Founded in 2008, Airbnb has created an online marketplace connecting travelers to potential hosts. Today, Airbnb has over 1,500,000 host listings offered in 34,000 cities and 190+ countries. That is over twice as many rooms as the biggest hotel chains, and three times the international coverage. And for CEO, Brian Chesky, this is “just the beginning”.
It all starts with the basic assumption that home owners have vacant rooms that may be sitting idle, either because they have extra space or because they are travelling. Airbnb allows them to make some extra cash by posting these rooms on listings, along with photographs and descriptions, connecting with potential guests and renting them out.
Airbnb is a marketplace that facilitates the exchange between the two and provides an online reservation system that facilitates transactions in a trustworthy and reliable manner.
From the traveler’s point of view, he will have a wide array of options that can be filtered by neighborhood, price range, size and luxury level, and will have a customized experience with an authentic feel. Moreover, the overflow of lodging supply over time bring prices down.
Security and Self-regulation
“Our starting premise is that people are good. But we are proactive in eliminating the occasional bad apple” says Merchiers, General Manager Europe. 
Feeling safe in someone else’s home and trusting your guest are central issues that Airbnb have had to battle with. Airbnb’s reputation relied on ensuring user confidence. Small incidents, like the widely-publicized experiences in 2011, could have dramatic implications on the viability and the scalability of their business.
To make sure travelers feel safe in other people’s homes and hosts trust their guests, Airbnb has put in place a variety of systems:
- Verified ID forces members to link a Facebook/Google+ account to their Airbnb profile and add personal information
- Payment collection, verification and delivery
- Deposits retained until the guests leave
- Insurance possibilities, for both the guests and the hosts
- Controlled messaging, where communication between the host and the guest is tightly moderated (no contact information exchange), and reporting features (to signal uncomfortability)
- Online reviews and ratings which would help guests and hosts judge the reliability of their counterpart
“Personal opinion is very important when it comes to evaluating accommodation” (Merchiers) . User experience, word of mouth and self-regulation are at the center of its strategy. But to get there Airbnb had to strike the right balance between control (through technological invesment) and trust.
The Network effect
From accomodating 3 guests on air mattresses to providing shelter to over 300,000 people on any given day, Airbnb has gone a long way. Operationally, it had to find a sizeable niche to get to critical mass. And this is where they got lucky.
In 2008, with Obama scheduled to speak at the Democratic National Convention in a 76,000 seat stadium in Denver, a city with 28,000 hotel rooms, Chesky saw an opportunity. “We looked for high profile events and said ‘We’re going to solve a high-profile solution to a high-profile problem.'”  Chesky only had one variable to solve in the “chicken and egg” problem of supply and demand, and focused his efforts on finding homeowners with extra space. Airbnb gave the opportunity for Obama supporters to host other Obama supporters from around the world. Supporting the same candidate made people feel related to each other. Airbnb managed to capitalize on this experience, and built a critical mass rapidly. A crucial requirement for a network, allowing customized demand to be met by the right offer, and users to find their match and want to come back.
Starting there, with an adaptable platform, transparency, reliability and trust, Airbnb has managed to rely on user-generated listings and content. Its role is to facilitate and assist other people’s value creation, and by doing so multiply that value exponentially. For that, it charges a 3% host service fee for each booking, and 6 to 12% of the reservation cost to the guest.
Unlike linear businesses in the hotel industry, Airbnb can scale at an incredibly fast rate at little to no marginal cost. By making their customers partners, it has created a platform which creates value for everyone: hosts (that create value out of an unused asset), guests (that get a customized, affordable and authentic experience), and share that value by orchestrating the network and facilitating connections.
Still, Chip Conley, founder of Joie de Vivre Hospitality, who was hired in 2013 as Head of Global Hospitality and Strategy identifies 4 main risks:
- Regulatory, which can affect supply, although Airbnb has already won a dozen lawsuits and has been gaining momentum in changing laws
- Trust and Safety, managed by a 200 person team, which is at the heart of the equation, for the operations to continue running smoothly
- Quality and its effect on brand reputation, although data shows that guest satisfaction is comparable to the world’s leading hotel chains
- Competition from other homesharing economies (such as Priceline and HomeAway)
That being said, with a solid platform, a good reputation and a growing community, Airbnb finds itself in a strong position to sustain its competitive advantage. With innovation and proven reliability, Airbnb will continue to create value thanks to its customers that they are slowly turning into passionate brand advocates.
- Harvard Business School Case: Airbnb, by B. Edelman and M. Luca
- Harvard Business School Working Paper: Efficiencies and Regulatory Shortcuts: How Should We Regulate Companies like Airbnb and Uber? by B. Edelman and D. Geradin
- Boston University case: The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry, by G. Zervas, D. Proserpio and J. Byers: http://people.bu.edu/zg/publications/airbnb.pdf