udemy-business-model

The Udemy Business Model In A Nutshell

Udemy is an e-learning platform with two primary parts: the consumer-facing platform (B2C). And the enterprise platform (B2B). Udemy sells courses to anyone on its core marketplace, while it sells Udemy for Business only to B2B/Enterprise accounts. As such, Udemy has two key players: instructors on the marketplace, and business instructors for the B2B platform.

Origin story

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The Udemy timeline, from its inception and founding to its evolution first with the enterprise offering, then with the subscription offering in 2021 (Image Credit: Udemy Prospectus).

Eren Bali had grown up in a small Turkish village, and as such he had limited learning opportunities until he got a computer.

Source: Udemy

Over the years, thanks to the learning resources acquired online, for free, Eren also won a silver medal at the International Math Olympiad.

Later on, Eren Bali, partnered with Oktay Caglar and Gagan Biyani to get Udemy off the ground, but the idea didn’t seem to find the approval of venture capitalists. Indeed, as Gagan Biyani explained back in 2010, they pitched over 30 investors, and they got severely rejected.

As Biyani explained “We then went out to pitch our startup and got rejected by 30 of the best investors you ever heard of. It was brutal, but we were fortunate enough to bounce back.”

They had to retweak their strategy and bootstrap instead. They first realized they needed some traction at least in terms of either users or money. Therefore, they opened the platform, make it freely accessible and within a few months they had a thousand instructors that had produced two thousand courses.

Initially, as the site launched, they primarily uploaded University courses freely available on the platform. That enabled the site to have an initial critical mass, to at least launch and make the site interesting for a decent number of users.

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Some of the courses available as Udemy launched the site (source WayBackMachine)

Therefore, as initial traction, the platform uploaded more than 600 video courses from free sources such as MIT’s Online Courseware project. While that seemed quite the opposite of its mission, to transform anyone into a potential instructor, beyond academic credentials, that initial strategy gave Udemy the ability to gain its first users, thus then becoming more attractive to investors.

Udemy the “mashup of “you” and “academy” would finally gain traction and pitch again only to get the funding it needed to further grow its user base.

Udemy also mastered the mechanism of getting venture capital to be allocated for growth. And over the years, Udemy would get over $223 million in funding.

As with any marketplace/platform, Udemy had to figure the chicken and egg problem. As it would later explain on TechCrunch:

“When we first started it was very difficult, because if you were a teacher why would you want to teach on Udemy; there were no students. If you were a student why would you want to go to Udemy, because there was nobody teaching there, right? So you really had to just grind it out, and build it brick by brick, inch by inch.”

Udemy two-sided value proposition

While Udemy started with the idea to become primarily a consumer platform, today it has two core customer profiles:

  • People who are looking to improve their skills for whatever reason, from professional to personal development.
  • To employees in medium, large organizations that want to quickly gain access to a vast library of courses so they can keep up with their teams.

It’s important to understand this difference as it will also change the way those two customers are targeted. Where, in general customers on the platform will be acquired via marketing activities and a platform that has many courses for free, which will be prompted to purchase premium courses (a sort of freemium).

On the B2B/Enterprise side, the acquisition will happen through a dedicated sales force which aim is to acquire a large client with a more structured plan, which as we’ll see is a library comprised of thousands of courses.

For that reason, Udemy has two core products:

  • Udemy courses for everyone.
  • And Udemy for Business.

Udemy’s mission, and vision

Udemy’s mission is “to make quality education more accessible and improve lives through learning” and “to create new possibilities for people and organizations everywhere by connecting them to the knowledge and skills they need to succeed in a changing world.”

As Biyani explained back in 2012, “We only make money if our instructors make money,” as Udemy make a cut on the sale of all paid courses. Biyani also explained the vision of Udemy “to let anyone enter that marketplace, in the same way that blogging let anyone with a computer publish online.”

Therefore, over the years, Udemy transformed thousands of people into online instructors with its platform.

On the B2B/Enterprise side, Udemy’s mission is “to help employees around the world do whatever comes next… Udemy is where employees and companies choose to learn. Organizations can also host and distribute their own proprietary content within their unique Udemy for Business account.”

A two-sided marketplace

In a two-sided marketplace, usually, network dynamics are triggered as a feedback loop between two main players. In Udemy’s case, you have instructors and students. Instructors are critical, as the more courses are available on Udemy, the more students will be drawn to it. And in these cases, to kick off the network, there is the chicken and egg dilemma.

The platform/marketplace needs to decide where to start, in terms of focused growth to kick off the platform. For instance, in Udemy’s case, to kick start the platform, rather than enrolling right own instructors, the founders started to upload free video lectures from Universities, which were available on the web.

Therefore, the platform started more as a curation website. As the user base grew, they started to invest more and more in enrolling new instructors, therefore kicking off its network of students.

