Trust eats network effects at Airbed & Breakfast

Airbnb builds trust to maximize networks effects and minimize disintermediation

From Bed & Breakfast to Unicorn

Funded in 2008, Airbnb grew as an premier online asset sharing platform that connects travelers with home owners and joined unicorns. On one side of the platform, home owners are enabled to list their space to rent. On the other side, travelers are able to book listed spaces.  Main value proposition is to utilize idle spaces at homes to provide cheaper accommodation alternatives to travelers. Those rooms are usually much cheaper than hotel rooms. By facilitating transactions between owners and travelers, platform enable significant savings for both sides. However, creating trust between parties who share homes, beds or baths is the key enabler of this business model. Today, platform is valued at $31 BN. Having 1.2 M listings, Airbnb has served 35BN guests. Everyday, 140K people stay at an Airbnb listed place.

Sharing Economy Business Model

Airbnb platform is built to disrupt hotels leveraging sharing economy. The main proposition is to facilitate savings for travelers and additional revenue for owners by affordable offerings and creating trust. Revenue model is based on service fees upon every transaction. Airbnb charges flat 3% commission fee to hosts and 10%-15% to travelers. Free listing is a great catalyzer for new customer acquisition to solve initial chicken and egg problem. Travelers only pay when they generated revenue. Hence, we can call it revenue sharing model.  

Strong Indirect Network Effects Built on Trust

Airbnb platform leverages cross-side network effects between hosts and travelers. Number of listings and transactions are strongly correlated as we observed an app store simulation. In order to maximize cross network effects, Airbnb charges travelers more. We can easily assume that, value created for home owners through utilization of unused space is higher that savings created for travelers. The reason, travelers have always competitive options like affordable hotels. However, number of available hosts and rooms are much more limited than demand. Due to supply demand issues and significant price advantages, guests have lowers price elasticity. In order to offer attractive prices, Airbnb uses flexible rates depending on willingness to pay of travelers which is calculated mainly based on ticket size. The higher the ticket size the lower the fee rate.  On the other hand, frequency of transactions is much higher for a host whereas volume is much higher for guests. By leveraging this frequency vs. volume phenomenon, Airbnb is able to capture scalable value from both sides of the platform.  In order to leverage those indirect network effects, Airbnb heavily invests on building trust through insurance, protection and reviews.

Same-side positive trust loop

On top of cross-side network effects, every customer enhances the experience by providing feedback to platform through reviews and ratings. The main challenge of the platform is to build trust and reputation. Direct network effects play a crucial role in filtering out the losers and ranking up the winners through feedback loop. Reputation system is essential for Airbnb to be able to compete with hotels. As we will see in the next model, Airbnb uses crowdsourcing model to overcome trust and reputation challenge.

Multihoming and Disintermediation: Trust is Gold

Travelers multi-home very easily and compare every single option in terms of price and quality. However, Airbnb has a clear price advantage which creates sticky travelers. Hosts do not have many alternatives to Airbnb. Craigslist seems to be only sharing platform. However, Airbnb invests on customer experience through advanced technological infrastructure to create satisfaction and loyalty. Search, comparison, visuals, maps and ratings deliver seem-less experience for both sides. Main challenge of Airbnb is to fight against disintermediation.  Main solution is to enable communication only through the platform by hiding contact details. Ensuring trust to hosts is another way to deal with intermediation. For instance, Airbnb offers insurance to hosts up to $ 1 MN. Dispute solution is another trust measure of Airbnb to minimize off-platform transactions. However, Airbnb needs more effective measures to dis-incentivize both sides from taking the transaction off the platform. The ideal path would be to move from transaction services to value-add services for both sides such as cleaning, insurance, travel etc.

 

Future: Share more as get more trusted

Airbnb is planning to different segments of sharing economy by offering Airbnb experiences. In this model, travelers might attend special classes, concerts, tours, hobbies offered by freelancers. Experiences is an adjacent and complementary product to accommodation services. Another expansion area for Airbnb is the higher end accommodation services through affordable luxury listings.

 

 

 

Sources:

  1. https://www.airbnb.com/s/experiences?refinement_paths%5B%5D=%2Fexperiences
  2. https://www.airbnb.com/help/article/1857/what-are-airbnb-service-fees
  3. http://vator.tv/news/2016-02-26-when-airbnb-was-young-the-early-years
  4. http://www.innovationtactics.com/platform-business-model-complete-guide/
  5. https://hbr.org/2016/04/network-effects-arent-enough

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