WeWork: A Look Into The High Cost of Market Penetration

A recent Wall Street Journal article dubbed WeWork “one of the world’s most valuable startups,” (Brown). The eight-year-old company—valued at $20 billion dollars—aims to bring shared office spaces to companies and individuals across the globe. In late April, WeWork publicly released a bond-offering document that highlights the company’s increased revenues as well as its troubling losses. The $866 million dollar revenues have resulted from rental payments, memberships, and software sales, and the $933 million dollar losses are due to the rapid expansion from property acquisitions, construction, and interior design.

 www.wework.com

The typical life cycle of a new product or concept includes four stages: market introduction, market growth, market maturity, and in the final stage in which sales decline. Examining this company’s increased revenues, spending patterns, and pricing strategy, I’ve determined that WeWork is in the early phases of the market growth stage. During market introduction, WeWork’s PR strategy was to raise consumer awareness and build brand identity. Now, WeWork must expand and further penetrate the market, which comes with high costs.

Essentials of Marketing, Perreault, Cannon, and McCarthy, McGraw-Hill/Irwin,

According to the company, its older, more established locations are indeed profitable, and the high expansion costs are warranted in order to ensure returns to scale. This position held by the company leads me to assume that WeWork’s current priority is to increase its market share, rather than earn economic profits in the short term. While existing profitable locations do offer hope, several financial figures remain troubling. For example, “sales-and-marketing costs more than tripled” from the year 2016 to 2017, and although increased marketing costs are to be expected in the market growth stage of the product lifecycle, I am concerned that the increased spending did not add enough to the bottom line during the fiscal year.

 https://laedc.org/coworking-spaces/

Additionally, WeWork is bringing in more corporate clients, but this benefit may be short-lived as more firms enter the market and begin to compete on price, which is to be expected during the market maturity stage. Finally, the WeWork “product” is largely untested in an economic downturn, and the company’s highly leveraged position and heavy use of debt financing are betting on continued overall economic growth in the U.S. economy.

Fortunately for WeWork, marketing can help play a large role in the future of the company. Through marketing, WeWork can continue to differentiate itself from upcoming competition and avoid competing purely on price. In the same way, marketing can play a vital role in case of an economic downturn by portraying WeWork as a cost-saving and business enhancing service rather than a luxury accommodation. WeWork is certainly a start-up to watch, but it remains to be seen if clever branding and inviting interiors can make shared-office space a profitable venture.

Written by Rachel Ann Eades

WSJ: A Look at WeWork’s Books: Revenue Is Doubling but Losses Are Mounting
Published: April 25, 2018