airbnb-business-model

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

Airbnb is a platform business model making money by charging guests a service fee between 5% and 15% of the reservation, while the commission from hosts is generally 3%. For instance, on a $100 booking per night set by a host, Airbnb might make as much as $15, split between host and guest fees. 

Airbnb origin story and evolution

It was 2007, Brian Chesky and Joe Gebbia were trying to make extra income to pay their rent. Chesky and Gebbia, friends from design school, saw a big opportunity when back in 2007, a large international design conference was about to be hosted in San Francisco. 

It wasn’t unusual to have all hotels sold out during these large conferences. However, at that time, Chesky and Gebbia swiftly built a website, which they called AirBedandBreakfast.com (their guests would sleep on air beds), and surprisingly rented it to three designers that were attending the conference. 

As Chesky and Gebbia recalled, at the time, most people thought the idea was crazy as strangers would have never accepted to “stay in each other’s homes.”

And yet, that first weekend, something interesting happened. As the three designers had rented the air beds at Chesky and Gebbia apartment, they realized the potential of offering an experience as a local to someone coming from out of town. 

Indeed, that was one of the key elements that would make Airbnb different, from the traditional Hotel. It wasn’t just a room, but potentially a whole end-to-end experience that made guests feel like locals, and hosts become the ambassadors of their own local community while building their own entrepreneurial journey.

That event made Chesky and Gebbia continue with this experiment and by 2008, software engineer, Nathan Blecharczyk joined the two co-founders, to focus on the UX of the platform, to solve what would become the central problem for Airbnb, that of “making strangers comfortable enough to stay in each other’s homes.”

Some of the elements that would make this possible combined a platform with: 

  • Host and guest profiles.
  • Integrated messaging.
  • Two-way reviews.
  • And secure payments.

Over the years, other key elements were added to the platform, that helped gain further traction (like hiring professional freelance photographers to enrich the visual experience on the platform, or like adding experiences on top of the stay). 

Each of those elements would help Airbnb achieve a larger and larger scale until the pandemic hit, and Airbnb had to figure how. to make its business model even more sustainable, to survive. 

airbnb-evolution

Image Source: Airbnb Financial Prospectus

How much money does Airbnb make?

The digitalization that happened in the last two decades has facilitated the creation of peer to peer platforms in which business models disrupted the hospitality model that was created in the previous century by hotel chains like Marriott, Holiday Inn, and Hilton.

As a platform, Airbnb makes money by enabling transactions on the peer-to-peer network of hosts and guests. And it charges both for the successful transaction that happened through the platform. 

airbnb-revenues

Image Source: Airbnb Financial Prospectus

Due to the COVID pandemic, Airbnb revenue decreased by $1.2 billion, or 32%, for the nine months ending in September 2020 compared to the same period in 2019.

This revenue decrease was primarily driven by a 42% decrease in the number of check-ins related to Nights and Experiences as a result of the pandemic.

Breaking down the economics of an Airbnb booking

economics-of-aribnb

As a peer-to-peer platform, once the transaction between host and guest goes through, Airbnb will collect a fee from both key players. As an example from a $100 booking per night set by the host, Airbnb might collect $3 as a hosting fee. While it might increase the price for the guest at $116 ($16 above the price set by the host) to collect its guest fees of $12 and taxes for the remaining amount.

Therefore, for a similar transaction, Airbnb will collect $15, the host will make $97 from an initial set price at $100, and the guest will pay $116 (tax comprised). 

economics-airbnb-booking

Image Source: Airbnb Financial Prospectus

How much is Airbnb worth?

In March 2017 the company was valued at $31 billion. As of that date, the company had $5 billion at the bank, and it rejected an investment offer by SoftBank. Airbnb was among the largest potential tech unicorns.

Then, in 2020 the COVID pandemic hit particularly the travel industry which had to adapt. And at the time of the Airbnb IPO, the company might be valued around $20 billion. Of course, as Airbnb goes public its price and valuation might change quickly. 

Airbnb mission and vision

Airbnb’s mission is to create a world where people can belong through healthy travel that is local, authentic, diverse, inclusive and sustainable.

This is how Airbnb describes its mission. And it continues:

Airbnb uniquely leverages technology to economically empower millions of people around the world to unlock and monetize their spaces, passions and talents and become hospitality entrepreneurs.

