I am doubtful of the scale economies of coaching firms. The success of a coaching firm depends on a few key instructors, and these advantages may decline if it is expanded with a large-scale recruitment of instructors or the use technology (or online modules). Yes, there is a possibility of scaling up to some extent but not beyond a limit. This is evident from the BYJU’s case also. By using a financial jargon, one can see that the growth of BYJU’s after getting a lot of capital was not organic. Hence it expanded by acquiring a set of relatively small-scale ventures. The reputation of such a venture may not go up (if not decline) when it becomes part of another company.
Many technology firms have benefitted from what is called demand externality. We may use a park more frequently if our friends also use the same park. Social media platforms have this feature. A particular platform’s demand may go up when the number of people who use it goes up. There is a technical or objective reason that is behind the demand externality in such cases. Though any firm may have certain reputation benefits when its consumer base enlarges, such a technical or objective reason for demand externality may not exist in the case of a coaching firm.
What may have happened in the case of BYJU’s? It was a successful coaching centre. There is an increasing demand for coaching in India. Many global investors have thought that this could be an opportunity to make money. Hence companies like BYJUs could attract a lot of capital. When venture investors put in a lot of money, the value of the firm has to increase continuously (even if it makes losses) so that those who want to withdraw can get away with their capital and handsome profits.
Hence there is an urgent need for the firm to grow (even if it is not making profits). Given the absence of substantial scale economies, one path of growth is inorganic – that is through the acquisition of other firms. I am not sure whether the real value of Akash Tutorial or such a company will go up just because it becomes a part of the BYJUs. The specific advantages of the former in the minds of consumers may disappear, if it also provides the same service as that of BYJU’s. There may not be a significant synergy. The real advantage is financial due to the increase in the value of the firm due to the increase in revenue (even if there is no profit).
The other way to enhance the growth is to expand the consumer base. There were allegations of using unethical means to compel parents to subscribe to courses or to increase their payments. There were stories of excessive compulsions on employees to increase the number of paying consumers.
Real Life Microeconomics 