Part hospitality, part housing, Subscription Living is a new trend at the crosshairs of the rental market. We dig in to the Business Model Innovation (BMi) behind this trend and dissect its potential going forward.
We can see clearly now that the pandemic saw some industries boom and others get decimated. Travel (and by extension hospitality) and residential real-estate rentals were two industries that skewed towards the decimated end thanks to huge fixed costs and not enough room for error on business models that rely on high-vacancy rates.
Yet as with every industry, there are unexpected bright spots and that’s why we are going to look in-depth at Subscription Living from the viewpoint of both hospitality and housing to better understand the business model innovation as a whole.
How does the Subscription Living Business Model work?
The Traditional Lease
Imagine the typical cashflow on a typical 12-month lease.
Rent is $1,000 per month. Then there are Utilities (heat, water, etc) WiFi+ (cable for many, or other bundling), and Other+ costs (parking, maintenance, fees, etc) which in this example total $250, or an additional 25% on top of the monthly rental rate.
Let’s assume that the typical rental is unfurnished. Many will have some items/effects of their own, but that cost will be inversely proportional to the moving-in and out cost (ie. the more furniture you bring, the higher the moving costs. In our example, we assume $2,000 will be spent on Furniture over the course of the year and $400 for Moving In & Out. If we were to amortize this cost and average it out on a monthly basis, that would equate to $200 per month ($2,400/12).
Thus overall, we assume that on a traditional 12-month lease advertised at $1,000 per month, the real cost to the tenant (outside of any additional agency fees to find the place) is $1,450 per month. This is where the concept of Subscription Living (+ CoLiving Business Model V1, see below) is born.
The Subscription (Sub) Living Contract
At their core, Sub Living rental agreements/contracts include all of the above rental expenses (WiFi, etc) and are fully-furnished. Naturally, they are priced higher than a 12-month rental contract. How much of a premium is dependent on two dimensions of the Sub Living experience:
>the timeframe (typically 1 – 3 – 6 – 12 month packages)
The timeframe + add-ons are dependent on the type of Sub Living package being put together: hospitality vs. housing.
Hospitality Model – LiveZoku
LiveZoku in Amsterdam skews more towards hospitality through the creation of their hybrid hotel/micro-apartment model. They were nominated as “one of the 25 coolest hotels in the world” by Forbes. Their latest hotels were purpose-built with this new vision of travelling and working, allowing them to bundle the experience of living into one package.
Stay in a private apartment for 1 month with access to a member’s workspace, afternoon refreshments, and a hand-picked community of like-minded professionals—for a flat rate as of €2,750.
• Choose from 3 vibrant European cities: Amsterdam, Copenhagen and Vienna
• Pay a monthly subscription fee as of €2,750 for accommodation, workspace and events
• Book your first month and take advantage of exclusive discounts the longer you stay
The value proposition may be especially appealing to remote workers during this pandemic. From there, Zoku is betting that the model will scale-out for those with the cashflow to afford it (see the Nomads Business Model).
“The vision is that remote workers will spend time with us in different cities every year,” said Veerle Donders, brand and concept director at Zoku. “Long-term, we anticipate that the creative audiences we serve will choose to pay an annual subscription to be part of the global Zoku community.”
This is a space that may actually become an area where boutique hotels can gain an upper-hand against Airbnb going forward if they can get the whole experience right:
“It’s attractive because of the convenience,” she said. “With Airbnb, you often find that the place doesn’t look like the pictures when you arrive or has problems you didn’t anticipate. That makes me less inclined to take trips because it might be stressful, or my work might be disrupted.”
The LiveZoku monthly Sub Living package includes accommodation and all associated amenities, co-working space and all associated amenities, access to a community of like-minded ‘nomads,’ and weekly events. While €2,750 is not cheap, the cost must be compared to the bundled cost that one would spend in an Airbnb/hostel, whereby you would be working and looking for others to connect with anyways.
Housing Model – Housi
Brazilian-based Housi is bringing the Sub Living model to the housing market – at scale – across urban Brazil.
Currently, Housi manages more than 200 buildings in São Paulo, but has already begun its expansion to other cities in Brazil
Housi was originally started as a play on apartment rentals. The idea was to improve the service for investors who managed traditional apartment buildings.
The first Housi apartment was a sublease from Airbnb. “Housi started with just one unit rented through Airbnb and inside a 25m² apartment,” he added.
Their model is more of a take on the tech-oriented Millennials and Gen Z consumers who are used to subscribing to everything.
That is, cleaning, maintenance, personal trainer, Netflix, everything else is already included with Housi’s monthly fee. “We already partnered with HBO Go, Amazon Prime, Americanas, Rappi, Netflix, Uber Eats, Apple Store, Google Play, Xbox, Spotify, Tinder, and iFood.
The monthly fee is paid by credit card for stays as long as a year and as short as one day. They currently manage more than 200 buildings in Brazil and have 200,000 members. They plan to triple in size this year, scaling to more than 500K members and reaching $30B BRL in AUM (assets under management).
