The Succes Of The AirBnB Business Model
More than 1 billion guests are hosted in almost every city and country - all without owning a single property themselves - this is how AirBnB got its start.
More than 1 billion guests are hosted in almost every city and country - all without owning a single property themselves.
Airbnb has been a blessing to travelers and a curse to hotel chains, and today we’ll be taking a closer look at how they got their start, achieved profitability, and what we can learn from their business model.
How Airbnb Got Its Big Start
The year is 2007, and two roommates in San Francisco are talking about rent. You see, Brian Chesky and Joe Gebbia heard of a design conference coming to the city that weekend, and that all of the hotels were completely sold out.
So they did the simplest thing: inflated three airbeds and turned their apartment into an “Air” bed and breakfast.
And it worked - people came, they stayed and they enjoyed themselves. The connections Joe and Brian were making that weekend showed them there was a big idea here, and once they were joined by co-founder Nathan Blecharczyk they put down the groundwork that would lead to the success they are today.
Since 2007, Airbnb has gone from having just two active hosts to have more than four million around the globe.
In 2008, the budding team developed a website for short-term rentals that would eventually become Airbnb.
But how is Airbnb so different from using a hotel chain? What makes people come back to the service over and over again?
The answer is connection, ease, and some basic human psychology.
The Magic Of Airbnb’s Timing
Airbnb is valued by its users for the ability to find a home anywhere, at any time. Not the hotel aesthetic necessarily, but the opportunity to share being in a home away from home for a short while.
And while it seemed strange at the time, Airbnb was primed to overturn the almost $5 trillion hospitality industry by relying on new technologies, lowering costs, and serving a wider audience.
Airbnb was launched just as smartphones were starting to become popular, making it the best time to launch a mobile app. The arrival of the first Apple iPhone in 2007 as the first fully realized smartphone in the same year meant Airbnb had the niche opportunity to be a leading app, launching their mobile version of their website just a few short years later.
By capitalizing on this technology as it was released, they were able to corner the market long before hotel chains had started developing mobile booking platforms.
How Millions Of Hosts Make Money For Airbnb
Hosts are incredibly successful using the Airbnb platform, and their success means money for Airbnb in turn based on their business model.
To start with, hosts can cater to customers around the globe. Research shows that half of all hosts receive a booking within four days of being listed, and Airbnb facilitates all their payments directly through the platform.
Airbnb makes money by facilitating guest stays at accommodations offered by hosts - the pricing of which is decided based on factors like location, season, demand, and more. The platform allows hosts to quickly manage their calendars and accept reservations directly from their phones.
Airbnb actually makes money from every guest and host booking alike. The platform makes money by charging both hosts and guests for using its platform, customer support, and payment processing. The host and guest also agree upon the applicable booking value as well as host fees and guest fees.
Guests are charged a percentage of their booking, usually a service fee of up to 14%. Hosts at the same time will pay a flat service fee of 3% of the booking total without fees for cleaning, taxes, and such.
And it works - in 2021, Airbnb generated $6 billion in service fees by charging an average of 13% on an average booking value of $156.
The Power Of A Peer-to-Peer Economy
This business model allows buyers (guests) and sellers (hosts) to conduct their business more easily by sharing human and physical resources, in this case, a home.
Companies in the sharing economy don't provide individuals directly with goods and services, but make their money by connecting buyers and sellers. The original giants of this model, for example, included companies like eBay at the start and evolved to have the likes of Uber and Airbnb.
The success of Airbnb meant they could raise more capital by 2009, which allowed the company to go international with offices in the UK, Germany, and France to name just a few.
On December 10, 2020, the company became a public company via an initial public offering, raising $3.5 billion. Shares valued at $238 million were offered to hosts on the platform at the price of $68 per share.
The company also offers other services including:
- Airbnb Experiences: Renters can take part in activities like cooking classes, tours, and adventures.
- Airbnb Collections: Renters can use this section to find properties that can be used for special trips or other occasions. These listings include full homes and private rooms with either private or ensuite bathrooms.
- Airbnb Plus: This section features homes that are highly rated and comes with standard amenities.
The Impact On Hotels
We talked about how Airbnb was a nightmare for the hotel industry - after all, it has caused a 1.5% revenue drop in hotel chains according to hospitality research.
That’s bad news for hotels, which have traditionally earned their biggest margins when rooms were scarce and customers were forced to pay higher rates.
Hotel groups have not taken Airbnb’s inroads lightly. Starting in 2016, the American Hotel and Lodging Association backed efforts by the Federal Trade Commission and the state of New York to investigate Airbnb’s impact on local housing prices.
As margin pressure increases from Airbnb properties over time, hotels will be forced to step up the competition even more. The problem is that they have fixed investment costs. The demand for rooms is always going up and down, but it’s not efficient for hotels to build enough capacity to satisfy the highest peaks and then survive the lowest lows.
As for the future, home-sharing platforms are likely to gain even more ground over time as consumers become increasingly aware of their benefits. At the same time, as cities add home-sharing regulations, both the benefits of Airbnb to consumers and hosts, as well as the effects on hotels, will likely even out.
It will be interesting to follow the future of Airbnb as a whole - considering how well their funding has gone with investments and VC over the years, others are also onto this opportunity.
If you want to learn more about interesting business models, why not read about Duolingo or Waze?