WeWork’s troubles go beyond poor leadership – its entire business model should be called into question. Can the company turn it around and become profitable? Maybe, but to answer this question one has to understand what kind of business WeWork is actually in (hint: it may not be what you expect). Ex-Bain consultant Jenny Rae discusses these four fundamental questions as they relate to WeWork:
- What is WeWork’s core business?
- What kind of actions do you need to take in that kind of business to succeed?
- Is WeWork taking those actions?
- Is WeWork “fixable?”
Will WeWork’s Business Model Ever Work?- YouTube Transcription:
WeWork. It’s all over the news. Softbank’s involvement, the delayed IPO, the crazy CEO. This is the stuff that news outlets dream of. But fundamentally I have a different question. Not “Should WeWork be in the news?”, but rather, “Does WeWork’s business model actually work?”. And today I’m gonna walk through our thought process as we’re teasing apart a business, about whether it has a great durable business model, whether it would be a good investment. Or, if it doesn’t have a great business model how we would fix it.
I’m Jenny Rae, the Managing Director at Management Consulted, and we’re a group of ex consultants from McKinsey, Bain, and BCG, who focus on advising students and corporations on how to break into consulting, and how to open consulting practices. And our focus today comes out of a conversation that we had at a recent corporate training event. I’m gonna walk through this in four parts.
- First of all, What is WeWorks business that it’s actually in?
- Second, what kind of actions do you need to take in that kind of business to succeed?
- Third, is WeWork taking those actions yes or no?
- And then fourth, if they’re not is there something that they can do to fix it?
Will WeWork Fail?
To start out, I want to let you know that I think that WeWork is destined to fail. The business model is not sustainable. Largely they are in a different business than they’ve pitched to investors and pitched even to their clients, and I want to talk to you about why that is going to result in their peril ultimately.
What Kind Of Business Is WeWork In?
First of all, what kind of business is WeWork in? WeWork is in a fixed cost business there are really only two kinds of business models, fixed costs and variable costs. For fixed costs, you have to spend money upfront to generate capacity, but then you sell off portions of over time. And ultimately you have a break-even point where you sell off a certain amount of the capacity, and then you have more above that where you actually begin to make money. WeWorks high fixed costs mean that it’s a largely fixed cost business. WeWork does have a few incremental costs, the free beer that they offer, that will be higher if they have more utilization. The utilities in their offices, maybe have a little bit more heating or cooling or refrigeration. But for the most part, WeWork as a fixed cost business.
What Does WeWork Have To Do As A Business To Succeed?
Second, what does WeWork have to do as a business to succeed in a fixed cost business? Well, you have two choices.
- Number one, you have to drive significant volume from that capacity to the point where you’re making a large percentage over your fixed costs, based on utilization.
- Second, you have to charge a super premium price from individual users so that you can break even faster utilizing half capacity.
Is WeWork Doing What It Needs To Succeed?
Third, is WeWork doing these things? Absolutely not. They’re actually doing the reverse. They’re selling to people who have low switching costs, which is the worst kind of folks that you could want, at a relatively low price. Those people can cycle out of the WeWork system really quickly. You have somebody who doesn’t make their sales this month, eh, they can work from their couch next month. You have somebody who might be able to just, you know, dive into another co-working space. No problem, co-working space that’s closer to our house, great. So WeWork has this fundamental product problem where they have to sell to people that have high switching costs, or at a higher premium price, and they’re not doing either one of those.
Can WeWork Succeed?
Except, number four, can WeWork fix itself? Well, our way of them thinking about fixing it is not the way that they’re talking about in the news, about getting rid of non profitable businesses. WeWork needs to go to a middle market model. WeWork needs to sell to businesses that have more than ten employees, where they set up their office in WeWork, and they have smaller centers. And there are businesses that have done this, that have been successful, Regus is an example of one of them over time. And those businesses have higher switching costs and also a higher willingness to pay. They’re willing to pay a higher premium. Both of those are better for utilizing capacity and meeting breakeven faster.
So WeWorks business model, as it stood, never would have succeeded. It had nothing to do with the delayed IPO, or anything related to that. Fundamentally, they’ve got bigger changes that they need to make, rather than just changing personnel. And we hope that they do because working at a WeWork is cool, but still, there are fundamental problems with the business that is helpful to understand before you think about investing, developing a copycat business, or building a business of your own.
You can follow us on YouTube or on social, and you can also see us at our website www.managementconsulted.com.