Live-Online Delivery: Part 3 of 3

This is the final posting in a series of three.

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Q: It sure looks like Mathnasium Online is getting a lot of attention, judging by the time you are spending to explain it. Scanning downwards, you may have written more than any posting in the history of Mathnasium Matters!

PM: I’ve spent much more time than I’d like. And I expect few franchisees will read the posting in its entirety. In writing so extensively, I’m risking making online larger in the group consciousness. My intent, instead, is to deal with the matter thoroughly and sincerely—so it can be set aside. I believe that the Advisory Committee is right in recommending that I invest the time to mitigate franchisee anxiety about this matter. And that the way to communicate is with a short declaration that we don’t want to teach in franchisees’ territories ^[1]. But also with much more substantial information sharing that tries to take transparency to a high level.

Q: Who is upset?

PM: First, quite a number of franchisees have expressed that they are concerned. Add up that number and it may seem like a small percentage of our franchisees. But we must weigh the attention this matter has received relative to other issues. It is more. And we need to weigh the depth of the concern expressed relative to other issues. It is greater. This is serious and needs to be addressed.

Q: You said “first.” Who else is upset?

PM: Well our team is upset. We’ve made a multi-million dollar investment in building infrastructure to increase our capabilities. All this is outside the online test. The investment is to keep growing franchisee revenue by advancing our present learning center strategy. We’ve hired 23 people in the last year alone, including very high level hires. These hires are in technology, marketing, support, and other areas. Our team wants to minimize distractions from side issues and advance the winning center strategy. I’d add that the members of our tiny group incubating the online offering are also upset. They don’t want to be seen as the bad guys in the organization. Their efforts are intended to be complementary, to merge with, franchisee interest. They see all sorts of ways this can happen. They want to get off first base so we can all learn more.

Q: You’re not upset? ☺

PM: Last week I was meeting with a franchisee. He said: You look sick. Do you want to stop the meeting? The franchisee was right that I felt sick. Mathnasium is a juggernaut. We achieved what we have achieved in a unique collaboration with franchisees. Central to that collaboration is trust. Trust at a higher level than other franchises. Unlike many franchisors that define their relationships exclusively by a contract, we want to be governed by an ethical standard. To “do the right thing.” We’ve spent years building credibility. That credibility has taken a hit and it hurts.

Q: What upset the franchisees?

PM: We had a perfect storm. “Storm” is strong language, especially when no franchisee’s business was compromised. But I use the phrase because of the small, seemingly odd, events that came together to create a larger emotional event.

Q: What’s the climate that shaped the storm?

PM: We have the environment of franchising. Business ownership is scary. It is also expensive, emotionally as well as financially. It is lonely. We may be connected, but not enough to relieve the sense of vulnerability. And the vulnerability is exacerbated by a sense of dependence on the franchisor. Franchisees’ businesses are vulnerable to bad judgment on the part of the franchisor. Look at Quiznos. Good judgment, then bad. Some said the same about McDonalds recently. Add to these franchise atmospherics the threat of the Internet.

Q: What do you mean by “the threat of the Internet”?

PM: It is the concern that the Internet is transforming business to the benefit of some and the detriment of others. People in bricks and mortar businesses worry that their businesses will be replaced by online applications. Some businesses stay the same. Others become a hybrid. Others disappear altogether. Everyone asks: How will this affect me?

Q: What are the events that came together against this backdrop?

PM: I described our online efforts in an article on Matters in September ^[2]. Many didn’t read it. These postings get buried fairly quickly—not intentionally, but because there is so much we want to communicate to our franchisees. Then, a franchisee contacted Mathnasium Online and said she wanted to enroll her child in the program.

Q: Why did she do this?

PM: She wanted to see if a student who lived in her franchised area could enroll in the program.

Q: What happened?

PM: She wasn’t asked where she resided.

Q: Why not? The plan was to only teach students who lived far from learning centers. Mathnasium even took the precaution of limiting online activity to states where Mathnasium has no centers at all…?

