Ask YC: Auction-based pricing? | Hacker News Reader

Ask YC: Auction-based pricing?

8 pointsandr13 comments

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.

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.)

Pros:

- Maximal usage of office space. We better have 1 person pay $5/mo instead of leaving the workspace empty.

- If this is a blind auction, the best bid could be as much as twice the average.

- We can accommodate people from different levels of income (e.g., underpaid artists).

Cons:

- Confusion on behalf of people wanting to sign up.

- 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.

- Winner's curse. People may feel tricked if they pay more than their peers.

- 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.

- 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.

- 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.

Thoughts? Ideas? Should we go with a blind auction?

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.

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?

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.

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

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.

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.

Yeah, second that. This is a real estate question that people who run office buildings and apartment buildings need to do all the time. You can have empty space if the other spaces make up for it. Or you can lower it month by month until you have all your spaces filled. You won't make the same amount of money each way, so you need to see how big the demand is and how much money you want to make. If you're feeling generous, lower the rent until all your spaces fill up, and then lower it some more.

If you're being altruistic, or want to cater to some really low budgets, you can have a "artist in residence" type program where you sponsor one or two spaces for free, or you can have a row of desks for single person freelancers that go for cheap.

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.

But why make the rich guys pay more? (If you want them to subsidize the poor, why not ask them outright?)

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.

the goal of this auction pricing is not to increase occupancy, but to maximize profit especially from the customers that can afford it

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).

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.

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