Flat World Knowledge’s Disruptive Business Model: Q&A with Co-Founder Eric Frank, Part 2

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Eric Frank, President and Co-Founder, Flat World KnowledgeBy Yvette M. Chin, Editor, Digital Book World

In the first half of this interview, President and Co-Founder Eric Frank of Flat World Knowledge, an open textbook publisher in the higher ed market, introduced us to the unique way his organization does business.

In this second half, we drill down to more specifics in Flat World Knowledge’s business model: how the company manages its sales and marketing infrastructure, how it relates to retailers like the campus bookstore, and specific advice for publishers outside of the higher ed market.

Tell me more about the sales and marketing infrastructure for Flat World Knowledge, especially since you operate on a direct-to-consumer sales model.

The structures are very different in our publishing costs and our sales and marketing costs, and yet we’re getting good penetration rates with our books into the marketplace, and then we’re generating income in the ways that I described earlier.

While we do have a marketing program, in the end, today 27% of our customers said that they came to us because they heard about us through a peer. We expect that number to be over 40% this semester, and our cost of marketing is mostly online marketing. We don’t have 400 sales reps; we have 10.

We primarily spend our marketing and sales dollars going straight to professors, even though sometimes we do approach institutions as well as individual professors. For example, if we’re going to publish Principles of Marketing, we’re able to lease the data of professors across the United States and basically do email and direct mail marketing right to those faculty members. Plus, our authors do webinars, and we do lots of webinars as well as presentations to faculty live on-campus or on the web.

So, we generate a lot of traffic to our website, and peer-to-peer is, in many ways, the greatest source of leads for us. We funnel the best leads (people who have spent the most time on the site, look at the most pages, things like that) to a telephone sales rep, who is assigned to the account based on where that professor teaches, and the sales process will go from there.

By focusing on driving people who are interested and who self-select through the website, and then filtering the best of those leads to a small group of reps, we have a really good close rate. We’re able to very efficient about the sales process, and while, sure we could scale our sales force up and we’d probably sell a lot more books, the profitability of the model and the growth rate right now is really healthy for us.

Since most of your sales are generated in a direct-to-consumer way, how do college bookstores react to Flat World Knowledge?

With bookstores, you know, I think they look at us partly as a significant threat and partly as a potential opportunity, and what I mean by that is: Clearly we’re threatening. We’re giving away books for free online. We’re selling direct to students online, and that is of great concern to a bookstore manager.

On the other hand, we do have some policies in place that allow them to purchase books in bulk, put them on the bookshelf, mark them up, and sell them, and even return some of them at the end of the semester if they don’t sell. So, we’re reasonably friendly in terms of bookstore policy; we don’t look that different from a traditional publisher.

Now, they will sell less of course, because a bunch of students read free online, but I think what they’re looking to us for, and where it’s interesting is, they realize they’ve got a huge business model problem too, maybe even worse than the publishers do, and they’re also looking for ways to get out of that problem.

Well before we came along, Amazon started pummeling them and with all the used book trading on eBay and Craigslist, or discount providers like Half.com, and then every day some student launches a new peer-to-peer trading service – it’s just brutal. You go on campus now, and not only does the bookstore buy back used books, but every fraternity and sorority sets up book buy-backs.

So, bookstores were watching this income erode anyway, and in some ways, they look at us and see an opportunity to play a unique role. For example, we’ve got about 20 pilot programs now with bookstores around the country where they’re the print-on-demand vendor. Rather than funnel orders to our printer R.R. Donnelly, the bookstore buys print rights from us, and so they just sit there with a file and a print-on-demand machine on campus.

It’s a great model, because for us, it’s all profit. We’re just selling rights here, not even a product.

And because it’s a profitable sale, we can get the price down so that the bookstore can mark it up more and still sell it for the same price that we have on our website, or even lower, and still get the healthy markup that they need. And, really, campus bookstores are uniquely suited to do this; nobody else is there on the campus that could provide the same service.

If you were to talk to your book publishing colleagues outside of the higher ed market, what are some of the lessons, advice, or warnings that you would offer?

