An analysis of the innovativeness, entrepreneurship, costs, risks, and benefits of the Airbnb business model.
Airbnb is an accommodation sharing site that connects people wanting to rent out their homes with travellers who need a place to stay.
Airbnb is an accommodation sharing site that connects people wanting to rent out their homes with travellers who need a place to stay.
Airbnb was born in 2007 when two roommates in San Francisco, co-founders Brian and Joe, were trying to find a way to pay their rent (Airbnb, 2021a). A design conference was being held in the city that weekend, but hotels were sold out. Brain and Joe inflated three air beds and turned the apartment into an Airbed & Breakfast. They hosted three guests and, in doing so, became the first Airbnb hosts. Not only did they provide accommodation, but they made new connections and new friends. Nate joined the team, and in 2008 Airbnb was officially established. Since then, Airbnb “has grown from two hosts in San Francisco to a community of over four million hosts all over the world” (Airbnb, 2021a, para. 8).
“Airbnb’s mission is to create a world where anyone can belong anywhere, and we are focused on creating an end-to-end travel platform that will handle every part of your trip.”(Airbnb, 2019, para. 2).
When Airbnb was first introduced, accommodation sharing was not something the industry had seen. They adopted a blue ocean strategy by pursuing differentiation and low cost simultaneously, offering a low cost solution to a low value customer, and quickly gained popularity. Airbnb utilised the sharing economy to create a new supply of income for hosts, which increased supply and subsequently demand. Traditionally, players in the accommodation industry were weighed down with owning and maintaining real estate, whereas Airbnb just owned the intellectual property and leveraged the assets of hosts to gain market share (Kaivalya Powale, 2019). Because of this, Airbnb is lean and agile and has been able to rapidly expand from the United States to over 100,000 cities in more than 220 countries around the world (Airbnb, n.d. – About us). They also offer guests a unique value proposition, as rentals are often cheaper and provide more amenity than hotels as you are renting a home. Airbnb first offered a platform for guests to rent a room in someone’s home, however it is now a hub for accommodation options, including entire homes and unique stays, and experiences so guests can truly immerse themselves in the local culture and lifestyle. Due to Airbnbs ability to adapt and evolve around the changing accommodation landscape, they have remained a market leader since the company’s inception.
Competition & Market Situations
The global travel accommodation market was valued at US $632.8 billion in 2018 (Allied Market Research, 2019). About 14% of this can be attributed to the vacation rental market, which was valued at US$87.09 billion in 2019, and is estimated to increase 3.4% year on year (Grand View Research, 2020). The vacation rental market is estimated to make up a more significant portion of the travel accommodation market in the future, as millennials are the driving force of growth within the industry. In 2018, 58 percent of Airbnb customers, both hosts and guests, were millennials, and Airbnb projected that over 75% of their demographic will comprise Millennials and Generation Z by 2022 (Airbnb, 2019b).
Although Airbnb was a pioneer in the vacation rental market, competitors are following closely behind as the market has matured. Booking.com is a leading competitor in the industry, providing consumers with an end-to-end solution for the entire travel journey, including car rentals, flights, activity bookings, and accommodation. Booking.com primarily offers hotel accommodation; however, with the introduction of homestays, they are in direct competition with Airbnb. Expedia is also a prominent player in the industry, mainly by acquiring country-specific brands such as New Zealand’s Book a Bach, Australia’s Stayz, and travelmob, which operates in Southeast Asia (Hospitable, 2020). Smaller competitors include Flipkey, originally a house swapping platform that now offers bookings for all parts of the travel experience, and Vrbo, which is a peer-to-peer rental site similar to Airbnb.
Airbnb has been hit heavily by the Covid-19 pandemic due to being part of the tourism industry. With many countries having travel restrictions in place throughout 2020 people were unable to travel to the extent they previously did, whether for work or leisure. Airbnb’s revenue for quarter two of 2020 was down 72% on the previous year to US$335 million (Airbnb, 2021b). Over the last twelve months, it has steadily climbed and reported a US $1.335 billion revenue for quarter two of 2021. Although they have grown their revenue stream back to pre-pandemic levels, Airbnb is still operating at a loss, reporting a net loss of US $1.24 billion for the six months ended June 30 2021.
Despite hefty losses resulting from COVID-19, Airbnb went public in December 2020, raising roughly $3.5 billion. On its market debut, the stock price doubled, tipping the company valuation over $100 billion (Wittenstein, 2021). Their 2021 quarter two figures reported a net loss of US $2.05 per share.
Before the Covid-19 pandemic, in late 2019, Airbnb’s revenue was growing at about 30% year on year, although they were operating at a net loss (Airbnb, 2021b). Research and development make up a significant portion of the company’s expenses, contributing to about one-quarter of operating expenses. Continued expenditure on research and development is imperative to their continued success in the ever-evolving tech landscape. We can already see, as travel restrictions ease and people are returning to their regular routines, Airbnb is bouncing back to its pre-pandemic operational levels and should continue to grow revenues and turn a net profit in the coming years.
Airbnb generates revenue by charging guests and hosts with service fees when a booking is confirmed. Hosts pay a service fee of 3%, and guests pay a service fee of 14.2% of the booking total. Hosts that offer experiences pay a 20% service fee.
