This week, China Voices brings TechNode Squared members a timely report VIPKID’s early promise and current troubles, translated by courtesy of LatePost. TechNode has not independently verified the claims made below. Additional reporting by Emma Lee.

VIPKID, an online English language teaching platform, occupies a unique place in US-China tech relations. Since its founding in 2013, CEO Wendy Mi has grown the company to the point where tens of thousands of Americans daily teach hundreds of thousands of Chinese. LatePost charts the growth of the firm, outlining how strategic decisions to focus on upmarket customers, create a strong sales culture, and prioritize growth over all else gave VIPKID an early advantage as the market for online education mushroomed. Yet of late, the technology backend and managerial shortcomings have hampered VIPKID’s progress. The firm has also struggled to create a product as appealing as its core offering of one on one online classes.   

This core offering, however, struggles to make money. This past June, founder Wendy Mi set the goal of making RMB 1 (about 14 cents) per class. In this week’s translation, LatePost reports that the company has bought size at a high price, reporting operational numbers based on an anonymous “former mid-level manager.” In a statement to TechNode, factoring in VIPKID’s extensive marketing, LatePost reports, customer acquisition costs are as high as RMB 6,000. Since profit per unit is about RMB 42, and the average customer takes seven classes per month, a customer has to spend two years on the VIPKIDS platform just for the company to break even on sales and marketing costs. Recent layoffs, moving employees to tier-two cities, and the disappearance of afternoon snacks speak to the firm’s efforts to aggressively cut costs as investors lose patience with companies that sacrifice profits for size. 

The following is an abridged translation of a long form article by Chen Jing and Song Wei, first published on November 15 in LatePost, Caijing’s new magazine outlet.

The story of VIPKID: growth and bumps on the road

Chen Jing and Song Wei, LatePost

Nov. 15

As a fast-growing company enjoying an industry halo, VIPKID simultaneously faces four of the most difficult problems of entrepreneurship: fundamental growth, creating new business lines, turning a profit and upgrading internal management.

Growth is one hell of a road

VIPKID is a Chinese start-up company valued at $4.5 billion. Starting from “One-on-one English classes with North America foreign teachers”, it has attracted 700,000 students. In merely four years, VIPKID has reached an annual revenue turnover of RMB 5 billion (about $700 million)—it took 19 years to New Oriental Education to gain as much.

VIPKID Founder, Mi Wenjuan, didn’t graduate from an elite college, but has extensive experience in teaching and recruiting. Co-founder Zhang Yuejia, who joined in 2015, is business-focused and more goal-oriented. 

In 2014, the company’s primary goal was to establish a business model. Mi did two things: unlike other online education platforms that hired teachers from Southeast Asia countries, VIPKID recruited North American teachers. Her familiarity with the market proved handy: she knew American and Canadian teachers were underpaid. In doing so, she quickly gained market share. 

Furthermore, instead of simply introducing foreign English textbooks, the company took their time to make self-developed learning materials better suited to Chinese students.

In 2015, the company focused more on building a sales and marketing system. Zhang Yuejia put RMB 40 million into brand advertising, while other companies spent their money strictly on customer acquisition. In October that year, VIPKID’s iconic orange advertisement, “American elementary school at home,” began popping up on subway and bus billboards in Beijing. As it turned out, they got it right again. It was the perfect time to build brand awareness before the market ballooned in size—these brand advertisements improved user recognition and penetration.

The difference between educational products and Internet products is that the former has a higher unit price and a longer decision-making cycle for users, thus customers will inevitably compare prices. In this process, brand recognition plays a decisive role. Internet products instead, often adopt a strategy of low price or even free of use since, when it comes to early-stage customer acquisition, traffic that reaches customers is more vital.

Zhang Yuejia transformed VIPKID from a teaching-oriented education company to an internet-oriented one, with growth becoming the most critical goal. As an advocate of quantitative indicators, he brought a team of corporate planners from [trans: a Chinese recruiting website] to lay down detailed indicators for every part of the company’s business. In 2015, VIPKID’s sales revenue grew at a rate of 30% per month, and in 2016, the cash flow turned positive.

VIPKID’s extreme focus on sales is reflected in its 8% commission for salespeople—the highest in the industry. With the market taking off, the company’s number and quality of user leads were excellent—most salespeople who joined in around 2016 saw VIPKID as the easiest company to make money in the industry.

Under such strong sales orientation, the growth rate exceeded everyone’s expectations. When Mi was raising a B round in 2016, she promised investors RMB 150 million revenue; eventually, it reached RMB 1 billion. Revenue rose to RMB 5 billion in 2017 and RMB 7 billion in 2018.

 It was the right time for VIPKID since highly educated Chinese parents were more willing to pay for high quality education through the internet for their kids. 

