Is Test Prep Ripe for Disruption?

Sizing the Market Opportunity

This week’s Back of the Envelope considers:

If an industry hasn’t changed much throughout the last several decades, there’s a good chance one of two things has happened: either the way things have been done for decades is the best possible way of doing things (unlikely) OR it’s ripe for disruption.

Test prep seems like one of those industries.

A couple of months ago, I ordered an LSAT book. About 6 years ago, when I was studying for the ACT and SAT, I bought prep books for those exams, too. Not much about the books (from the ordering process to the way they deliver content) seemed to have changed, despite over half a decade having passed. In fact, unit sales of physical books are at roughly the same levels they were at in 2007 (link). It’s hard to imagine much had changed in the decades prior, either, when e-books and internet resources were significantly less accessible than they are today.

Notably, the major test prep companies are pretty old. The Princeton Review has been around for 40 years. Barron’s is even older - according to its website, the company has been “helping students succeed for more than 80 years.” While the broader edtech industry is full of disruption, test prep is somewhat of an exception. Just consider the marketing on the books in 2000 compared to prep books in 2021:

Maybe the lack of innovation stems from a perception that test prep doesn’t need much updating. Others may simply find the industry boring and focus their efforts elsewhere. But many used to consider the banking, lending, and insurance industries fairly boring, antiquated, and stagnant. Then some people realized the opportunity for technological disruption. Today, fintech is seen as cool. It’s possible the same could be true of test prep.

The goal of today’s newsletter is to try to size that opportunity. Let’s dive in.

Sizing The Test Prep Market

The U.S. test prep market can be broken down into three big categories: AP exams, college entrance exams, and graduate school entrance exams. AP exams cover a range of topics (history, government, literature, etc.). College exams include the SAT, ACT, and SAT subject tests, while graduate school exams can generally be broken down into the LSAT, MCAT, GMAT, and GRE (the main exams for law school, med school, business school, and a sort of catch-all for other types of grad school, respectively). I’m sure I’m missing some other types of exams, but that’s ok. This is back-of-the-envelope math, not rocket science.

For the sake of this exercise, I’m going to limit my analysis to just one subcategory: the LSAT exam. Why? For one, it’s a fairly defined category. Second, it’s pretty easy to find data - the American Bar Association publishes stats on LSATs registrations/takers and law school enrollments. Finally, as I mentioned earlier, test prep is a somewhat boring subject. (It is what it is). So, I don’t want to bore you by walking through each category within the broader test prep market. Rather, the process I use to size the LSAT market should be replicable for nearly all of the other grad school exam prep markets (and can be applied to AP and college entrance exams with a little tweaking). Anyone interested in sizing the entire market should be able to use the tools/methods outlined in this post to size the rest of the space.

The LSAT Market

In 2019, 124,960 people took the LSAT. Yet only 38,284 first-year law students were enrolled (ABA data). That’s around a 30.6% conversion rate and highlights how it’s important to clearly identify the type of data you’re looking for when sizing a market. Had we used first-year enrollments as a proxy for the number of addressable customers, our estimates would be low.

The equation for this market will be something along the lines of:

Market size = (customers)*(average $ spent on LSAT prep)

We already determined a good proxy for the number of customers. Average spend on prep is a bit more tricky, because prep is generally broken down into two categories: books and courses. So our equation should actually look a bit more like this:

Market size = (customers buying books)*(avg cost of book) + (customers buying courses)*(average cost of course)

Starting with books:

• The average LSAT prep book costs ~$40.

• If we assume every person who takes the LSAT buys a prep book, annual revenues deriving from LSAT prep book sales should be roughly $4.998M.

Next, courses:

• Many LSAT courses range from $500-$2500.

• Using the midpoint, let’s assume the average LSAT course costs $1500.

• Because these courses are expensive, it would be unreasonable to assume all LSAT test-takers purchase a course. So, let’s say half of the people who enroll in law school bought an LSAT course - they may have been more determined to go to law school, so they invested a greater amount in preparation.

• That’s 50% of 38,284, or 19,142 people.

• That means LSAT courses should generate roughly $28.7M annually.

Books + courses would put the LSAT market at around $33.7M in annual sales. Not small, but nothing to get too excited about, either.

With a realistic market size <$50M, it’s probably not worth pursuing a business that seeks to disrupt only the LSAT market. For perspective, if every student who took the LSAT bought both a prep book and a course, the upper bound on the market would be ~$62.4M. Again, not small, but likely not a business opportunity worth pursuing unless you’re really really passionate about improving LSAT prep.

To be fair, the broader test prep market is probably much larger - the GMAT and GRE markets are likely larger than the LSAT market, and college & high school exams further expand the potential. Of course, market size is the only metric worth assessing when considering a business opportunity - growth, margins, and capturable market share matter, too.

Would I personally pursue a business within this market? No - there are other, more interesting, higher-growth markets with fewer incumbents to compete against. One such example is the potential market(s) enabled by remote work (which I wrote about here).

Yet while I prefer to research fast-growing markets, it’s still a useful exercise to look at slower, more mature markets. Sometimes it’s just as you expected, and the mature market is mature for a reason. But other times, data on a mature industry highlights an untapped opportunity (likely what we’ve seen over the past few years with the growth of fintech and disruption of traditional financial institutions).

I strongly believe that sizing a market opportunity is important regardless of whether you’re a tech guru looking to build the next “Uber for X” or a skilled baker trying to expand your homemade cookie business. That’s in large part why I started this newsletter - there’s no course on “how to market size,” so I figured we could learn together. This week was useful in examining a market where size probably matters. Next week’s post will return to a high-growth industry, where the direction of growth is just as important as its current size. If you haven’t already, make sure to subscribe to stay up to date:

Until next time 👋