The Co-Working Business Model – How Co-Working Spaces Make Money

The sharing economy has been one of the major themes when it comes to start-up investing in the past decade. Investors and entrepreneurs have woken up to the idea that resources can be utilized in a much more optimal manner if they are shared between various people. The mega-success of the co-working business model is a testament to the fact that the idea actually works. Companies like WeWork which have a multi-billion dollar valuation have been created as a result of the co-working business model.

In this article, we will have a closer look at what a co-working business model is. We will try to understand the pros and cons of this model as well.

What is a Co-Working Business Model?

The availability of quality office space at a cheap price has been a pain point for most companies. Also, companies want the flexibility to increase and decrease the amount of office space that they rent out. The co-working business model provides this value proposition to its customers.

Co-working spaces allow the customer to rent out office spaces in a flexible manner which they can then use to facilitate work in a collaborative manner. Co-working spaces are especially useful for companies such as start-ups since they allow these companies to use well-developed office infrastructure even though they want to operate smaller teams.

Co-working spaces also have other infrastructure such as conference rooms which can be shared amongst the various occupants so that they are not a cost burden for any individual company.

Why do Customers Prefer Co-Working Spaces?

Co-working spaces have largely been preferred by smaller companies until now. Larger companies have started taking an interest in co-working spaces. However, they have not been able to build significant momentum until now. Some of the advantages which make customer prefer co-working spaces are mentioned below:

1. Co-working spaces support an asset-light business model. There are many companies that want to have an asset-light model. They want to utilize the limited funds at their disposal in a focused manner. This means that if the firm has access to certain funds, then they want to spend them building the right product instead of spending them on obtaining a plush office space.

   In the case of co-working spaces, start-ups have to spend very little money upfront. They operate on a pay-as-you-go basis which gives them a lot of flexibility. There are several businesses that are willing to pay a premium to have access to that kind of flexibility

2. Co-working spaces tend to bring a lot of different companies together. For start-up companies, this often leads to networking. There are many companies that have been able to obtain sales orders or even investment funding because of the networking opportunities they got from their co-working space.

3. Co-working spaces can be much more productive than a traditional start-up office setup. This is because co-working spaces have all the tools required to monitor the productivity of the workforce. The supervisors can use these tools to share feedback with their employees which helps further increase productivity.

Risks from an Investors Point of View

Large co-working space companies have been able to obtain significant investor attention. However, the multiples offered to these companies have been significantly lower as compared to other companies. This is because investors are averse to certain specific risks that this model has to offer.

• Timing Mismatch: The co-working business model is based on taking possession of an entire office, furnishing it, and then renting it out to short-term tenants at a higher price. However, there is a huge problem with this business model. The model is based on taking long-term obligations in the hope that the company will always be able to find short-term tenants. This creates a fundamental mismatch in the nature of cash inflows and cash outflows. This is the reason that many investors view the entire model as being risky.

• Work from Home Culture: Ever since the coronavirus pandemic broke out, the basic value proposition being offered by co-working business models has taken a massive hit. This is because of the fact that co-working companies generally own the top office spaces in the biggest cities of the world.

  After the pandemic, the world is seeing a rise in work from home as well as hybrid business models. Hence, the demand for office space is decreasing. Also, companies which do want to have an office are relocating far away from the city centers. Since co-working spaces have locked in their leases for a longer period of time, they might end up losing money as a result of these trends.

• No Technological Advantage: Lastly, there is nothing very technical about the co-working business model. One can view the business model as being a “retailer” of office spaces. Since the model is not technology-intensive, it is highly commoditized. Gaining a competitive edge that allows the company to maintain its premium pricing is quite difficult in such a market.

How Co-Working Spaces Make Money

1. Space Rentals: The first and most obvious source of revenue is space rental income. A co-working space leases out large office spaces. Typically, entire buildings at prime office locations are either leased out or purchased outright by these companies. They then offer the same space for rental on a retail basis.

   Co-working spaces offer small cubicle spaces for rent. They may also enclose some cubicles and sell that space as a private office within the co-working space. However, customers typically have to pay a higher price to obtain any kind of privacy.

2. Infrastructure Rentals: Some companies do not want to rent out only cubicle space. Instead, they want to rent out the entire office infrastructure. This means that they want to rent out office desks, chairs, computers, printers, and even servers. This equipment is quite expensive and can require a significant cash outlay. Hence, many companies prefer to rent this equipment from the co-working space as well.

   Co-working spaces have established vendors which provide this equipment to their customers. Since the co-working spaces require this equipment in bulk, they can take advantage of economies of scale. They can offer to lease the equipment at a lower price while still earning a decent profit margin on the same. Infrastructure rentals are the second most important source of revenue for co-working spaces.

   Also, co-working spaces tend to offer conference rooms, storerooms, and such other rooms to rent separately. In many facilities, companies can hire these rooms by the hour. Renting out conference rooms and other conference facilities also provides a significant source of revenue.

3. Virtual Offices: There are many start-up companies that have adopted the work from home model completely. However, even such companies have a small physical presence. There are many co-working spaces that offer such virtual office facilities.

   They allow the companies to use their office address as a registered corporate address in return for a fee. They also provide other facilities such as collection and forwarding of mail to alternate addresses. The popularity of virtual office spaces has also increased making it an important revenue option.

   

4. Commissions: There are a lot of facilities such as restaurants, cafeterias, cab services, facilities, printing and stationery, etc. which operate in conjunction with office spaces. These ancillary facilities can also act as significant sources of revenue.

   Many co-working facilities have their own subsidiary companies which provide a lot of these services. However, even if the co-working space owner is not able to provide these services on their own, they subcontract it to a third party in lieu of a commission.

   There are many different types of contracts structured between co-working spaces and third parties. Sometimes, the co-working spaces receive lumpsum payments whereas at other times they receive a percentage of the overall revenue.

5. Promotional Activities: The companies which operate on the premises of the co-working spaces are also consumers of a lot of products and services. For instance, every company requires a marketing agency or a public relations agency.

   Hence, co-working spaces are actually the perfect marketing venue for other companies that want to sell goods and services to start-ups that operate on the premises.

   There are other companies that want to sell products to the employees that work within a co-working space. For example, credit card companies may want to sell credit card products to the employees of the co-working space.

   Co-working spaces often lend out lobbies and other common areas to companies for performing promotional activities and below-the-belt marketing activities. The temporary lending out of such areas can also contribute a lot towards the overall revenue of the co-working space.

The bottom line is that co-working spaces have several revenue streams. It is possible for the co-working space to become even more creative and add new revenue streams to its revenue model. The multiple revenue streams help to enhance the basic return on investment. They also help diversify the risk inherent in having a single revenue stream.