PM: Because it was assumed that she was calling from one of the states we would teach in, since our Pay Per Click advertising was only taking place in those states and Mathnasium.com would direct a visitor through the location finder to the Online page only if they searched for a location in one of those states. Further, we at that time had expressed on the webpage, explicitly, the states in which the program was available.

Q: Would Mathnasium have enrolled the student when it was determined where the student lived? If this had been an actual student?

PM: No. But it was reasonable for the franchisee to assume that we would.

Q: How do you feel about a franchisee posing as a parent?

PM: I thought about this a lot. I decided I would have done the same thing that the franchisee did. I might have been the only franchisee in the system to make that call. But I’d have done it. My paranoia runs high.

Q: Why not just tell the franchisees that there was a misunderstanding?

PM: Because we should have anticipated a franchisee calling. We should have asked where the customer lives. And because other factors contributed to the appearance that we might teach a student in a franchisee’s territory.

Q: What other factors?

PM: Months ago, on a call with top franchisees, they had asked for the online website to state that only listed states were eligible for the service. That comment was put on the site. But later it was taken down. Maybe this was because it was assumed (again) that only customers were looking at the site (and that they would think less of the service if it seemed to be limited to remote states). Or maybe because it was anticipated that the MFAC was going to advise that it would be OK to teach in other states in low-income areas (they advised against it). Whatever the reason, taking down the statement was inconsistent with what I’d personally promised earlier.

Q: What happened next?

PM: A franchisee Googled “Mathnasium Online” and found his search yielded results in organic search. (our website vendor has since told us that we can limit or even eliminate the results of such a search outside our online marketing area. It will take time for this to happen.) Since the franchisee was searching from his area, he felt that Mathnasium was being marketed in his area. But of course virtually no parent does a search for the words “Mathnasium Online.” So the threat wasn’t real, but it felt real. Especially since the site looks serious. It needed to look serious in order to see if we could enroll paying students. One can’t appear to be a “pilot” site. This show of seriousness on top of a franchisee reporting that we were willing to teach their child in their area created real concern.

Q: There’s more?

PM: One franchisee reminded others that the franchise agreement explicitly states that franchisees do not have rights to serve students online. Franchisees already knew this. The clause is standard with like companies because if franchisees could market online, they could invade other franchisees’ territories. Online rights need to be introduced via an amendment if, later, a company is certain that the franchisee system will benefit. The amendment would need to contain provisions to protect franchisees from each other. Protocols and standards and training would be necessary.

Q: If franchisees knew about the clause and understood the reasons what is the problem?

PM: The problem is that, given the other factors contributing to a perception that we were invading franchisees’ territories with an online offering, the clause fueled concern that Mathnasium had retained the rights because we planned to replace learning center services with an online service. This may not make business sense. But it seemed like a plausible conclusion given the convergence of factors—and the strong wording of the clause.

Q: Why is the wording strong?

PM: I won’t blame the lawyers. The fact is that agreements can only be structured around known (defined) services—not future possible ones. Competition clauses must be limited. Here is an example. Mathnasium is not planning collaboration with Sesame Street. But if Sesame Street had a Mathnasium character on a TV show and the character helped explain numbers, is that “competing” with franchisees? I don’t think so. In fact, such exposure would help franchisees. But Sesame Street would never sign an agreement with us if franchisees had rights to “indirect competition”. We’d need to get hundreds of franchisees to individually sign off on the plan.

Q: What can you do to reassure franchisees?

PM: We can be open about how the concern was fueled. We can make simple affirmations and provide detailed explanations. But franchisees in any system will continue to worry. Their only assurance is what the franchisor actually does on an ongoing basis. We are not teaching students in franchisees’ territories and don’t plan to. We assume responsibility for not having firewalls in place that would prevent concern.

Q: How many students are presently being taught with this method?

PM: The exact number varies. I think it is fewer than 20 students. We need to grow this number to learn more.

Q: You said none of the students reside in any franchisee territory?

PM: That’s right.

Q: Where do the students reside?

PM: We chose to run a marketing test in states where we had no franchisees. Some of the students are the result of that marketing test. But these are exceptions. For example, some of the students were early test subjects.