Udemy business strategy

Where other EdTech companies (like Courser and EdX) have helped academic institutions get online. Udemy has followed the opposite path, that of helping anyone become an instructor and make money with that.

Therefore, when Udemy started, it worked as a sort of CMS for online courses, where it was effortless to set up an online course and start selling it thus making additional income online.

On the other hand, over the years, Udemy also built up its B2B/enterprise platform, with Udemy for the Business offering, which targeted a completely different customer.

Key partner: Instructors

With over a hundred million visits each month on the platform, no doubt that Udemy is among the most known educational marketplaces. Therefore, if the platform wasn’t that popular it would not be that interesting either for instructors.

Another thing that makes Udemy interesting to instructors is its simple revenue-share structure divided into three areas:

  • Instructor Promotion: here Udemy acts as a CMS, where it gets a 3% administrative processing fee, while 97% is given to the instructor.
  • Udemy Organic: If the sales come through Udemy organic traffic the revenue is split 50/50.
  • Paid User Acquisition Channel Sales: If Udemy has pushed the course through its paid acquisition strategies (promotion and affiliations), 25% goes to instructors.
  • Udemy for Business: In addition, Udemy allocates 25% of monthly subscription revenue from Udemy for Business customers for payments to Udemy for Business instructors.

It is fundamental for Udemy’s continued growth to have a sustainable Instructors’ community that keeps producing quality courses for the platform. And this all starts by enabling them to earn enough revenues through the platform.

Key customer: Udemy For Business

udemy-for-business-plans

While Udemy is a platform that reaches millions of people, with its inexpensive, and often free courses. In reality, Udemy has been pushing its Udemy for Business comprising:

  • Unlimited access to the top 4,000+ courses selected from Udemy.com – anytime, on any device
  • Fresh content taught by 1,500+ experts and real-world practitioners – for any learning style
  • Actionable learning insights and admin functionality

Where the Udemy platform targets mostly consumers and B2C, and many of its courses are free. Udemy for Business instead attracts companies to offer a complete e-learning plan for the organization.

Udemy in numbers

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Udemy’s key metrics, as of June 2021, as per its prospectus.

How does it make money? Two-sided revenue modeling

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The company reached over $429 million in sales by 2020, almost doubling its revenues as the pandemic hit, thus making online learning much more appealing. As of 2020, the company registered an over $74 million net loss. With most of the costs skewed toward content development costs (revenues are split with instructors developing content on the platform), together with platform/technical development and maintenance and sales and marketing activities).
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The Udemy revenue streams can be primarily broken down according to the customer type: consumer or enterprise. The consumer segment, as of 2020 made most of Udemy’s revenues, with over $326 million, and a gross profit of over $160 million. While the enterprise segment revenues were over $103 million with a gross profit of almost $68 million. It’s worth highlighting that Udemy’s enterprise offering has been rumped up in the last years, and therefore, we can expect a fast growth of that segment (Image Source: Udemy prospectus).
  • Consumer-facing platform: on its core marketplace, Udemy adopts a strategy of aggressive promotion where courses get periodically and widely discounted. This enables the platform to reach a large number of potential customers, and convert many of the free users in paying customers. The transaction is mostly one-time. And customers can buy more courses, thus turning into repeat customers.
  • Business/enterprise SaaS platform: at an enterprise level, Udemy for Busines is sold more as a sort of software as a service. The learning platform gives access to thousands of courses to team members.

As highlighted on Udemy’s website “The Udemy for Business instructor revenue model is different from the Udemy marketplace instructor revenue model.”

“While marketplace instructor revenue is calculated on the volume of course purchases and students’ lead sources for a given course, Udemy for Business instructor revenue is based on learner engagement or the total number of minutes consumed within an instructor’s course(s).”

In 2020, Udemy raised another $50 million in funding from the Japanese publishing house, Benesse, which valued the company $2 billion. As the CEO, Gregg Coccari highlighted “Udemy is on a mission to improve lives through learning, and so is Benesse. 2020 will be a milestone year where we serve millions of more students and enable thousands of businesses and governments to upskill their employees.”

Therefore, Udemy’s two-souls will widen in the coming years. On the one end, the consumer-facing platform, which is a critical element of Udemy’s overall success as a brand. A freemium-like model drives this. And its enterprise side, driven by Udemy for Business, which follows more a SaaS model.

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Udemy’s product overview, based on four main segments. 1. The Udemy consumer, where students can purchase courses individually, gives them lifetime access. 2. The consumer subscription, where students can individually purchase a subscription package that gives them access to most of the consumer courses available on the platform. 3. The team plan, which is the first offering for small and medium businesses, enables access to the platform for their teams. And the last tier, 4. the enterprise plan, for larger teams, and more advanced tools to monitor the learning process of employees (Image Credit: Udemy prospectus).
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The main topic areas on Udemy are business, technology (development and data science), and personal development.

