Profit margins, prices and unit economics of a coliving space

Jon Dishotsky, the founder of Starcity coliving shared on Twitter that there is almost no competition in the coliving industry. He wrote this in December 2019.

No competition, easy to start, that sounds like a good business to be in 🤑

However, in reality, we need to look at Jon’s statement from the exact opposite perspective. You are running a business within the accommodation market and there are quite literally millions of competitors.

Let’s me tell you a story about the early months of my coliving business

The pitch on our website was “Coliving, coworking and community” (3C). At this time, I was seeing a similar pitch on many other coliving websites. We charged 65€ per night (private room) and there was a discounted rate per month.

Some of our customers told me that they would prefer to book accommodation elsewhere (Airbnb) where they could have a private apartment. We didn't have that option - we rented private rooms with shared bathrooms. These customers asked me if they could use our coworking space and be a part of the community. We organized a lot of small events: BBQs, going to restaurants together, hiking trips etc.

I was curious to know, if the price of the “3C” package was 65€, how much was each item priced individually. The answer is probably not surprising for existing coliving operators - guest want to pay very little for anything other than accommodation.

You can easily go to Airbnb and see how much it will cost to rent a room in your area. At the time it was about 30€ per night in our location. The coworking space was already a commodity and people were willing to pay 200-300€ a month for access. Let’s say 10€ per day to keep the calculation simple.

So we are at 40€ per day for a room + coworking but we charged 65€. Does that mean people are willing to pay 25€ a day for the community? You know the answer 🙂

Community doesn’t have a price tag and people don't really want to pay for it even though they understand the value. Often, you will hear them tell you that community is the most important part of the whole experience.

So to keep healthy margins, you have to create a package, right?

The problem is, coliving is now a commodity too. Same as coworking.

You have other substitutes on the market you’re competing with. People know how much the alternatives cost and they’re not willing to pay much extra. I was lucky, because coliving was a new concept at that time and people were willing to pay extra for the experience.

You make money with rooms

This is easy to forget but it's extremely important. The more rooms you have, the more customers you can serve, the more money you can make. That's why you need to have a certain number of rooms to make the business work.

Opendoor shared their deck for investors and it explains coliving from the perspective of real estate developers perfectly.

Essentially, you fit more rooms into the same space and create better common areas. That's why many coliving spaces in cities are refurbished student dorms.

Understanding the hospitality business

Many founders come to coliving without any previous experience in hospitality. Sometimes this is useful. By not knowing how things work in this industry, you can find new innovative ways to solve problems. But in most cases, it’s a disadvantage.

I really recommend you learn more about how hotels operate before starting your coliving business. There is a brand (Marriott), asset owner (the company that owns the hotel) and operator (company that operates the hotel and holds the Marriott's franchise license).It's very rare, that the same company who owns the asset and brand will also operate the hotel. What is more common? A combination of two. For instance some brands also operate their hotels.

Why is this important? Because the way your coliving space is structured is going to completely affect your margins. Remember: brands and asset owners always make money.

Revenue management and prices

For a year now, I've been recommending this Coursera course about revenue management. I wish I would have taken this course before starting my coliving business.

To be successful in hospitality, you need to master revenue management. It’s all about forecasting and mixing different types of customers. Your goal is to create a healthy mix that will help you keep high occupancy for as high a price as possible.

To create a healthy mix, you have to be flexible, meaning you have enough rooms to play around with. If you don't have demand for certain seasons, it doesn't mean that your coliving concept doesn't work. Perhaps you just have to combine it with different types of customers.  

This article is part of the guide where I'm sharing tips on starting a coliving business.

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