airbnb-business-model

How Does Airbnb Make Money? Airbnb Peer To Peer Business Model In A Nutshell

As a peer to peer network, Airbnb allows individuals to rent from private owners for a fee. In fact, Airbnb charges guests a service fee between 5% and 15% of the reservation subtotal; While the commission from hosts is generally 3%. Airbnb also charges hosts who offer experiences a 20% service fee on the total price. 

The digitalization happened in the last two decades has facilitated the creation of abu peer to peer platform able to disrupt the hospitality model that was created in the previous century by hotel chains like Marriott, Holiday Inn, and Hilton.

How much money does Airbnb make?

Airbnb made $93 million in profits on a $2.6 billion revenues. This means the company net margin was 3.58%. That seems a low net margin compared to the 9% from the hospitality industry. However, Airbnb is a startup gaining traction and market share over traditional players. Also, its business model is based on the growth of its users base.

How much is Airbnb worth?

In March 2017 the company was valued $31 billion. As of that date, the company had $5 billion at the bank, and it rejected an investment offer by SoftBank. Airbnb might be the biggest tech unicorn IPO in 2018.

What are the key partners for Airbnb?

There are three key strategic partners:

  1. Hosts
  2. Guests
  3. Freelance photographers

There are also other partners, from which it depends on the platform success, like IT experts, and interior designer.

Guests (travelers) can easily find hosts (pretty much anyone with a private home for rent) through the Airbnb marketplace. Also, Real estate agencies that have vacant units can use Airbnb as a way to rent the excess properties they were not able to rent on the market. Instead, freelance photographers can earn a living by joining Airbnb as independent contractors.

Airbnb value proposition to its key partners

There are several value propositions for both hosts and guests. And for freelance photographers.

Hosts

  • hosts to can earn an extra buck by renting additional space they have at home
  • hosts are provided with insurance and liability coverage, the "Host Protection Coverage."

Guests

  • The booking process is straightforward and the digital platform very effective
  • travelers have affordable prices
  • guests can have unique experiences

For both hosts and guests

  • The review system for both hosts and guests guarantee standards of quality

For freelance photographers

Airbnb makes money in two ways:

1. It collects a commission from property owners, which is generally 3%. While it collects a commission fee from the same owners offering experiences, which is generally 20%.

2. It collects a transaction fee from guests of between 5% and 15% of the reservation subtotal

What are two key issues to Airbnb success?

There are two main issues Airbnb has to face:

Trust

When hosts are listing their rooms and homes, they're trusting the platform to put them in touch with good people. The same applies to guests. Would this trust be eroded over time so will be the value of the marketplace.

Customer retention

Travelers nowadays have plenty of options. If they revert back to hotels or other solutions, Airbnb loses momentum. Also, another risk might be that of losing guests that make friends with hosts. In fact, they might choose to organize their next transaction privately. The paradox then is that Airbnb rather that strong incentive tie between hosts and guests. It has to create an experience so that both parties can trust each other enough to make the transaction but not so much to get out of Airbnb marketplace.

Summary and Conclusions

Airbnb is a start-up unicorn that disrupted the hospitality industry. As of 2017, it made $93 million in profits on a $2.6 billion revenues. Also, back in March 2017, it was valued at $31 billion. There are three key strategic partners: hosts, guests, freelance photographers. The revenue generation model is quite simple and its based on a commission fee of 3% on hosts (while 20% for hosts is offering experiences) and a transaction fee of 5-15% over guests.

Two main risks that Airbnb faces as a peer to peer marketplace are trust and customer retention. The company is growing quite fast, and it is planning to get listed. Will this growth continue?

Airbnb Business Model Explained in an Infographic

airbnb-business-model-explained

Handpicked related articles:

 

Published by

Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

Leave a Reply