Udemy customers’ composition

Let’s dive into the Udemy customers’ composition from its financials, to understand what drives its brand, and what drives instead its revenue growth and profitability.

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As Udemy points out “a buyer is a consumer who purchases a course or subscription through our direct-to-consumer.”For the years 2019 and 2020, Udemy recorded 962,000 and 1.4 million monthly average buyers. You can see the positive effect of the pandemic for online learning in the second quarter of 2020. The effect slowed down by 2021 as Udemy recorded 1.36 million monthly average buyers.
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Udemy Business customers are defined as “a customer who purchases Udemy via its direct sales force, reseller partnerships or through the self-service platform.” This number will become increasingly important in the future to drive the profitability of the business. As of June 2021, Udemy had 8,669 business customers.
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As of June 30, 2021, Udemy’s ARR from business students was $181.9 million.

While Udemy will keep pursuing consumers. It is pushing on its business/enterprise customer base for several reasons:

  • Quickly improve revenue growth: as the enterprise customer base can work with larger and larger budgets, it becomes easier for the company to scale up its revenues.
  • Create a seemingly more stable revenue stream: given the ability of enterprise customers to sustain a continuous expenditure for e-learning for its employees, it becomes easier for Udemy to build a continuous revenue stream, through subscription, which in the short-term seems more solid and can quickly improve the company’s valuation.
  • Optimize the self-serving funnel: since most interactions on Udemy might start from the consumer-facing platform, by having qualified salespeople, it’s possible to identify those consumer accounts that can convert into enterprise accounts, thus further spurring the growth of the enterprise segment, in a relatively short time frame.

Why though it’s important for Udemy not to lose sight of its consumer base?

  • Increasing sales acquisition costs: as the self-serving funnel is optimized, and the enterprise segment fully matures, it might become harder and harder to convert consumer accounts into enterprise ones. Therefore, over time without a solid, growing consumer-based it’s also hard to keep the enterprise segment growing.
  • Devalued brand: focusing too much on the enterprise, in the long-term can cost the brand value, for a company that started as consumer-facing. That’s because the consumer-facing platform is not just a revenue stream, but it represents the company’s brand with the outside world. Thus, strengthening, and improving the consumer-facing platform is critical for the long-term success also of the enterprise business.
  • Bottom-up approach: losing sight of the consumers-base, might result in other EdTech platforms taking over, as they follow a bottom-up acquisition approach. Where a large number of users are drawn into the platform, thus over time adopting it also as an enterprise solution. The risk, therefore, is to reduce the market size, as the enterprise niche becomes smaller and smaller.

Key takeaways

  • Started as an e-learning platform, initially, Udemy had to upload University courses to kick off its website, which gave some traction, and it enabled it to get funding and capital allocated for growth.
  • As it grew, the Udemy marketplace became a popular consumer educational platform. However, many courses on the platform are still free or offered at widely discounted prices.
  • As Udemy evolved, it also launched its enterprise platform, which follows a substiptio..absed revenue model, where the sales force is driving enterprise accounts.
  • Udemy, therefore, is a hybrid platform, both consumer-facing and enterprise, with the former running on a transaction-based model and the later on a subscription-based model.
  • As Udemy got tits latest funding, it also explained its strategy to keep growing its B2B segment in the coming years.

Connected EdTech Business Models

Duolingo

how-does-duolingo-make-money
Duolingo is an EdTech platform leveraging gamification to enable millions of users to learn languages. Duolingo leverages a hybrid between ad-supported and freemium models. Indeed, the free app makes money through advertising. Free users are also channeled into premium subscriptions with an ad-free experience and more features.

Khan Academy

how-does-khan-academy-make-money
Khan Academy is an EdTech non-profit organization whose mission is “to provide a free, world-class education to anyone, anywhere,” It runs thanks to the sponsors of various donors that keep the platform developing content at scale for its millions of students across the world.

Masterclass

masterclass-business-model
Started as an attempt to transform education, MasterClass finds top talents and turns them into instructors. With a straightforward membership model of $180 per year, the streaming online education platform gives access to all its courses and the new releases on the platform. In 2020, it got valued at over $800 million.

Udacity

udacity-business-model
Udacity is a freemium EdTech platform, offering MOOCs (courses open to anyone for enrolment). Udacity partners up with companies and universities to offer nanodegrees (short-term online education programs focused on specialized skills in computer science). The user either pays a one-time or subscription fee to access one or all courses.

Udemy

udemy-business-model
Udemy is an e-learning platform with two primary parts: the consumer-facing platform (B2C). And the enterprise platform (B2B). Udemy sells courses to anyone on its core marketplace, while it sells Udemy for Business only to B2B/Enterprise accounts. As such, Udemy has two key players: instructors on the marketplace, and business instructors for the B2B platform.

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"