Revenue Management for Co-working Space
Co-working is an emerging trend and lifestyle for those who do not need to work in a fixed office environment. Many freelancers, independent contractors and entrepreneurs alike seek a shared space as their “office” to work. They have already taken advantage of the coffee shops accessible in most cities as ‘the third place’. But cafés may not be the most ideal location and environment – they are designed primarily for retail and are usually busy and noisy. The co-working space gives a solution to the growing demand by the “nomad”. It not only provides an office-like place, but also builds a social gathering platform for a group of independently working professionals that share values or interest. Recently, co-working spaces have sprout up rapidly around the world, particularly in communities where entrepreneurs and IT developers prefer to cluster. They typically have large open space, in addition to separate meeting rooms or discussion rooms. Some co-working spaces also provide ancillary services such as F&B and shower.
The following link gives an overview of co-working: http://www.coworkingsingapore.com/index.php?pg=about
Here’s another video clip on Youtube offers an interesting view of co-working: http://www.youtube.com/watch?v=le0dfcG_jVw
The co-working space businesses typically generate revenue by selling seats (in public shared area or in rooms) by hour (or period) to guests. They also obtain income from ancillary services, such as F&B sales, rental of projector and tele-conference facilities. In short, the co-work businesses define ‘space’ by rentable seats, and ‘time’ by hours. Like restaurants, they seek to maximize revenue per available seat hour (RevPASH) or day (RevPASD). Some co-working spaces with ample space for events etc. would also measure revenue per available square meter/feet day, as their seats are not fixed and configurations of the shared spaces are relatively easy to change. In our analysis, we focus on RevPASH as the primary parameter.
Space division and configuration
The co-working businesses define spaces implicitly, as they have the maneuver of how the space is divided. The basic inventory unit is seat, which is then grouped in different forms to meet the demand of consumers. Occupancy is calculated as the percentage of seats occupied over the total seats available at certain time point. For example, most co-working spaces would offer:
– a station (1-2 seats and a table)
– a multi-top (2 or more seats and a table)
– a meeting room (4 to 12 seats and a table), typically equipped with TV screen facilities and have sound-proof walls
The spaces are divided in such a way that multiple types of supply are offered, yet the amount for each type remains dynamic. The tables and seats, often with wheeled-legs, can be moved easily to group according to the specific requirement of customers. Companies need to first determine the demand for different types of supply, as well as the best supply mix for generate maximum utilization of space. The key decision to make, in this case, is how to draw the line between shared space and private area (meeting rooms). Once the rooms are set up and furnished, it would be difficult to reconfigure.
The following floor plan represents the configuration of a shared space for a co-working café. In this example, the public space is populated by 2 two-top, 5 three-tops, 7 four-tops and 8 six-top tables.
However, such flexible configuration creates new challenges from a revenue management perspective.
Unlike restaurants where sharing a table by two or more parties is rare, sharing a table at co-working space is common especially among small parties of one or two people. So the calculation of optimal table mix in restaurant settings may not be fully applied here.
Also, in cases where customers want to rent the entire shared space for a particular event, the company needs to carefully calculate the rental charge to ensure the event does not cannibalize revenue what could otherwise be made through normal operation. Renting the entire space, in part, changes the implicit sale of space to explicit. For some co-working businesses, an entire floor would be designed for and dedicated to events. This would enable a more professional set-up of the space, and ensure that the noise at the event exerts minimal interruption to other floors and corners of the place. The following analysis would also try to address this notion.
Because guests come to co-working spaces to work more efficiently and to get inspired by new innovative ideas from like-minded people, the interior design usually aims to create a vibrant yet comfortable atmosphere that encourages open dialogue and brainstorming. Essential as an ambient element is the lighting system. In more popular co-working spaces, a mix of natural and artificial lighting is well blended to keep the space bright, close to the nature while being eco-friendly by conserving energy consumption. Similarly, the furniture also has light colors and comfortable coating. The layout is generally spacious, giving sufficient room between tables. Social elements are addressed through, for example, the division of space (relatively noisy shared space and quieter meeting rooms), as well as physical arrangement of tables (not too close to each other).
A common ancillary service is the provision of food and beverage. This service not only brings in additional revenue, but also increases customer satisfaction by making the co-working experience more convenient. Some co-work spaces operate coffee stalls or cafés inside the venue. Some provide buffet-style snacks and desserts mostly complimentary to guests.
