My Home Is Your Home: Airbnb Revamps the Hospitality Industry

Airbnb challenges the status quo in the hospitality industry.

A sense of community, cultural immersion, and novel experiences—this is what Airbnb promises its customers. The home-rental company, founded in 2008 by two roommates who couldn’t afford their San Francisco apartment rent, is now valued at over $25 billion after its latest round of funding led by the PE firm General Atlantic.

Airbnb offers an online two-way marketplace for listing and finding rental properties. It boasts over 60 million total guests and has listings in over 34,000 cities around the world, enabling travelers to find cozy, authentic, and peer-reviewed short-term rentals, when their alternatives are expensive and impersonal hotels.

For hosts, Airbnb offers an unparalleled opportunity to earn revenue on an underutilized asset and ties hosts into a thriving network of like-minded individuals, through its blog and social gatherings like Airbnb Open. Many hosts have transformed their Airbnb rentals into thriving businesses and their main source of income. As entrepreneurs, they have invested in upgrading properties and innovating on their service offerings to improve customer satisfaction, which furthers Airbnb’s reputation as well. Airbnb, in turn, rewards these “Superhosts” by providing high visibility to their properties on the website and enhanced customer service support.

The company charges hosts 3% of the booking price and guests 6-12% as a service fee. It projects booking 37 million room-nights per year by 2016. Third-quarter revenues for 2015 alone are $340 million, and are expected to reach $10 billion by 2020. But the company will have an operating loss of approximately $200 million this year, largely due to its rapid growth in new markets. Airbnb’s future rests on its ability to achieve direct network effects, so that both hosts and travelers have good reason to use the marketplace. The company has also faced regulatory hurdles in key markets like New York City, where the Attorney General lodged complaints that Airbnb’s hosts are running “illegal hotels” and violating tax laws.

Despite this, Airbnb is arousing fear among hotel chains and online travel agencies (OTAs), like Expedia, who are recognizing that the new kid on the block could steal their market share. Because it does not own the properties listed on the website, Airbnb does not require large capital investments to fuel growth, in the way that a hotel chain would. Overhead and labor, which are significant costs for most hotels, are also minimal for Airbnb, as hosts have the direct incentive to maintain their own property. Unlike Expedia, Airbnb does not have to negotiate complex contracts with large hotel chains and compete with other booking sites seeking to list the same properties.

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Airbnb’s main asset is its elegantly designed website and mobile technology. A novel feature is the abundance of artistic photographs, which showcase the architecture and design of homes, and drive a traveler’s search on Airbnb. CEO Joe Gebbia believes in “aspirational travel” and enlisted over 3,000 professional photographers to capture the imagination of travelers. The online platform also has a blog with stories of Airbnb hosts and the company’s impact around the world.

The company has invested in strategic partnerships. Paypal processes Airbnb’s online payments and as of last month, customer can use American Express points to make Airbnb reservations. Teaming up with Facebook, Airbnb developed “Social Connections” that allows travelers to filter their search by properties listed by their Facebook contacts, a move that could shelter customers from security issues and lower the barrier for booking via Airbnb.

Airbnb is a leader in the so-called “sharing economy”, a new business model enabled by globalization, expanding social networks, and mobile technology. It captures the modern-day consumer’s incessant need for convenience and customization—all at an affordable price.

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Citations:

  1. https://www.airbnb.com/about/about-us
  2. http://crafthousellc.com/blog/2014/06/12/i-heart-airbnb/
  3. http://www.wsj.com/articles/SB10001424052702303851804579560352369427202
  4. http://www.businessinsider.com/airbnb-billion-revenues-2013-1
  5. http://articles.latimes.com/2014/apr/06/opinion/la-oe-rifkin-airbnb-20140406
  6. http://www.wsj.com/articles/the-secret-math-of-airbnbs-24-billion-valuation-1434568517
  7. http://www.kenontek.com/2014/02/09/dissecting-airbnbs-business-model-canvas/
  8. http://money.cnn.com/2015/06/27/technology/airbnb-funding-valuation-update/
  9. http://skift.com/2015/03/25/airbnbs-revenues-will-cross-half-billion-mark-in-2015-analysts-estimate/
  10. http://qz.com/569738/the-dupont-invention-that-forever-changed-how-things-work-in-the-corporate-world/
  11. http://www.fastcodesign.com/1670158/the-new-airbnb-focuses-on-pretty-pics-rather-than-searches
  12. http://fortune.com/2015/11/02/amex-airbnb/
  13. http://www.wikinvest.com/stock/Priceline.com_(PCLN)/Data/Total_Revenues
  14. http://mashable.com/2011/05/10/airbnb-social-connections/#aV_FIa549uqc
  15. http://www.economist.com/blogs/gulliver/2011/10/airbnb
  16. http://www.psfk.com/2011/05/airbnb-and-facebook-use-social-connections-to-find-you-a-place-to-crash.html

