Test prep is a global, multi-billion dollar business currently undergoing a massive online shift. Traditional companies like Kaplan and Princeton Review are struggling to adapt and cannibalize their profitable, offline operations, while a host of well-funded startups promise online adaptive, anytime learning at a fraction of the price.

Historically test prep was a distinctly offline experience. Practice questions were in book format, courtesy of the non-profit companies that administer the major tests—College Board (SAT), ACT, GMAC (GMAT), and ETS (GRE)—who were happy to make a nice profit on the side. And for a hefty price, private tutors offered group and individual instruction.

This was a market custom-made for technological disruption: it featured on one side large, complacent incumbents used to a high-touch, high-margin business, and on the other side price-sensitive consumers focused on the best results.

Technology held out the promise of better, adaptive instruction, available to everyone, at a fraction of the cost. Win-win-win.

Startups

Over the past decade a host of well-funded startups entered the space promising adaptive, customizable learning through technology. The most notable were Knewton ($157m raised), Grockit ($45m raised), and Magoosh. Unfortunately early results were decidedly mixed. Knewton pivoted away from test prep altogether in 2013 and now sells its software directly to education companies. Grockit failed to find a profitable business model and sold to Kaplan in 2013 for an undisclosed price. But Magoosh, which raised less than a million dollars in funding, emerged as the largest online test prep company and has been cash-flow positive since 2012.

In recent years a new batch of startups have emerged featuring new business models and approaches.

Testive started off with an adaptive, online platform but in 2014 offered its content for free and now connects students with private tutors who use the software to track and encourage their students.

Score Beyond provides app-first SAT/ACT test prep with an online portal for parents and live private tutoring.

Ready4 offers free, app-only test prep for the GMAT, GRE, MCAT, SAT, PSAT, and ACT. Rather than charge users it sells student data (just as test makers do, by the way) to universities and student loan companies.

And Varsity Tutors, which offers free online content for students and paid online-based private tutoring, recently raised $57m to expand its offerings.

Test Maker Response

The test makers themselves have also moved online recently. In 2015 the College Board announced a free, online SAT platform in partnership with Khan Academy. In September of this year the ACT launched a new, online partnership with Kaplan for test prep. A GMAC, which runs the GMAT exam, over free GMATPrep Software on its website, mba.com.

Traditional test prep companies like Kaplan still offer offline classes but have also added online options that are either self-paced or feature live, online instruction.

Current Market

So how big is the test prep market in the U.S. that all these companies are chasing?

Evaluating the current test prep market it’s important to distinguish between SAT/ACT and graduate-level (GRE/GMAT/LSAT/MCAT/etc) test prep. In the former, the customer is parents not students. These parents typically have a high willingness to pay and often want in-person tutoring. In contrast, for graduate exams, the customer is the student themselves. These students are comfortable with online/mobile-only offerings and are quite price sensitive. Expect this market to move online much more rapidly than SAT/ACT test prep.

We know the number of students in the U.S. who take the major tests in 2015: 1.9m for the ACT, 1.7m for the SAT, 416,000 for the GRE, and 84,600 for the GMAT.

Now that SAT test prep is free and online, it’s unclear how that will impact paid online test prep offerings. Perhaps more students will study for the exam, will be used to doing it online, and will want a paid, premium option? Or maybe Khan Academy’s resources will be good enough and cut into paid, online SAT prep?

For the GMAT, a market size calculation is much simpler, especially if we assume a price point set by Magoosh, an industry leader, which charges $99. In that case, the total annual market size is 84,600 * $99 = $8,375,400.

Future

Is an $8 million total market enough to support a VC-funded startup? Probably not if they’re focusing on just the GMAT.

Again it’s notable that the largest success in the space, Magoosh, has raised very little outside capital and has no apparent plans to do so in the future.

In addition, there is a lack of clear exit opportunities for VC-funded test prep startups. Who do you sell to? Maybe Kaplan but they’re struggling to adapt themselves and likely can’t pay a huge multiple on whatever funding a VC-backed startup has raised.

So if there are no clear exit options and you’re competing against a self-funded leader, it’s worth posing the question: is online test-prep appropriate for VC funding?

If you look at the SAT/ACT/GRE/GMAT there are roughly 4 million test takers a year. What percentage will pay for test prep? And what will that eventual price point be?

These are the major questions current and future companies in the online test prep space must answer.