Q: Why did you test marketing in states where you have no franchisees?

PM: We wanted to stay well away from franchisee territories. But the principal reason is that the reason for testing now is for international markets where we have no franchisees.

Q: Do you have no aspirations for using the method in countries in which Mathnasium already operates, like the US or Canada?

PM: As I wrote in September ^[2], I do think the method could have value in the US or Canada. For example, we could teach students in lower income areas of the US or Canada. And long-term, there may be opportunities for franchisees in the form of an additional delivery method, an additional menu offering. We have an obligation to test this delivery method for our franchisees, but this is not an urgent need.

Q: Why is the need to test for North American franchisees “not urgent”?

PM: Because consumers don’t yet know what live-online instruction is. They would need to be introduced to the concept and converted to it. In the coming years, this may slowly change. But we don’t expect it to change entirely. We think consumers will continue to prefer a center experience for math instruction. Same for music instruction. Martial arts instruction. Going to church versus televangelism. The list goes on.

Q: So you don’t see an opportunity in the short-term for franchisees in North America?

PM: Not a large enough opportunity where the reward would justify the time and distraction for a franchisee. Presently we think franchisees’ investment of their time is much better spent on the traditional delivery.

Q: What if a franchisee believed that there was a sizeable online opportunity in their territory? Would you run a test with a franchisee deploying the method in their area?

PM: Definitely. We’d want to choose a high performing franchisee—one whose business would not be hurt too much by the distraction of the franchisee offering an online service. We’d set out with this franchisee to prove that we are wrong that the opportunity is immature. The idea might be the center as a point of sale with online as an extension of existing services. And maybe a choice for those parents who cannot bring their children to a center. Obviously we’d like there to be an opportunity for franchisees now. But that opportunity would need to be sizeable.

Q: You mentioned the opportunity to teach children in lower income areas —areas where we do not have franchise territories presently or plan to in the future. Will you start teaching in those areas?

PM: No.

Q: Why not?

PM: We decided to put the question of whether we should teach in these areas to the Mathnasium Franchise Advisory Committee. They recommended that we not teach in these areas, at least not now. There would be thorny issues to work out. Should there be a buffer outside franchisees’ territories? And more.

Q: If our mission is to teach “all students,” why did you not insist on teaching in areas where we may never have a learning center?

PM: In situations where the customers’ interest seems to conflict with the franchisees’ interest, we often choose the franchisee. That’s because we reach the customer through the franchisee. We determined we would lose more students in franchised territories by having anxious franchisees who are unnecessarily distracted from their businesses than we would gain by teaching students in areas that cannot be franchised. We never believed there were enough students in the lower-income areas to “move the needle.” A motivation for teaching in these areas was to learn more by teaching more students away from franchisees.

Q: But lower-income students will not have the Mathnasium opportunity… ?

PM: By definition, lower-income students cannot experience Mathnasium because they cannot afford it. When we speak about teaching students in areas where we would not have a franchise, we are talking about teaching people who are the exception, individuals who have the money or live in pockets of affluence that are not large enough to support a center. The fact is that to teach low-income students, we would need someone to sponsor these students. This would be a great opportunity for Bill Gates (how better could he spend his money!). But we are not perusing non-profit opportunities right now. We are presently not teaching many students all over the world whose parents can afford Mathnasium.

Q: If there were not a significant opportunity for franchisees in North America right now, why would there be an opportunity in other countries?

PM: It would not be worth the bother to franchisees to gear up for online delivery to get 4 incremental students in their territory. Even if the franchisee invited Mathnasium to provide the service with revenue split, it is unlikely it would be worthwhile to either party. But if we could enroll 8 students in every (moderately affluent) territory of a country, the cumulative enrollment could be worthwhile if that number might grow over time. (8, rather than 4, because some parents who would prefer to go to a center might enroll their children online if there were no center option). Multiple countries could be marketed simultaneously.

Q: You are suggesting that where we have a center we don’t need online—at least for the foreseeable future.