I think one lesson is probably that, at some point, as painful as it is, you have to “play.” And to “play” effectively, you have to have some different cost structures in place. I think it’s just a reality that digital is increasingly a critical part of the mix. If you don’t get your publishing architecture right, then it can be really painful to be in the digital world.

Today, many publishers are going through the cost and expenditures of production to build a book the way they’ve always had to do it, right? You get out of that process and end up sending a really high-quality PDF to a printer, and you’ve incurred all the expenses of design and page make-up and production.

And then, all of a sudden, someone like Steve Jobs comes along and says, “You’re going to have to have that in an iBook-ready EPUB format,” and so now you have this additional conversion cost. And then, “By the way, you’re going to have to sell it through me, so I’m going to keep 30%.” So you’ve incurred additional costs and then give a good chunk of that sale to a third party.

I think that drumbeat just keeps going. Someone else is going to come along and say, “You know, you’re going to need an interactive version of that.” And now just the static version of EPUB is just not nearly good enough, but we’ve got these really cool cookbooks where images of the chef-of-the-day offers some tips. And without that now you’re at a competitive disadvantage. So now you’ve got to create those assets.

However, you’re doing that for an increasingly fragmented market. You had your original investment; now you’ve got all these additional investments, and you’ve got all of these other people sticking their fingers in the pie. It becomes a pretty hard business to run, and I think at some point you need to get yourself to place where you’ve got a publishing architecture in place that does assume the world is “digital-first” and that print is just another output.

And, in might not be as perfect as the past. You might have to make some trade-offs there, but I think eventually, you’re going to have to do that. It’s just hard questions on the timing of when to invest in that architecture and when to deal with that expense, and then culturally, shifting internally within the publishing organization can be pretty challenging. These are just some realities that people are going to have to confront.

I think there are some other realities that are just “tough” – and this is definitely true in the education space, but it seems generally true elsewhere – that when people look at technology, they generally assume that technology is going to significantly reduce their costs. But, we also look to technology to add slick, new features. At least in textbook publishing, people will say, “Oh, the reason people haven’t shifted to ebooks is because they’re just static, flat ebooks and that publishers haven’t really taken advantage of the medium to improve education.”

However, I would argue that that’s just fundamentally not true – I think the reason people haven’t shifted to ebooks in the higher ed market is because publishers are trying to sell them at 60% to 80% of the price of a print book, which the student can sell back at the end of the semester and get more money back, where the ebook they can’t. Plus, the ebook expires in 6 months, so it’s not even something they can keep, and so the students just think it’s dramatically overpriced. But, the publisher can’t afford to drop prices because costs haven’t yet shifted commensurately.

Another reality to really grapple with is, while there is going to be a segment of the market willing to sustain high costs for functionality, a lot of them are just going to look to tech for low-cost access to the product, and until you wrap your head around that and say, “We really have to get our costs in line,” this is going to be a painful proposition.

I also think that this question of copyright is an interesting one. I came into this business with no “open” bones in my body. I wasn’t philosophically inclined toward open-source anything; I didn’t even know what it was, really. But, as I learned more about it, it just struck me as an opportunity because the other thing people begin to expect more with technology is interaction. Slowly and surely we’ve moved from a one-way, read-only culture to a culture that likes to interact with content, whether that means we can literally modify it, or it means we can comment on it, interact with other users around it. Whatever it is, we’ve come to expect a higher level of engagement with it, and I think that’s going to be increasingly true.

Sure, a lot of people freak out about open licensing because they think, “Well, anyone can just take my stuff and do anything with it.” And that’s not entirely true: the nice thing about Creative Commons is that there’s a variety of “flavors,” and copyright holders can select the license appropriate to their goals. I don’t believe that it’s a universally appropriate solution, but in the end, there are certain projects that just lend themselves to engagement and interactivity. Open licensing actually provides you with the legal foundation for enabling that.

Eric Frank is President and Co-Founder and of Flat World Knowledge, Inc., the largest publisher of free and open college textbooks for students worldwide. Committed to making higher education more affordable and accessible, the company has launched a classic disruptive model in the face of the $8 billion U.S. textbook publishing market. Prior to co-founding Flat World in 2007, Eric served as Director of Marketing for Prentice Hall Business Publishing, and he is a frequent speaker at universities and colleges, educational conferences, and publishing industry events.

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