Airbnb: how a simple online matching service trumps value of hotel giant, Marriott

How does a simple online matching service become valued higher than hotel giant Marriott, a long-established hotel giant that owns over 4,000 physical properties, in just under 8 years? The secret is in its disruptive genius business model – designed so that Airbnb can make money by merely facilitating transactions, no risks and no costs associated with owning actual properties.

The story of Airbnb starts like that of many other successful startups. Two young, broke urbanites look for creative ways to save a little money. Brian Chesky and Joe Gebbia moved to San Francisco in October 2007, and realized they needed a little help paying their rent. During the Industrial Design Conference, they hosted three visitors who did not want to pay for inflated hotel prices, by offering an air mattress and a home-cooked breakfast in the morning to each guest.

Pic 1

Original lodging space for one guest in duo’s San Francisco loft

pic 2

First Airbnb guest, Amol, enjoys hospitality and accommodation for just $80

A lightbulb goes off. How could they scale this? They immediately brought in their ex-roommate and engineering whiz, Nathan Blecharczyk, and established Airbnb.com in the summer of 2008. Today, the company is valued at over $24B and has had over 11 million travelers enjoy stays all over the world.

BUSINESS MODEL:

Airbnb is an online marketplace that provides unique value to two sets of users:

For Hosts:

  • Offers a trusted, easy-to-use platform to list their available space and earn extra income
  • Provides insurance for listed properties

For Travelers:

  • Provides a safe platform to find cheap, comfortable alternatives to hotels
  • Also provide alternatives to grungy, potentially dangerous hostels
  • Provides unique opportunity to interact with locals

For Both:

  • Connects buyer and supplier that would otherwise not have found each other
  • Rating/review system provides transparency on both sides

The company earns revenue from two different sources: They charge commission to hosts at 10% of every booking. And they charge a 3% “transaction fee” to travelers for every confirmed booking. Through these two channels, Airbnb projects $900M in revenue for 2015. The brilliance of their strategy is how they have managed to successfully provide the above values to travelers and hosts while monetizing this with a lean operating model that offloads the risks and intensive capital requirements of actually owning physical properties.

business model

OPERATING MODEL:

Airbnb’s greatest competitive edge within its operating model lies in its people. The three founders understand the need to keep its operations simple while offloading as much risk as possible. They have also established an innovative, adaptive culture within the company, where responding to user needs is of the utmost importance. Furthermore, the three founders complement each other in skillset:

Joe Gebbia was an entrepreneur from an early age and acts as the “face of the company.” He is responsible for crafting the company’s culture and identifying future growth opportunities. He is charismatic, inspiring, and often speaks at high-profile tech events to establish Airbnb’s position as an industry leader and disruptor.

Brian Chesky is responsible for setting the company’s vision and acts as the chief strategist. He identifies innovative ways to grow Airbnb’s business and looks for genuine ways to positively impact the lives of users and the communities they serve. He is also responsible for the design and look, and makes sure the interface of Airbnb.com reflects the company’s personality.

Nathan Blecharczyk is the CTO of the company. He is responsible for building a team of world-class engineers that keeps the website running smoothly, and ensures it is nimble enough to quickly react to customer needs/industry trends.

All three are gifted leaders who know how to mobilize and inspire a team. They are also well-entrenched within the tech world and have deep connections to investors with just as deep pockets. Their networks in the Silicon Valley investor community have allowed them to easily secure multiple rounds of generous funding. This, in turn, have allowed them to operate freely, without external pressures to deliver short-term profits. The founders, as a result, are primarily committed to delivering unique, first-class value to users and investing in the best talent to grow their business.

 pic 4

The total disclosed amount of funding that Airbnb has secured easily trumps that of many other successful peers. The access to this type of funding has been critical in growing Airbnb’s business without external pressure to focus on pure profits

Another key to Airbnb’s success is the management team’s focus on nimble, adaptable technology that quickly reacts to users’ needs. The company quickly added details to the webpage such as user reviews when trust became an evident issue between traveler and renter. In extreme cases, travelers have burnt down their host’s home after a wild party, and one user even created a fake identity to rent out a home to set up a meth lab. In reaction to these horror stories, Airbnb quickly changed user/host profiles to include detailed reviews of each user. In 2008, they offered information on social connections (via Facebook) to build up trust between the two parties.