PM: Exactly. Where we have a center, we don’t need online. And where we don’t have a center, we could benefit from online, but only in areas that have sufficient income. Because we have a chain in areas with sufficient income in North America, and we have the infrastructure to expand that chain, the online opportunity in North America is small.

Q: International is different?

PM: For us it is, because we do not have the infrastructure internationally. We have to build that infrastructure country by country. Or we could go to many countries virtually simultaneously if we have evidence an online business model might work.

Q: Hasn’t Mathnasium determined that online delivery could in fact work?

PM: Early testing encourages us to believe that we can deliver online. But we have not determined that it could be profitable. For such a service to be profitable, we’d need to enroll students at a cost per student enrolled that would enable us to make a profit. We’d need to test a marketing method that is scalable. That is tough when one has to introduce the consumer to a method of delivery they may never have considered.

Q: If we have the infrastructure in North America to open learning centers, why designate states for online?

PM: Initially we wanted to learn, to see how many students we could enroll and to learn about delivery. My view is that the most important value now is having a place to conduct a marketing test for international markets. It is less expensive to test in the US than in other countries. Further testing for the US market could be done in collaboration with a franchisee. By designating states for online, we are interrupting our learning center strategy. We are losing students by not opening learning centers in those states.

Q: Couldn’t an online competitor enter the market and take away our learning center business?

PM: Part of the reason for our exploration of online is to be prepared for any online challenges. But, no, I don’t think that is likely anytime soon.

Q: Why not? Isn’t everything moving online?

PM: No it is not. Ask a parent if they would like to take their child who hates math to a Mathnasium center or if they would like their child to have Skype style tutoring and they will choose the center. Karate is taught online now. If a company had a karate studio in every neighborhood, would they introduce an online alternative? In a country where 7/11 had no stores, perhaps an online ordering and delivery system would be desirable. In North America, more stores would get a better return on dollars invested than an online offering. Same with Mathnasium.

Q: What is the short-term benefit to North American franchisees beyond a long-term defensive investigation?

PM: We have a responsibility to enter international markets with one delivery method or another. If we don’t, a competitor could grow internationally and then challenge us in North America. This threat may seem remote. But it should not be underestimated. We also need to learn about online defensively for our franchisees for the long term.

Q: What resources are you investing in exploring the online model?

PM: They are limited. This is one of the smallest areas in our budget. We have one full-time employee under David that is involved in testing the online model, plus a couple of part-time employees for instruction. We have spent and will spend money on marketing, but not with the marketing fees franchisees pay. The fact is that we have been testing—incubating—on the side of our Mathnasium operations. Our focus is on franchise operations.

Q: Do you think the online experience is as good as an in-person experience?

PM: In-person experiences are better than online experiences. In any industry. It is better to go to a doctor in person than to consult via Skype. The online consultation does not hurt the doctor’s brand because people expect less. Similarly, it is a great experience (I imagine) to go to Tiffany in Beverly Hills. But buying a product online does not hurt a brand because customers expect less of an experience.

Q: So you don’t think an online offering should be marketed under a different brand?

PM: I’m interested in building one great brand for math education. Even if there is a limited opportunity for franchisees now with an online offering, there may be a bigger opportunity later. Another brand would divert more resources. I would worry that a different brand would open a door to competing with franchisees. If the online offering turns out to be unworthy of the name, it should be dropped altogether. I’m hoping it would be good, but we need to teach many more than 20 students to find out.

Q: Any silver lining to the upset? What’s the moral of the story?

PM: There is not just a silver lining. There is a silver lining that dominates the cloud. Underneath franchisees’ concern is real passion about their businesses. For many, that is felt more profoundly because of how they felt about their earlier endeavors. This is serious expression for franchisees. Business and personal, even spiritual. Many have great aspirations. Given those aspirations, threats to their businesses are magnified. There is a strong sense that we have accomplished so much together, and that we can accomplish so much more if we do the right things. We need to keep reaching. In doing so, we’ll experience strain. This is the price of the pursuit of a great opportunity. It is an opportunity we should be grateful for. Let’s keep growing.