Chegg is an American education company, based in Santa Clara, that specializes in renting textbooks online. They also provide a range of services including tutoring and help with homework, finding scholarship opportunities and matching students with beneficial internships. Their target consumers are students who are going through college or high school. Online education is a highly competitive world but Chegg have successfully managed to carve its way into the conventional mindset of its target consumer.
The company, which is based in the United States, was formed in 2001 by three students from Iowa State University – Mike Seager, Mark Fiddelke and Josh Carlson – and the entrepreneur Aayush Phumbhra. At first, it was an opportunities website that was only available to students at Iowa State University. It was Phumbra who approached the others with the idea of taking it national. The name Chegg originally came by merging the words ‘chicken’ and ‘egg’.
Why chicken and egg? Well, the founders faced a key problem when they left college. They did not have any experience so they were unable to get jobs, but at the same time, because they did not have jobs they could not get any experience. This is a key problem faced by pretty much all young people entering the job market.
Phumbra had an issue in that he was lacking in funds after college. He mentioned his idea to a friend of his, Osman Rashid, who became excited by the idea and eventually became Chief Executive of the company. He provided some seed funding and Chegg Incorporated was formally launched in August 2005. The original team were all involved in the beginning but Carlson left in February 2006.
April 2006 was a key time in that the team managed to get some investors interested. These included Mike Maples and Sam Spadafora who reportedly invested $2.2 million. The founders of the company quit their regular jobs as a result to focus full time on the company. Chegg grew slowly and was publicised on college campuses nationwide. They began their textbook rental programme in the summer 2007, modelled on the Netflix system. It was originally marketed under the banner of ‘textbookflix.com’ but changed to Chegg.com in December 2007, to put it in line with the rest of the company. By this time, brand recognition was improving so it made sense to bring everything under a single umbrella.
The business model is based on a recognition in the growth of online rental services and the size of the college textbook market. It is estimated that college students spend about $1000 per year each on textbooks. By renting through the Chegg service, college students could save money, which they always like doing(!), and Chegg would profit out of it. Campuses across America quickly took hold of the idea.
In 2008, Jim Safka, the former CEO of match.com was brought on board the team to run the company. This proved to be a fantastic decision. Previously, annual revenues were about $10 million but in January 2008 revenues simply for that month were $10 million! Campus representatives helped to drive sales, as did more money coming in through venture capitalists.
The company has had a flexible approach to funding throughout its history. The 2007 financing from Mike Maples brought in $2.2 million. In August 2008 Oren Zeev gave $4.7 million. In November 2009, a broad selection of investors, including Primera Capital, gave up to $57 million it is reported. One suggestion is thsat by 2010 $150 million had been sourced, primarily from venture capitalists. The key funders have included TriplePoint Capital, Pinnacle Ventures, Kleiner, Insight Venture Partners, Foundation Capital, Perkins and Caulfield & Byers.
On November 13 2013, Chegg began trading shares on the New York Stock Exchange. This raised an enormous $187.5 million testimony to the success of the founders and the hard work that they had put in to the company over the previous few years.
Partnership with Ingram
In August 2014, the company moved into a new partnership with Ingram Content Group. This meant that the new textbook side of the business would be marketed through Ingram, about 10% of the anticipated volume of textbook sales for the semester of Fall 2014. It had great benefits for the company in terms of reducing overhead costs, especially shipping. In February 2015 Ingram took on a greater workload, being in charge of distribution, logistics and warehousing.
What does the future hold?
Chegg is aiming to become a wholly digital company by 2017. Shipping and distribution are their major overhead costs and if they can cut this figure then they have the potential to become overwhelmingly more profitable, as well cutting their retail prices so that they will be more competitive. The Ingram partnership was the first step of this. By shifting the overhead costs to Ingram, Chegg is able to save lots of capital, reportedly $100 million of working capital annually, which enables them to invest in new digital services.
Chegg is having to shift to changing demands and going digital is all part of this. Five years ago, the company was focused solely on textbooks, but now physical textbooks have become so expensive, many students are shifting towards online formats. Chegg have also diversified their offering and now provide other services, in line with their identity but not to do directly with textbooks any longer. This has boosted digital revenues to about $137-145 million per year.
Chegg also wants to move towards a new kind of service, building a high school and college student hub, aiming to ‘solve student’s problems’. This market is reportedly worth $84 billion so there is great potential here. Chegg has a strong brand identity and there is every likelihood that they will thrive in this new area.
How has Chegg changed the education landscape?
Chegg has shown how education is shifting. Indeed, it has encouraged a shift to an online format. Students are now looking to Chegg for a range of different services. Tutoring can come together with book rental and advice. They have shown how you can have a one stop shop for all of these things and students like the convenience. They have also created an environment where students realise they no longer need to carry around clumpy textbooks with them all of the time. They can simply rent what they need for a fraction of the price and then hand it back when they don’t need it anymore. It has made education services far more convenient and the competition, noticing the shift in attitude, has been forced to follow line and compete with Chegg at their own game.