Photo/Shetuwang

Mar. 11 (NBD) -- The news of EdTech firm Hujiang Education Technology ("Hujiang") laying off 95 percent of its workforce made headlines last week. Hujiang later denied the report but admitted that it has been optimizing and adjusting its money-losing businesses.

Founded in 2001, Hujiang is one of the earliest online education firms in China, and most of post-80s and post-90s have either heard of or used the company's services. The EdTech firm submitted the prospectus to the Hong Kong bourse last July, but the process of getting listed has bogged down since late last year.

Despite the IPO plan, the company posted deepening net losses over the past several years, from 280 million yuan (41.7 million U.S. dollars) in 2015 to 863 million yuan (128.4 million U.S. dollars) in the first 8 months of 2018, according to the listing prospectus.

What Hujiang is being through is an epitome of the entire online education industry.

A report on online education in 2016 showed that the number of online teaching firms decreased to 1,143 in the first half of 2017 from over 2,000 in late 2015, and the number of players in the sector was expected to shrink further in the future.

Popularity of online courses doesn't bring high returns to players in this sector and Hujiang is obviously not the only online education firm that incurs huge losses. But why?

The combination of "capital" and "Internet plus" is widely used in various industries. Bike-sharing Ofo, coffee chain Luckin and ride-hailing Didi are all created by such mix. The massive capital influx that fueled the barbaric growth of online education in the preceding years also created false demand.

What does false demand mean? Imagine that the five-star hotel next door one day announces a big price cut on its buffet to 50 yuan (7.4 U.S. dollars) for each person from the previous 200 yuan (29.8 U.S. dollars), the place must be crowded. But when the price goes up, the number of customers will return to normal. The gap is referred to as false demand.

Similarly, the rosy popularity created by loss leaders of online education enterprises will vanish as soon as the price recovers.

The rocketing expense-to-sales ratio is another pitfall for online education enterprises.

Reviewing financial reports for 2017 of firms providing online courses, news outlet 36kr found that four of them had an expense-to-sales ratio of more than 70 percent, with the highest approaching 171 percent, whereas the metrics for off-line education stands at 10-20 percent in general.

Unlike brick-and-mortar educational institutions, the online counterparts rely on telemarketing, network marketing, etc., to attain customers, which results in a very low conversion rate. To make things worse, malpractice by some online platforms breeds distrust in customers’ minds, hence low-lying customer acceptance.

So how and when will an online education enterprise turn loss into gain? The trick lies in how to reach users at lower cost and how to make them willing to pay for the services. 

Email: gaohan@nbd.com.cn