Airbnb invests heavily in digital marketing, with an annual marketing budget of approximately $1 billion. They focus on sharing content to their target consumers, Generation Z and Millenials, across various channels. Airbnb introduced influencer marketing in 2015, which has supported its growth and is now an integral part of its marketing strategy moving forward. Airbnb tends to collaborate with high profile celebrities to gain an extensive outreach and showcase their luxury Airbnb through the celebrities social media channels (Pafitis, 2020). Airbnb also has a comprehensive referral programme that gives members travel credit for inviting new users to the platform. This helps expand the customer pool and reduce the high costs of acquiring new customers.
Airbnb also utilises offline marketing channels to recruit new customers and spread brand awareness, such as guerrilla marketing. An example of this is the 2015 Floating World campaign, where a floating house sailed down the Thames River for five days (Pafitis, 2020). This generated phenomenal press throughout the UK and the world and was attributed to bringing 10,000 new users to the Airbnb platform (Pafitis, 2020).
Airbnb’s business model has several significant risks attached, especially with its continued growth; the larger the company gets, the more scrutinised it will become. The greatest current threat to Airbnb’s existing business comes in the form of regulation/legal risk. Over the last decade, the industry Airbnb has operated in has been largely unregulated and been referred to as the wild west. This has given what many would argue an unfair advantage in the short term accommodation market; they are not subject to the same costs/expenses that businesses such as hotels incur. This is set to change. Lobbyists argue that the Airbnb business model should become more regulated, hosts are seen as a business, and there are greater tax implications as a result. This may reduce Airbnb’s margins and diminish their unique selling point, which is usually predicated on affordability.
Another threat moving forward is the emergence of regulators through the medium of technology. Previous attempts at regulating the industry in the UK, mainly London, have been curtailed as they were using particularly manual processes.
In some cases, they were physically visiting properties on regular occasions to try and enforce the regulations (Dearsley, 2019). It just isn’t feasible or cost-effective to implement a £20,000 fine. This is where the tech play comes in. Host Compliance offers Artificial Intelligence (AI) technology that automatically scans the market and identifies hosts. The company is already working with 300 local authorities in North America to collect taxes and enforce the rules.” Again this could significantly impact Airbnb reducing its ability to maintain its competitive edge.
A third risk that should be addressed is the impact of Covid-19. The pandemic has changed the world; currently, there is less travel than ever. Whilst the volume of travel may only be impacted in the short term, the pandemic still poses risks. Looking long term travellers may prefer hotels and more familiar establishments to have great assurance over the health and safety of the premises.
Another area that Airbnb must always be aware of is the low barrier of entry to the market. They are software companies rather than a real estate company, so there is no significant capital required to enter their market. Furthermore, whilst they can have patents over their marketing and apps, they cannot have IP rights concerning the short term rental business model, nor can they have exclusive rights to the hosts/properties they supply on their platform as it was never theirs to begin with. Just like Uber and UberEats have seen multiple competitors join their market, offering the same service, Airbnb will continue to face this in their industry. Whilst their initial concept was ground-breaking, there is very little to stop competitors from entering the market. There is very little they can do to maintain a unique offering as it will be difficult for them to protect their ideas and business models.
The Management Team
The executive management team numbers ten people, three being the co-founders (Airbnb, n.d.b). This is one of Airbnb’s greatest assets; having the people that created the business provides an unparalleled level of experience and knowledge. The founders will be the most in tune with the demands of the company. They have a deep understanding of the path it took to get where the business is now and are in the best position to provide a vision moving forward. The founders have surrounded themselves with a diverse and talented team with a myriad of experiences and different skills, in house experts ranging from legal and operation through to tech, marketing and HR. Airbnb has acquired talent from reputable brands such as Apple and the president’s personal team (Airbnb, n.d.b). Each executive management team member is an industry leader in their field of expertise and is responsible for the department relevant to their skill set.
The Board of Directors
The board of directors is made up of nine people, three being the co-founders. The board follows the same trend set out by the executive management team by employing a diverse group of directors. There is a mix of internal and external parties present on the board, helping Airbnb to gain perspective from both sides of the business (Airbnb, n.d.b). Airbnb has also used its board to help strengthen its business network giving board seats to partners of venture capital firms and hedge fund managers alongside individuals with extensive experience in creative and digital spaces. This allows Airbnb to access all of the right groups of people who can help continue to expand the business.
The company has focused on building a structure with a low hierarchy. Executive managers are responsible for departments, and departments are made up of many small teams, typically 8-10 people in size (Airbnb, n.d.b). These teams have direct authority over their particular scope of work. There is a culture of collaboration. Teams and departments are expected to stay in constant connection with one another to maintain an easy and quick flow of information within the business and consumers. The flat hierarchy combined with minimal physical assets within the company has allowed Airbnb to remain agile and lean, allowing them to be large with a relatively small number of employees. In many ways, their business model uses the hosts (who are not employees) to act as ambassadors for the brand; Airbnb can use the host’s local expertise and knowledge of their hometowns to offer a more honest and connected product.
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