Later on, they received user feedback that photos, house rules, list of amenities, and information about the neighborhood would be extremely useful in the decision making process, so they quickly appended these features to their website.

To keep up with mobile usage trends, they also offered a mobile app for iOS and Android users. By 2012, over a quarter of the company’s traffic came from mobile usage and the app had been downloaded over 1 million times.

We have explored how Airbnb’s business model of delivering unique value to two sets of customers is supported by their customer service-obsessed strategy and technology-driven team of engineers that quickly adapt to user needs. This complementary system will continue to provide Airbnb access to unique growth channels and we can expect to see more great things from them in the future.

Sources:

http://fortune.com/2014/11/24/uber-airbnb-sharing-economy-fallacy/

http://techcrunch.com/gallery/a-brief-history-of-airbnb/

http://nextjuggernaut.com/blog/airbnb-business-model-canvas-how-airbnb-works-revenue-insights/

http://www.wsj.com/articles/the-secret-math-of-airbnbs-24-billion-valuation-1434568517

https://en.wikipedia.org/wiki/Airbnb

http://www.slideshare.net/ThiagoPaiva/airbnb-12210879

Previous:

ARTSY: Finding Art at the Intersection of Science and Technology

Next:

Beating Nike to Become Nike? Check out Oiselle

5 thoughts on “Airbnb: how a simple online matching service trumps value of hotel giant, Marriott

  1. This is really interesting Anny, thanks! AirBnB sounds a bit like Facebook, with its two-sided business model (serving users and hosts), and innovative/responsive operating model. I am curious to see where AirBnB goes next. It’s found this market of consumers looking to save on lodging, or prefering to stay in a home to a hotel. But now other startups (e.g., Flipkey, Couchsurfing) are entering the space, so they’re going to need to continue to differentiate themselves (beyond being first movers). Also, they’ve really limited themselves to vacation travelers, who don’t have the same money to spend as business travelers. It would be interesting to see AirBnB team up with a hotel chain looking to expand their reach, as AirBnB is a first choice option for many travelers.

  2. Great article, Anny! Last year one of the C-members of Airbnb came to one of my classes at HKS. He mentioned that one key element of his operating model was QUICK expansion. In a few words, in the last 4 years they have tried to expand to as many countries as possible. The idea is that Airbnb wants to be the lodging option for any traveler no matter where they go. If a customer doesn’t find an Airbnb in a specific location, the probability that he will use Airbnb for his next trip is lower. Then, coverage is a key element to drive loyalty to Airbnb. For expansion, they use massive advertising in targeted cities and sometimes they offer lower fees to incentivize use. It is definitely a very interesting model!

  3. Thank you, Anny. The biggest question that remains for me is how Airbnb will capture the business traveler segment. In my experience, business travelers make their lodging decisions not based on cost, which you point out is Airbnb’s value proposition to travelers, but rather based on hotel loyalty programs and service. To address the first question, I wonder if Airbnb has considered establishing an Airbnb loyalty program? Or perhaps partnering with a credit card company to create an Airbnb branded credit card? To address the second (and the main reason why I myself am yet to try Airbnb), do you think Airbnb will ever expand their value proposition beyond a cheap place to stay? I wonder if they could partner with a cleaning service to provide daily housekeeping services or perhaps local restaurants to provide “room service” of sorts? Once they have sufficiently expanded to their target countries as Rafael mentions above, I feel that it will be very important for them to fully round out their service model in order to capture a larger share of hotel users.

  4. Great post Anny! This is another great example of a strong founding team launching an innovative business model, resulting in massive success. I’d like to know how they plan to create sustainable senior leadership when the founders plan to move on to something else. How are they approaching succession planning? I imagine the same network they used to find funding would be useful. I also find it amazing how quickly they have grown. As they continue to saturate more markets, are there different ways to capture value? Perhaps partnering with smaller hotels to shuttle their customer base into last minute discount rates?

  5. Thanks Anny, I really enjoyed the read! I had some limited experience with Airbnb as a consumer, but didn’t know about it’s foundation and operations.
    It seems that Airbnb became a success story so quickly, and even a model for other types of platforms in today’s “sharing economy,” matching excess capacity with high demand. Do you know if Airbnb plans to move into any other, even totally different, industries with a similar model? I know other companies have tried to take this concept to borrowing/lending cars, and I wonder what else it could be applied to and if Airbnb will try to spearhead any of these market entries.

    Thanks again!
    Caitlin

Leave a comment