Seeds 03: How do We differentiate TPC?
People often ask me, “how do you differentiate TPC?” When customers ask this, it usually translates to “why should I pay for this over the coworking space down the street?” When family and friends ask, it’s more akin to, “There are many companies doing this with more money and people than you—how do you compete?”
The first version of the question is harder to answer, because we usually have to condense a response that naturally fits into a short conversation while giving someone a tour of the space. The short but boring answer is that our team does myriad little things well that adds up to a better working experience for our members. After a customer takes a tour, we invite them to trial the space for a week to see if they agree that our way of doing things aligns with the way they want to work. In other words, we tell and then we show.
The answer to the second version of the question has been built into the DNA of the company, and counterintuitively, our relative lack of resources has informed the strategy that differentiates both our business model and customer experience.
With whom is TPC competing?
First, with the home office and traditional leases
Before the customer decides on a coworking space, they are first deciding between the home office, a traditional office space, or a flexible workspace (this term encompasses everything from local coworking, to executive suites, to large chains like WeWork and IWG). I have discussed the details of each of these solutions at length in the past.
Second, with other coworking operators
The coworking spaces in the Seattle area roughly fit into three categories:
Local Indies - single location, first wave coworking spaces (Hing Hay, Cloud Room)
Regional - multi location or greater than 15,000 sqft, local (TPC, CENTRL, Labour Temple, Thinkspace)
National Chains - more than 100 locations (WeWork, Spaces/IWG, Industrious)
Once a customer decides that coworking is a potential fit for their needs, they’ll typically tour 3-5 spaces and consider four main attributes before making a decision:
Location
Product & services
Atmosphere
Price
Where does TPC differentiate?
Location: We’ve carefully chosen our locations, but because we expand so infrequently, it’s not a major focus of our day-to-day differentiation strategy.
Pricing: Our pricing is high-middle of the market but straight forward, while larger competitors usually use complex pricing schemes with low face-rates and a lot of incremental charges.
TPC focuses most of its differentiation efforts on product & services and atmosphere.
Public facing: To the customer
We build smaller spaces (atmosphere) - fosters a sense of community, interaction (10,000 - 20,000 square feet vs 40,000-100,000 square feet WeWork)
We practice bottom-up design (atmosphere) - goal of making spaces feel familiar, welcoming and at the same time aspirational. We hand pick furniture pieces and design elements from a variety of sources so our spaces don’t feel monolithic or formulaic.
We employ skilled and helpful staff that know real estate, technology, and hospitality (product and services)
We focus on serving smaller businesses and remote workers, while enterprises are a smaller piece of our customer mix. We also serve both on-demand customers and monthly recurring members. This contributes to a more dynamic, locally-focused atmosphere in our spaces. (product and services + atmosphere)
Behind the scenes: What allows us to achieve this differentiation?
Disciplined capital management.
Fixed cost control: we are very disciplined about the risk profile and cost structure in our real estate agreements. We don’t chase Class-A buildings, rather we aim to add value to mid-market historic properties. Maintaining low real estate costs is the single most important aspect of the business model.
Diverse revenue mix: We leave some potential revenue on the table by foregoing ultra-dense small office grids and instead programming more open space, meeting rooms, and flex space than most operators. This leads to lower initial build costs and FF&E spend, differentiation, and revenue resilience. Roughly 30% of our revenue comes from meetings and events, 45% from offices, 20% from coworking, and 5% from business services. When demand falls for any of these categories, we can shift focus to other offerings.
Trade-offs: We operate like an NFL team, not an MLB team. We need to allocate limited resources to the right areas to ensure we can offer the best customer experience.
I believe that constraints are beneficial to a business. Constraints force you to make hard decisions and plan for the future, they typically lead to good financial stewardship, and they can contribute to your company’s personality and a point of view.
The constraint shared by most entrepreneurs is a lack of money. When we started TPC, we had less than 10% of what experts said we needed to fit out a new coworking space. We didn’t know this at the time of course, but when we started building a budget, we realized we would need to make serious trade-offs.
That exercise shaped a simple philosophy that still informs much of our decision making to this day. We created an informal list of areas we felt we could value engineer, and areas where we refused to compromise.
Areas Where We Save
Real Estate: the most important expense line item for a coworking space. We are obsessive about keeping our core real estate costs low. This gives us the highest probability of sustained success, and allows us to invest more capital in staff and customer experience. It also makes finding new space harder, eliminating many buildings we’d love to occupy but can’t afford, and limiting our pool of sites to properties other operators typically deem too odd or quirky. This introduces design constraints in the built environment, but also contributes to the unique feel of TPC spaces.