This is arguably the first Sub Living housing model at scale in the world. The Brazilian version of ‘bring only your clothes‘ has some nuances in relation to the timeframe and the add-ons. Nightly pricing will naturally be priced in relation to its comparables (a night at an Airbnb) and there are incentives to lock-in for longer – in this case, access to Housi Hub (a choice of 3 digital subscription services) for stays longer than 6 months.
What is the Business Model Innovation in Subscription Living?
In a nutshell, the Business Model Innovation (BMi) here is cost-bundling the experential layer into the overall rental experience, and scaling it into an offering that at its core enables mobility and flexibility.
It is clear that Sub Living is not for everyone. Nor is it forever for those who are the earliest adopters of the model. Many will want to rent their home in a way that allows them to choose their furniture, their decorations, the wall colour, etc. Others will want to buy. But if there is anything that we have learned from 2020 and the pandemic, it’s that things can change quickly. For the digital nomads, professionals on the move, and families in need of a change of scenery, Sub Living becomes quite appealing.
How is Sub Living different than CoLiving?
In many ways, Sub Living is identical to CoLiving. Mainly in relation to the design of the spaces, whereby much of the amenities (ie. kitchen, common rooms, etc) are offered communally. Where it differs is the idea of bundling of services into the experience. Whereas the CoLiving model endeavours to create a community of long-term tenants, Sub Living is meant to be more of an on-demand lifestyle for short to mid-term stays.
We have seen big bankruptcies in the CoLiving sector in the last several months. The model was built on the idea that younger Generations would flock to urban centres en masse and be ready to fork out hefty monthly premiums (compared to a traditional lease) for the long-term. The model was leveraged to the price of the master lease/purchase agreement that any respective entity signed. The bigger the lease/agreement, the heavier the exposure to a downturn like we have seen:
Quarters’ U.S. expansion appears to have ended in bankruptcy. Eight properties and two additional limited liability companies tied to the German co-living firm filed for Chapter 7 bankruptcy on Friday, according to court records. Under Chapter 7 bankruptcy, companies cease operation and liquidate all eligible assets to repay creditors.
Let’s call this CoLiving Business Model V1. It appears that the only real operators who came out relatively unscathed in the CoLiving bloodbath of 2020 were the smaller boutique operators.
The Experience + The Value Chain
The context of replacing a traditional 12- month rental contract with a flexible co-living contract is appealing to many. This alone explains the rise of CoLiving. But the BMi of adding an experience to it is what makes the difference with Sub Living. Using the two examples above of housing + hospitality:
As the whole Sub Living concept is in its infancy – let alone the stage of the market – we don’t have a lot of data to enable us to predict how this market will play out. But when we look at the state of hotels and the hospitality industry as a whole, it is clear that bets need to be made in order to reinvent the business model of the average hotel chain.
Reinventing the value proposition (Sub Living), targeting new segments (Nomads and Remote Workers), and building a new competitive alternative to Category leaders (Airbnb) is a step in the right direction for hotels.
Real-estate developers are another segment that have been hammered by the pandemic.
For real estate investors, the company presents itself as “an alternative to the traditional real estate rental management model, offering more profitability and better management.” For developers, Housi acts as a residential banner to speed up sales.
Using Housi as a proxy, the real-estate value chain is stronger with a scaling Sub Living sector than without it.
Business model innovation is never easy precisely because it requires rethinking industries end-to-end.
Competition & Their Business Models
Competition for SubLiving in the hospitality sector is most closely correlated to Airbnb.
>Airbnb’s combined Homes & Experiences model can be brought together to create a more compelling SubLiving product as time goes on
>Airbnb does not sign master lease agreements/buy hotel properties (in their core business model)
>They take ~3% from the Host (and 12+% from the Guest) on Homes and charge Experience Hosts a 20% Commission
Competition for SubLiving in the housing sector is most closely correlated to CoLiving.
>some major CoLiving brands have already positioned themselves downstream to offer more short-term, experience-driven options
>other boutique CoLiving brands continue to expand their service offerings to facilitate access to a product that more closely resembles Sub Living
>the core model of working with developers/real-estate institutions, signing a long-term lease, and then renting at a higher yield per unit is the same as CoLiving
>where a brand like Housi is creating a unique model, on the margins, is via a rapidly-expanding portfolio of Partners that align to the core values of their target segment – in this case, young consumers
Apart from these, we are always eyeing companies that we believe have a profile that adds value to our product,” says Frankel.
BMi – Key Components of the Canvas
When we look at the Canvas, we can see that the main area of opportunity here – outside of the value proposition for living in high-quality, shared spaces – is linked to how the experience is embedded into the overall ‘Living’ product.
>Hospitality: Nomads, Remote Workers, Professionals want the workplace and social experience embedded into the core hospitality experience
>Housing: Millennials and GenZ want the services layer (digital subscriptions, food delivery, etc) embedded into the core rental experience
What unique value does a company’s product or service create for customers?
