, taking takeaway as a springboard to develop new scenarios such as hotels, travel and ticketing in the city. During this year's epidemic, Meituan's performance has been remarkable, with its market capitalization surpassing $200 billion for the first time, making it the second largest Internet company in Hong Kong after Alibaba and Tencent.

But it's hard for the online education industry to emerge as such a winner.

Online education may seem like a single business, but its segmentation differences are worlds apart. Online education spans a much longer age range of users, from preschoolers to working adults, all of whom have a need for further education. Specifically, because of individual differences, people have different demands for education, some need to brush up on their English, some need to recharge their business, and some need to further their diplomas.

In the most in-demand K12 (pre-school through high school education) market, for example, different children have different learning needs that can be broken down into people. Online education platforms need to successfully engage users to pay attention, complete the first payment, and then feel satisfied and willing to continue paying for learning. This requires online education platforms to seek balanced optimization in terms of their own products, customer acquisition costs, team establishment, and operational management. A company that is passionately committed to the industry, it is difficult to complete the subsequent highly complex operations with burnout marketing alone to complete the first step.

Today even New Oriental, which has been in the education industry for many years and has so many online and offline resources, has so far been unable to swallow the online education pie whole. In the online education industry, it is difficult to have a single giant company like the group-buying industry.

This year, the market capitalization of GSX Techedu after 11 rounds of short selling has surpassed that of New Oriental, making it the star company in the online education industry this year. "Double teacher mode", "large class teaching", "WeChat diversion", in terms of business model innovation and marketing cost control, GSX Techedu has made a lot of useful exploration. VIPKid, another online English education brand for young children, announced that the company's unit operating profit (UE) has been positive for two consecutive quarters, with 90% of the channel's first orders turning a profit, maintaining consistent growth. Building on the original English track, VIPKid has begun to expand its product matrix to explore learning courses beyond English.

It's too early to say that these two companies have succeeded, but at least they have proven with their actions that although it's hard to have a monopoly in online education, they can still get a share of the pie by constantly polishing their business model and seeking a second growth curve based on their own accumulation.

This is an article from WeChat official accounts LiuJiu Fiance(ID: liujiucaijing69), translated by Chris Yuan.