IT / AV: While we’d never sacrifice performance when it comes to IT and AV, we’ve learned over time that with technology, you can easily overspend by 10x, with no material benefit to performance. We can outfit a conference room for presentation and videoconferencing for around $3,000. I know competitors that spend $30,000 - $40,000 on a similar sized room and I truly believe our experience is more functional and intuitive. (Please let me know when wireless presenting is plug and play and works with any operating system and hardware, but for now, we’ll make sure to have a hard wired HDMI cable on every table). You will also never see digital signage or informational displays in common spaces at TPC, which has the double benefit of reducing screen pollution and reducing spend.
Consultants: There are times when pricey consultants are worth it. We paid an arborist to advise us when planting street trees. We hire architects when we need permit plans. We don’t hire agencies to manage marketing spend, we don’t hire interior designers to pick furniture for our spaces. It’s not that these services can’t provide value, they certainly do in many situations, but we have many of these skills on our in-house team, so are able to save significant money by trusting our people to do the work when it falls within their areas of expertise.
Areas Where We Allocate More Resources
Staff: As previously mentioned, our people are our most important asset and by controlling our fixed costs, we’re able to invest more in retaining our great team.
Atmosphere: This includes everything from furniture, to paint, to art. We take a high-low approach to design in most spaces and are always on the lookout for unique pieces that will set a room apart. We want our spaces to feel aspirational but welcoming. We don’t skimp on things like task chairs, where price is pretty closely correlated with quality, but members might notice an heirloom rug next to a second hand coffee table, next to a designer sofa. We try to be as frugal as possible with design, but certain items are worth a splurge to create the right feel. We also design and manufacture a large percentage of our furniture. We like working with solid wood and steel and it’s hard to find that with large manufacturers, even the most expensive ones. Many of our work tables, desks, shelves, banquettes and booths were built by a local fabricator, Weld & Glue spaces
Core Services: Internet, lighting, coffee, and seating are so vital to the experience that it’s nearly impossible to over-invest in these areas. Like a mattress, a user spends such a large amount of time experiencing these elements, that the relative price per impression is low, even for the most premium versions.
Vendors: Having reliable vendors is almost always worth it, even when they are not the cheapest option. Some reliable vendors that are worth every penny include our door access vendor, Region Six, our bookkeepers at System Six, and our coffee roasters Elm and Bluebeard. A note on coffee: I’m always surprised when I visit spaces that spend millions on elegant build outs, $10,000 sofas, and Peloton machines, but then set up a Keurig or Jura coffee machine in their kitchen. From the very start, we sought out our neighbors at Elm Roasters in Seattle and Bluebeard in Tacoma to become the wholesale coffee suppliers for our spaces. Beans from independent roasters are more expensive and brewing fresh ground coffee dozens of time per day is time intensive, but the elevated customer experience is worth it.
Responsible Capital Management Allows For:
Maintaining a Small Cap Table: The founders of TPC are still the sole owners. We don’t need to generate outsized returns for investors or answer to a bank when making decisions. That means we can grow at our pace, prioritize long term decisions, and aren’t forced to scale unless we feel it will directly benefit the business and our customers.
Investing in Great People: We are able to pay everyone from entry level staff to managers well above industry averages, offer perks like four day work weeks and health insurance and in turn we boast very high retention rates. Our on-site employees are the reason our spaces operate at such a high level. They are skilled in hospitality, operations, and facilities management and we’re able to compensate them because we strictly control costs elsewhere.
Diverse Revenue Streams, Diverse Real Estate Structures
Venture-backed coworking spaces focus the majority of their energy into scaling quickly, staying asset-light, and maximizing revenue per square foot. In WeWork’s case, this required signing market-rate class-A leases, exposing them to massive financial risk and requiring them to limit their product mix to the highest yielding product offerings in order to cover their massive fixed costs. They were forced to chop up their spaces into a maze like grid of tiny private offices and huge enterprise suites to cater to the customers that paid the most. While they were able to build some stunning common areas, 80-90% of their real estate was earmarked for these grids, creating sterile and overwhelming work environments. This fundamental business model limitation was something no amount of money or credentialed interior designer could overcome.
TPC is able to maintain a mix of real estate structures, which builds resilience into our business model. We try to maintain multiple agreement structures:
Buildings offering below-market leases e.g. “diamonds in the rough” that expose us to some risk, but keep our fixed costs low and our upside high.
Revenue share agreements with asset owners. We provide FF&E capex, they provide TI capex, we split a percentage of monthly revenue to cover both our opex plus upside. Lower risk, lower upside for TPC.
Asset ownership + operating company. The next step in our evolution will be vertical integration.
We started TPC with a clear vision and have remained committed to it over our first 10 years in business. Disciplined decision making combined with external constraints to reinforce our differentiation strategy as we grew. We’ve managed to build resilience into our business model and have carved out a niche as a smaller independent operator that can compete with the large players. As the workplace ecosystem continues to mutate, we’ll be challenged to stay true to our vision while staying nimble enough to adapt to changing customer behavior and an evolving competitive landscape.
Like this post? Check out the first two installments in the series. Thanks for reading!