In 2015, there were 3,000 students enrolled, and two years later, under Zhang’s leadership, the number exceeded 200,000. On customer side, VIPKID spent up to RMB 10 million on brand advertising. To improve the referral ratio, they created a promotion in which a user would get 25% of their class hours free if they posted links on a WeChat page. In 2016, the referral ratio doubled. 

Meanwhile, the foreign teacher team led by Mi Wenjuan and Chen Yuan grew from 5,000 to 20,000 at the end of 2016. It was also in 2016 that VIPKID far surpassed Da-Da in terms of revenue, ranking first in the industry. 

Speed or quality?

It is difficult to keep up with the most advanced technology in a rapidly changing business, especially under pressure to scale. VIPKID chose to prioritize growing its business over technology upgrades. So naturally, when business lines expand, product quality will drop, even if only temporarily.

Growth masks problems, and starting in 2016, those issues grew ever more glaring. 

“When a plane’s engine is on fire, is it better to bring the plane down to change the engine, or try to fight the fire while still flying? VIPKID always chose the latter,” a VIPKID investor told LatePost.

 As the founder’s managerial reach expanded, managerial skills did not. In the early days, the most obvious weaknesses were in technology and products, in which the two leaders found themselves incompetent. In 2016, the low conversion rate was caused by backward technology, and 10 out of 100 courses were lost due to technical reasons. 

Most employees described VIPKID’s company culture as a sales-oriented one and, even though Wendy Mi wanted everyone to love education as much as she does, the truth was taht most people’s passion came from hitting sales goals. 

However, the high growth rate covered up deeper problems. “VIPKID didn’t even have a sound budget management system and strategic plan”, a former executive told reporters. Strategy existed mainly in discussions among the three founders, and most so-called strategic meetings turned into discussing small business details.

How to diversify

In June 2019, at a management conference, Mi Wenjuan said their goal would be to earn one yuan per class by 2020.

A former mid-level manager gave a LatePost reporter a window into the numbers: the unit price of one-on-one classes is RMB 14,000 for 72 classes. During a heavy promotion period, users can get 23 classes for free if they successfully refer a new customer, which would bring down the unit price of each class to around RMB 140.

Meanwhile, for each class, the teaching cost is RMB 70 [trans: at about $10 for a standard 25-minute class, this lines up with the company’s advertised $20/hour pay]. Service costs, including supervision, customer service, teaching assistants, etc, total about RMB 24, and network costs are about 4 RMB. 

Under large-scale deployment, the customer acquisition cost is about RMB 6,000 per student, and the gross profit per unit is RMB 42. According to internal data, the average customer takes seven classes per month, so a customer has to spend two years learning to cover the cost of customer acquisition. 

If VIPKIDS lowers spending on large-scale advertisement and reduces the number of free classes, the process can be shortened to one year. 

VIPKID has started to reduce labor costs after putting forward the idea of earning 1 RMB per order. Some teaching and research teams have been relocated to second-tier cities such as Dalian, Wuhan, and Chengdu. Instead of 200, one head teacher now needs to monitor 500 students. The company also no longer serves afternoon snacks to its employees. 

At the same time, they have increased the importance of the renewal rate target. At present, VIPKID is trying to reduce acquisition costs by raising renewal rate and conversion rate. The goal is to achieve 70% renewal rate and new customer conversion rate next year.

According to the Financial Times, VIPKID reported a net profit loss of RMB 2.2 billion on revenue of RMB 3 billion in the first ten months of 2018.

But investors are divided on the trade-off between market size and profitability. Internally, VIPKID believes that its growth rate has reached a ceiling in first and second-tier cities—the annual income of VIPKID’s target family is between RMB 150,000 and 200,000. Currently, the market of first-tier and second-tier cities is limited, accounting for 70% of total revenue. 

With a relatively high price, it’s hard to attract customers in lower tier cities. In 2018, 40-50% of VIPKID’s total revenue came from first-tier cities, and only 5-10% from third-tier and fourth-tier cities. 

Diversification is probably a more practical option.

VIPKID began to test diversification options in 2017, expanding its user base from primary and middle school kids to preschoolers and the elderly, and offering subjects ranging from English to mathematics and Chinese. The mentality at the time was to prevent competitors from overtaking in other models. However, none of these offerings has generated a reliable product with high growth. 

Concentrating on large classes has become an industry norm. In March 2019, Bee School [an online group class product taught jointly by Chinese and foreign teachers which employed AI to correct errors] was established for more than one year before it became officially independent and focused on English and math classes. 

Compared to other competitors, Bee School keeps a low profile. Its main strategy is to rely on the pool of users generated from one-on-one classes. VIPKID expects Bee School to be its second source of growth, so it still has a lot of growing to do. 

Wendy Mi is bold enough to realize on her own ambitions, but she now has two co-founders, more than a dozen investors, 10,000 company employees, 700,000 parents, not to mention competitors with similar business models. Now she needs to be tougher, faster, and more confident than ever.

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