Why it’s hard to make money with co-working spaces

[Half a thought about business strategy, developed over coffee with @alsteve1]

Co-working spaces offer desks to freelancers and small businesses on short-term contracts. The gap in the market comes about because traditionally landlords want to let buildings on long leases to one occupier, whilst freelancers only want a desk and don’t want to commit for years.

As work is changing, (we all work for ourselves in smaller, more temporary groups), this gap is going to get bigger. The demand for office space provided on a variable cost basis will likely increase.

But providing co-working space as a service probably won’t be a great business to be in.

The business model, at its simplest, is about buying wholesale and selling retail.

Buying something wholesale and selling it retail is sometimes called ‘breaking bulk’.

Co-working spaces break bulk. They buy long commercial leases and sell them in small bits. They take on a five year lease for an office for thousands of square feet and then sell desks for a monthly fee.

Breaking bulk in general and desk-selling in particular is a hard place to make money. Costs are fixed, revenue is variable, the product is pretty much commoditised, there aren’t many suppliers and most customers will be price sensitive.

The customers of co-working spaces have variable income, and their desk is an overhead, not a core cost. They are unlikely to spend more money than they have to, and will cut the cost quickly if they have to.

This only works as a business if i) you can get leases cheaper or on better terms than other people ii) you can charge more per desk iii) you can keep the office full.

These things will only happen if you have a strong brand, community or network, special access to property stock or attract customers who are less price sensitive.

Most co-working spaces don’t have those things. They are growing because the market is growing, but they don’t really have the advantages that will give them an edge in the long term.

(Selling coffee and meeting rooms and other extras will make additional money, but if you want to run a cafe, just do that instead and save yourself the bother of getting into the desk-selling business. Similarly, if you want to sell other services, why not just sell those other services? I’m not more likely to buy PR services from someone just because they are my landlord.)

In the long-term, success will be about pulling one or more of the three levers of property, brand, or customer segment. Everyone else will get squeezed out.

So in the long-run you probably have a few premium brands making all the money at the high end, and a huge tail of break-even commodity businesses. The commodity businesses might sit under networks of national brands that provide the systems and marketing to franchise owners who are property players. In this state, it starts to look like the mature hotel industry, whereas today’s industry looks like a collection of nice, but barely viable, bed and breakfasts.

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