

Ask YC: Auction-based pricing? - andr

We are organizing a coworking office space in Sofia, Bulgaria. One of our biggest problems is finding the right price to ask for rent, as the difference in income for freelancers here can be as big as 15 times.<p>Therefore, we are leaning towards auctioning off the 30 office spaces one by one. (Technically, the 30 best bids will win, with the minimal bid being the cost of electricity and water for the person.)<p>Pros:<p>- Maximal usage of office space. We better have 1 person pay $5/mo instead of leaving the workspace empty.<p>- If this is a blind auction, the best bid could be as much as twice the average.<p>- We can accommodate people from different levels of income (e.g., underpaid artists).<p>Cons:<p>- Confusion on behalf of people wanting to sign up.<p>- If the auction is open (everyone can see the bids) we won't get such a good price, because we don't think there will be more than 100 people bidding for the 30 places.<p>- Winner's curse. People may feel tricked if they pay more than their peers.<p>- We won't require a contract from renters, so at the end of each newly open space will be auctioned off. People that pay a price too high could leave and immediately make a lower bid for next month.<p>- Cartels. Given the relatively small number of people bidding, we can have groups of people agreeing not to outbid each other and thus driving our average price down.<p>- If the average price falls under our total expenses we are in for cash flow problems. However, this could also happen with a fixed price - if 1/3 of the people leave we are screwed.<p>Thoughts? Ideas? Should we go with a blind auction?
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thrill
Look into a dutch auction - multiply the various bid amounts by the number of
people that will pay that, and take the highest product - which all successful
bidders pay. For example, it's better to fill 25 offices at $10 per month than
30 at $5. From a fairness perspective all winners are paying the same amount
too, and any empty space can be rented out shorter term for larger amounts for
inevitable short-term overflow needs.

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ntoshev
Does anyone use dutch auctions in practice? They are more complicated, and if
you have small increments there is no difference from what I suggested (a
31st-price auction). With big increments there is just rounding error. Or do I
miss something?

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ntoshev
The economically fair way to do it would be to auction all seats at once, on a
blind auction. Have the top 30 offers win, everyone paying the price of the
31st offer (the first that doesn't win).

You could probably do it in an open auction too. Count the people who want to
participate at the minimum price, start incrementing the price at predefined
steps and count the people who are still in. Once you have less than 30
people, you have a price. An open auction every month may be too much of a
hassle, though.

I live in Sofia too, drop me a mail if you like.

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madmotive
We considered a similar approach with our coworking space in Brighton, UK
(<http://theSkiff.org>). We were going try an airline ticket model. eg First
people to commit to paying for a particular month get it at the cheapest price
with the last desk to be filled going at a premium.

However, while we felt this might work well if we were simply selling serviced
office space, we didn't think it would help create a nice coworking
environment. In a coworking space the individuals that come to the space are
far more important than anything else. If we made a big deal out of the
pricing structure, we might end up with people that are their primarily
because they see it as cheap and not because they want somewhere to cowork. We
choose to just keep it simple and replicate Citizen Space's approach:
<http://coworking.pbwiki.com/PricingExamples>

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james2m
Pricing is very hard to get right especially when you have a conflicting
values and aims to balance. Like you we are a larger coworking space and
therefor are not just supplementing our office with some additional coworking.
We built The Werks <http://thewerks.org.uk> purely for coworking. We have a
capacity of ~70 people so had to balance the aims of;

1\. Covering our rent and the large financial risk 2\. Creating an environment
that brings interesting people into the space, as madmotive implies the people
are what makes the space work 3\. Being open and flexible to suit people with
different incomes, often the most interesting people are not the ones with the
largest budget but can contribute more in other ways

What has worked for us is to do some of what tstegart suggests and create
different products for different people so we have a percentage of the space
as small offices who pay a higher rate plus a number of serviced desks...
these create financial stability and provide products that suite those with a
better income. We then have all the rest of the space for coworking and offer
a range of options that give people choice depending on their need and budget.
Some pay £100 per month and less frequent coworkers pay £60. We also have
drop-ins with no fixed price. This is important to get right, no fixed price
doesn't mean free as free implies no value. It is up to the individual how
they pay and it may not be entirely a financial arrangement, we have people do
workshops or help out in other ways. If you were to do this, I would encourage
you to make it very easy for people to understand value from your perspective
so they can make a decision based on facts, most people have no idea what it
costs to provide a bit of space so give examples.

There is a delicate balance that we had to work at and still haven't made it
perfect, but having such a mixed range of offerings means we are able to
balance the financial risk whilst removing barriers to entry for cool people.

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bdfh42
How about just setting a fair rent and leaving it at that? Simpler, humane and
with only a minor risk of less than 100% occupancy if your rent reflects the
income of your target customers. If you are worried then you might set it on
the high side to start off with and then reduce it (for everyone) to increase
occupancy - as required.

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andr
The problem is the wide income distribution. One freelancer can make as many
as 15 times the other one, so what's a fair price for one would be ridiculous
for the other, and what's a fair price for the poor one would be under our
break-even price. When it comes to apartments, 95% of the households fall
within an x to 2x income range.

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tstegart
However, the way you suggested is automatically unfair. You're assuming that a
richer person will want to pay more (and they will) but that they won't feel
unfairness when poorer people get a better deal. Unfortunately, even if I was
rich, knowing the person next to me was getting cheaper rent just because they
were poor (or less successful or less hardworking) would seem unfair.

You might want to offer different services or spaces for different amounts,
cutting back costs and offering cheaper/smaller space to make the inequities
real, and therefore justifiable.

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dreeves
What you're actually trying to do is known as price discrimination. In other
words, you want people who value the spaces more to pay more. Airlines, for
example, do this by charging more if your trip doesn't span a Saturday (since
that means it's likely a business trip and business travelers tend to be
willing to pay more). Grocery stores do it with coupons (by your willingness
to cut out coupons you reveal yourself to be more price sensitive). More
generally, companies often do price discrimination by offering two tiers of
service (like Windows Professional Edition vs Windows Home Edition, or
whatever).

So you'll have to come up with something like that. None of the auction
proposals (Dutch, M+1st price, whatever) will do it because everyone will
pretend to be poor.

PS: Student/senior discounts are another classic form of price discrimination
(the assumption being that students and seniors tend to be more price
sensitive).

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HeyLaughingBoy
You're making this harder than it needs to be. Your tenant market isn't
"freelancers," it's "freelancers who can afford $x/month." You just need to
decide how much "x" is based on the desirability of the space.

Basing rent on what it costs you to service the place is OK if you just want
to keep the space occupied, but not if you intend to make money. So make the
decision: which is it? Profit or occupancy?

I was a landlord for a few years and had to deal with this every time a lease
expired; it isn't rocket science.