>Flexibility vs. a Lease
>Sociability and the ability to meet new people, experience new services in a given city
>Mobility to move to another brand (hospitality) or another space within the same brand (mobility)
What group(s) of customers is a company targeting with its product or service?
>Housing: Millennials and GenZ
>Hospitality: Nomads, Remote Workers, Professionals
How does a company plan to build and maintain relationships with the customers it is serving?
>Housing: In-app support, on-premise engagement, prompt response to any problems
>Hospitality: Weekly Events, Front-Desk Service, engagement via community events
What channels does a company use to acquire, retain and continuously develop its customers?
>Digital: some companies will focus their acquisition on digital channels where customers are actively searching for new experiences and places to work/live remotely
>Word-of-Mouth and Reviews: we know that in hospitality, in particular, reviews play a huge part in driving people towards or away from a given operator. In housing, word-of-mouth in close-knit circles within younger demographics helps to drive sign-ups
How is a company pulling all of the above elements together to create a revenue stream(s) and generate cashflow?
The above 5 Building Blocks represent the right side of the canvas, and contribute to the Revenue side of the business model.
What assets and knowledge does a company possess that allow it to deliver its value to customers in ways that other companies can’t?
>physical assets – a beautiful space, bespoke setup for working/living concepts
>operational platform – managing complexity of payments, guest requests, customer support, etc.
>strong brand – brand image is key in creating trust and confidence with new customers/early adopters
What activities does a company engage in that allow it to execute its strategy and either establish a presence in the market or gain market share?
>optimize business model first – many CoLiving V1 operators made the mistake of scaling before they optimized their business model
>be customer-experience focused– ensure early-adopters love the experience. Focus on wowing the first 100 customers, rather than thinking about simply pleasing the first 1000
>find sources of margin – build margin into the business model, don’t rely on projections of 100% occupancy in the short-term
What strategic and cooperative partnerships does a company form to increase the scalability and efficiency of the business?
>On-Demand, Local Services – some of Housi’s subscription partners are global platforms that the young generations love. Going forward, it will likely be scalable local services that become important from a partnership perspective
>Authentic Experential Partners – while these markets are in their infancy, on the hospitality side we would expect that any partner that helps enhance the Sub Living experience for nomads or remote workers is likely to be worth exploring
What are the key costs associated with running the business and how can key partnerships/resources be leveraged to reduce the cost structure?
Depending on the model, the majority of the cost structure will either be linked to the real-estate and the technology used to unlock a given model. There are also significant customer acquisition costs in an early-stage model to ensure new customers continue to ‘subscribe.’
The remaining 4 Building Blocks come together to form the left side of the canvas, and contribute to the Cost Structure of the business model.
A business model is defined as:
Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.
Business Model Analytics
LiveZoku is a new service only now registering interest in this new offering. Housi, on the other hand, shows us that this model is not only profitable, but scalable.
It is not that the money is necessary, because according to the CEO, operationally, Housi has already reached breakeven. “But our business model requires capital to further speed up our exponential expansion process.”
Length of Stay will be a very interesting metric for any Sub Living business if we use Airbnb as a proxy:
People are starting to stay longer at Airbnb locations, rather than opting for a quick getaway, making travel less of a feature and more of a way of life. “As length of stay increases, those two worlds start blurring together,” Chesky told USA TODAY. “We are seeing that length of stay is increasing.”
If, for example 1 month is the target Length of Stay (initially), the hotels should see something similar to Airbnb when they look at their customer set as a whole. Length of Stay increasing and the blurring together of travel vs. working.
On the housing side, there is probably a sweet spot where the model begins to optimize (guesstimate would be between 3 – 6 months). In theory, the longer the customers stay the better, but in reality it is hard to judge consumer behaviour without seeing any data.
This leads to the second point about Churn (people who ‘unsubscribe’). Sub Living platforms should have high rebooking rates. Any sort of consumer-focused business will a much different Churn profile than SaaS businesses naturally. In that sense, Rebooking Rate may be a better metric in the early-stages while consumers experiment with the new product.
Finally ARPU (Average Revenue Per User). Pricing will be a challenge initially in this market, and so finding the sweet spot will be the key. Is is better to have customers book 3 months at a higher rent or 6 months at a slightly lower rent? In Hospitality, this will be particularly salient, as figuring out how to get a subset of customers to extend from 1 month to 2 may help increase ARPU and offset any vacancy periods.
Overall, Subscription Living is a somewhat complex and yet equally intriguing example of Business Model Innovation. Hospitality and residential real-estate are two sectors that have been hammered by the pandemic; yet, as always, necessity is the mother of innovation and Sub Living may be a key part of that reinvention for both industries.
What is Business Model Innovation? Innovation using the Business Model as the main mechanism, rather than product or technological innovation. Reinventing a business model – or creating a new one – is a matter of remixing the core components of a business model and developing new value propositions, revenue streams, and cost structures.