Written by Scott Chambers, Pacific Workplaces COO
Update: Pacific Business Centers rebranded to Pacific Workplaces in 2014.
CloudVO asked me to expand on the presentation Laurent Dhollande and I made at GWA Atlanta on “Maximizing Virtual Office Revenue,” and expound on Pacific Workplaces’ (Pacific) pricing methodology with Virtual Offices (VO) and the role of channels in our VO marketing approach.
In the interest of full disclosure, I cofounded Pacific (a.k.a. PAC) and own a small equity interest in CloudVO. I wrote this blog article in collaboration with the CloudVO data analysis team. PAC is a proud CloudVO partner and we are happy to share our data with other workspace providers in the network.
How is this data relevant to other Workspace Providers?
At the end of Q1 2013, PAC had 14 centers, all located in California but in very diverse locations. We have centers in class A and class B buildings, the majority in suburban locations, but we also have centers in urban downtown/financial districts, mid-size towns, high tech hubs, and even in rural areas. Most centers occupy 15,000 to 20,000 square feet, with a couple of centers closer to 10,000 square feet.
If you are a flexible office space operator, chances are that PAC has a center in its portfolio that looks just like yours, unless you are located in a landmark building in a city like Chicago or New York. Pacific Workplaces does not have any landmark buildings in its portfolio that would command an unusual price premium or drive unusually high volume.
Our size gives us the flexibility to try out alternative approaches in different centers, and analyze comparative data to extract what we think is the optimal pricing structure. For example, some of our centers have experimented with a high price/high margin approach, while others have taken a very aggressive low price/high volume strategy over a sustained period of time. In some cases, the same center experimented with opposite approaches over consecutive periods.
We closely monitor the impact of each implementation on key metrics such as revenue, center resource utilization and optimization, profitability, and the impact on user experience quality when the mix of visitors changes over time. What came out of these various experiments is an articulation of four Key Success Factors we pay a lot of attention to:
- Optimal Price Points
- Conference room hours in VO Plan Bundles
- Channel Alignments
- Commitment to VO sales
CloudVO’s analysis of VO pricing experiments – including our own – shows that the demand for virtual offices is extremely price elastic. To put it simply, the CloudVO data analysis team found that a 20% drop in price could drive a 50% to 75% increase in volume.
Was this reason enough for PAC to offer the cheapest VO plans in town? No. We don’t give away our “Mail Service Only” plans. By the same token, we are very careful not to price ourselves out of the market.
In one specific instance, we had priced a center V-Office plan at a ~10% premium over the closest Regus competitor to reflect the value of a brand new, high-end center. In the next year, that center experienced a very slow ramp up in VO revenue. After a year of slow growth, we decided to drop our VO price by ~25% and within a year’s time the center made up for lost time and tripled the number of plans sold, while still enjoying very gratifying margins.
We also found that an aggressive pricing approach did not lead to any of the negative effects we initially feared, such as high turnover or default rate, or unsuitable traffic to our high end centers. In fact, we experienced substantially the same (low) default rate and substantially the same ~18 month average life cycle term with VO clients whether they purchase the least or the most expensive VO package. Price level has shown no correlation with default rate or longevity.
Not too many years ago our attitude was “why bother with anyone who can’t even pay $100/month?” But listening closely to a few VO pioneers and seeing for ourselves the impact on our bottom line changed our opinion about the volume VO business.
Bundling Meeting Room Hours in VO plans
We found that it was easy and cost effective to upsell clients from a simple Mail Service/Business Address Plan (we call it ‘Mail Plus’) to a richer package, such as our ‘V-office’ plan described below, using relatively low cost upgrades as an incentive.
45% of PAC VO plans are “Mail Plus” plans, which include the use of the center’s address to establish a business identity and mail forwarding services.
PAC’s ‘V-Office’ plan is the VO package modeled after the CloudVO “Cloud Office” package and similar to Regus’ main “Virtual Office” plan. It includes Business Address, Mail Services, Live Phone Answering, and 16 hours of free conference room usage. The V-Office Plus plans include 40 hours of free conference room hours per month.
Our data suggests that in average VO clients with 16-hours of meeting room plans consume less than 3 hours per month, so we price these plans accordingly. One additional benefit of including free day office and conference room hours in a VO plan, is that it drives desirable traffic to our centers. It is not unusual for visitors of an existing VO client to become a VO client himself. And it is also quite frequent for VO clients to become full time clients as their businesses expand.
In the end, and after much trial and error, we have found it best to provide attractive conference room hours bundled into our virtual office plan and minimize restrictions. For example VO clients can book meeting rooms for just 1 hour and only the priciest boardrooms are excluded from our V-Office packages and even then only in some centers.
Commitment to VO Marketing and VO Channels
Although we have a strong web presence via our own SEM efforts, we have found our reseller channels invaluable.
Our go-to-market strategy includes a strong SEM presence, both organically and via Pay-per-click (PPC) campaigns. However, at $5 to $9 per click in our markets for a top-three sponsored search position, the “virtual office” search terms are significantly more expensive than the “office space” related search terms (~$2 to $5), so the bulk of our PPC budget still favors full time offices.
Resellers who specialize in marketing VO, such as CloudVO and Davinci, realize greater economies of scale than local operators. The Search Engine Management costs related to Virtual Office terms is cost prohibitive and can often only be justified when amortized over a relatively large and concentrated portfolio of locations. Resellers also pursue creative marketing initiatives which we could not do on our own. This is why we anticipate the channel sales to continue to grow faster than our directly originated business.
On the other hand, with 14 centers concentrated in the same region, we have been able to fund a fairly significant web marketing budget on our own. Hence, the portion of our VO business brought to us by resellers is a lot smaller than it is for most operators (~20% of our current monthly volume and 17.7% of the total plans in inventory). It is not unusual for operators to rely on resellers for half or more of their VO business.
Hence, Resellers are important partners for us at several levels:
- They complete our web marketing coverage with a strong nationwide presence;
- They do bring users from out of town which we would be unlikely to recruit on our own, with creative marketing approaches (for example CloudVO’s CloudTouchdown program)
- They are expert at the Virtual Office business and we benefit tremendously from their advice and observations;
- If we didn’t list with them, it would only benefit our competition.
Commitment to Selling VOs
We don’t want to miss any opportunity to promote our VO plans to prospects, including those folks seeking full time offices. Our VO marketing is prominent in the materials we publish, and we train managers to educate visitors on the value of the virtual office. We would rather sell a Virtual Office even when a full time office is 5X to 10X the monthly revenue.
Why? The reason is simple: if a vacant office is sold after a tour, that inventory is gone. When vacant offices are gone and we reach full occupancy, there is no upside revenue opportunity. With the VO business, on the other hand, we have virtually limitless capacity.
Of course, what I just described is a snapshot of our best practices today. We don’t stop experimenting, discovering, and adjusting.