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7 thoughts on “My Home Is Your Home: Airbnb Revamps the Hospitality Industry

  1. Very interesting post! I have a lot of respect for Airbnb; they took an extremely innovative approach in an industry which I feel has only demonstrated incremental changes over recent decades.

    It was been interesting to watch Airbnb’s popularity explode just in the past couple of years – I myself have switched from exclusively traditional hotel-usage to almost exclusively Airbnb usage. Although the regulatory issues certainly pose challenges for their continued growth, it sounds like they are remaining optimistic. Now I will be very curious to watch how the competitive landscape responds. Will others enter the market to try to emulate their model? Will existing hotel models try to incorporate elements of Airbnb, or will they try to differentiate further to distance themselves?

  2. Like Andie I am also a big fan of Airbnb. But I am wondering if their operating model needs to adapt to address the regulatory and legal issues better. I know that these concerns are preventing people in places like India from embracing Airbnb completely.

  3. Interesting post, Komal! I think one of the most fascinating aspects of Airbnb has been its ability to completely change consumer behavior. Before Airbnb, when would any of us feel comfortable renting space shared by (or offered by) strangers? Like Uber, this business has found a way to make us feel comfortable trusting complete strangers. That is why the user experience (e.g., peer-reviews, other security-enhancing design choices) may be the most important aspect of their operating model. Without giving both the supply and demand side of their marketplace a feeling of security and comfort, I don’t think Airbnb would be the success story today that it is.

  4. Thanks Komal for the great post. You really highlighted well Airbnb’s innovative and differentiated value proposition to prospective hosts (monetize high fixed cost asset with excess capacity) and guests (differentiated travel experiences at a lower cost). I also hadn’t appreciated how the collaborations with Facebook and American Express contribute to Airbnb’s economic moat, which was already strong given its network effects business model. I think it will be really interesting to watch how the business model evolves over time. As you point out, today the company makes money based on a take rate from guests and hosts. There are so many natural adjacencies which the company could enter into in the future (with ease), including lead generation for car rentals, events, flights, all of which are large and potentially lucrative markets.

  5. Great post on hotel chains’ biggest threat!! When I think of Airbnb I can’t help but compare it to uber, I find both business models to be very similar in every aspect. However, it still surprises me how Uber can charge a 20% commission to drivers for a very similar service when Airbnb charges only 3%. I believe that the fact that Airbnb just charges 3%, makes it an even more sustainable business in the long run. One that will not anger its partners (homeowners) as uber has done with its drivers. To me, this is more evidence of the close alignment between Airbnb’s business and operating models.

  6. Very enjoyable article, Komal. Similar to many of the other comments on this post, I am a big fan of their business, and of their business model. In terms of their business model, it’s such an advantage for them to have no assets and simply serve as a platform that connects users. Although they will face numerous legal hurdles, I think they will ultimately prevail because fundamentally they are simply serving as a “marketplace”, connecting willing buyers and sellers.

    I am also a fan of their business from a user perspective – getting to stay in someone’s home can provide such an interesting glimpse into a new place and enhance the cultural experience of a trip or vacation. The fact that they charge at a discount to most hotels is an additional bonus – I think they could manage to increase the price to help cover their costs and still have a very successful business model

  7. I loved your post, Komal. I am a huge fan of this business model. As you mentioned, there is no need for major CapEx to expand and therefore makes the business easily scalable. However, when I think of the Hospitality Industry, the first thing that comes to my mind is the consistency of my experience as a customer across different regions and hosts. As a customer, I will get the service from the hosts themselves (when you think of the operations of the business), facilitated by airbnb as the middle man. As airbnb expands into new geographies, it would be interesting to look for the processes that they are putting in place between airbnb and the hosts to govern the relationship and oversee the operations part in a way that guarantees a consistent experience and a premium service for the end users.

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