Another revenue stream is renting facilities, including projectors, speaker phones etc. However, I have not identified any specific information on the web regarding charges for such meeting equipment. In fact, an increasing number of co-working spaces include these rental services in the rental / membership package to attract customers.
The majority of co-working spaces sell time through day-pass or membership that entitles limited or unlimited access to the space. Like restaurants, customers exert control over the length of service experience, forming a rather implicit sales of time. While it is more desirable to sell time explicitly with stronger control by the business itself, it would be difficult to only sell Hour/Day Pass. Most customers are not contingent mobile workers and would like to see a more economical package in the form of membership or long-term pass.
Take The Hub Singapore as an example. Prices are based on the number of hours one guest can use – the plans. The pricing structure is quite sophisticated and could suit varied needs of customers. Day pass is promoted as for travelers or try-outs. There is no hour-pass available. And this is similar across other co-working spaces in Singapore. A potential bottleneck would be the control of number of people at peak time (for example weekends) to make sure the spaces are not over-occupied. If a guest comes only to learn the place is fully occupied, he/she would likely be less satisfied. If this repeats for a few times, he/she may decide to buy the lower-tier pass with less time allowed. On the other side, the management should be flexible in accommodating high incoming guest flows during peak period. They may encourage co-workers to share tables, or put additional tables and chairs.
Productive use of the space and time
To increase the productive use of the co-working spaces, several approaches could be utilized: (1) to extend the time the space is used, (2) to offer multiple uses, (3) to offload non-revenue producing activities, and (4) to reduce the amount of idle between events. The first two options are adopted by a number of co-working businesses.
To extend the time, a few businesses operate around the clock or till midnight to attract customers who are more used to working at night.
To offer multiple uses, some organize events such as guest lectures, speeches and movie nights in shared spaces to increase occupancy, particularly when the spaces are under-utilized. Revenue is generated from selling entry tickets. For businesses with event-dedicated spaces, this approach would be an effective tool to boost sales in off-peak times (for example, the evenings of work days). However, it would be rather risky for space-constrained businesses that need to convert the shared co-working space to a plenary. Once the conversion is done, the potential income of renting co-working seats would be completely substituted by selling event seats. The businesses thus risk not having enough flow for the event. It is critical to carefully plan ahead and forecast the guest arrival and occupancy with tools available, like online sign-up.
To offload non-revenue producing activities, co-working spaces may outsource the production of, for example, drinks, snacks and meals to external suppliers or locate the production to a central kitchen. More space could then be used for guest occupancy and thus making revenue.
The level of complexity in the pricing structure varies. Basically, price packages are set on the maximum days or hours each pass or membership can use, in addition to entitlement of free or discounted use of meeting rooms and other facilities. Co-working spaces apply a few physical fences that include a few tangible features such as different types of meeting rooms. However the use of physical fences is not mainstream, as most co-working spaces do not exclusively sell meeting rooms of different types and seats with different views. The application of non-physical fences is more popular, especially the policies pertaining to the use of time and facility.
A simpler price structure may look like the following. There are only four different membership packages. Each package is entitled to a certain length of time to use the co-working space.
A more complex structure can be developed if the business is able to segment the market and forecast customer demand. The membership package of The Hub Singapore presents a good illustration. The tiers (with interesting names) are differentiated by the number of days and total number of hours allowed to stay in the space. The longer the guest plans to use the space, the more discount he/she gets.
Other rate fences applied include 50% discount for students younger than 23 years old, as well as 1 month free for half a year signup (pay 5 get 6) to encourage long-term signup. Members can also rent event space at heavily discounted prices.
The Hub Singapore has also adopted demand control techniques to ensure the occupancy of capacity remains at optimal level. For instance, guests seeking a Day-Pass would need to prewire the company about the time of arrival beforehand. Event organizers also need to make reservation ahead of the event.
It is interesting to see how co-working has shifted the way people work and communicate. Some well-run co-working businesses have already started revenue management practices along certain dimensions. A sense-making next step would be to incorporate demand forecast capacities within existing infrastructure. To illustrate, the co-working space could use an online sign-up board to record the show-up of members and occupancy rate changes throughout the day and week. It may also be able to identify less occupied seats and rooms, and adjust correspondingly to increase occupancy. Moreover, if spaces allow, more ancillary services, including showering room and sleeping cube could be offered and charged at certain rates. Ultimately, revenue management process could help co-working spaces better manage the unpredictable duration of the guests, and come up with variable prices to extract higher revenue.