The key element of a platform and peer-to-peer business model like Airbnb is the creation of a viable ecosystem. In this case, Airbnb becomes a platform for other entrepreneurs or aspiring hospitality entrepreneurs:

Airbnb’s people-to-people platform benefits all our stakeholders, including hosts, guests, employees and the communities in which we operate.

What are the key partners for Airbnb?

There are three key strategic partners:

  1. Hosts.
  2. Guests.
  3. Local communities.

In the initial traction stage, freelance photographers also played a key role in the growth of the platform. 

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.

But let’s look at what makes Airbnb platform compelling for each of those key partners. 

Airbnb value proposition to its key partners

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

Hosts

  • Hosts can earn an extra income stream by renting additional space they have at home.
  • Hosts can also turn into entrepreneurs by renting multiple locations with longer-term leases and making money with short-term rentals or by buying properties and generating a higher income with short-term rents. 
  • Hosts also have a set of tools for pricing, scheduling, payments, and more, which makes it easier for them to handle their customers without having to invest in proprietary technology. 
  • Hosts are also provided with insurance and liability coverage, the “Host Protection Coverage.”

Trust, indeed, is a key element of the platform. In part, Airbnb’s success is given by its effort to make transactions as smooth as possible on its peer-to-peer marketplace. 

Guests

  • The booking process is straightforward and the digital platform very effective.
  • Travelers find affordable prices.
  • Guests can also benefit from different experiences compared to the traditional hotel. Indeed, the host can act as a local touchpoint for the guest in the new community. 

For both hosts and guests

  • The review system for both hosts and guests guarantee standards of quality.
  • A secure payment system. 
  • A set of tools for them to connect, and to design experiences beyond the traditional stay. 

What is the revenue generation model?

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 challenges to Airbnb’s success and further scale?

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 than 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 the Airbnb marketplace.

Airbnb through the pandemic

Airbnb has been among the most hit companies though the pandemic, as its business model was fine-tuned around global travel, and short-term stays and experiences.

In May 2020, this is how Brian Chesky, CEO, and co-founder of Airbnb explained the current scenario:

Let me start with how we arrived at this decision. We are collectively living through the most harrowing crisis of our lifetime, and as it began to unfold, global travel came to a standstill. Airbnb’s business has been hit hard, with revenue this year forecasted to be less than half of what we earned in 2019. In response, we raised $2 billion in capital and dramatically cut costs that touched nearly every corner of Airbnb. 

He also explained how uncertain the situation is at a global level:

  1. We don’t know exactly when travel will return. 
  2. When travel does return, it will look different. 

Airbnb which was among the companies that most surfed the change in the travel and real estate industry, of the last decade, can also give us a better perspective of what might happen in the coming years for this industry.

Airbnb new business strategy based on a sustainable cost model

Travel in this new world will look different, and we need to evolve Airbnb accordingly. People will want options that are closer to home, safer, and more affordable. But people will also yearn for something that feels like it’s been taken away from them — human connection. When we started Airbnb, it was about belonging and connection. This crisis has sharpened our focus to get back to our roots, back to the basics, back to what is truly special about Airbnb — everyday people who host their homes and offer experiences. 

As Airbnb moves forward in this new normal, it looks at a few core elements:

  • Local travel
  • Safety
  • Affordability

At the same time, the company is focusing back on its core, and yet converting from physical experiences to online experiences.

Airbnb stretching its business model

growth-strategies
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling the whole new problems for new customers (reinvent mode).

As Airbnb knows the travel industry might not look as it used to, it’s now trying to redefine the boundaries of its business model, by leveraging on its tech platforms, an existent global audience, that used to be interested in physical experiences.

By stretching and extending its business model, Airbnb is trying to diversify it while the global pandemic will be over:

new-online-experiences-aribnb

Example of the new section available on the Airbnb platform: Online Experiences

By leveraging on its audience Airbnb can test quickly a new product:

online-experiences-aribnb

example-of-new-online-experiences-aribnb

Example of an online experience where the “digital hosts” provide the format of the experience and the “digital guests” take part to it.

book-an-online-experience

The online experience can take also the form of a private group where a limited number of “digital guests” can join by paying a premium price.

Will this platform be able to supplant, and integrate part of Airbnb’s revenues while the pandemic is over and the company can redesign also physical travel experiences?

Key lessons in redefining travel experiences and changing a whole business strategy, fast!

  • Back in March 2017, Airbnb was valued at $31 billion. Then by May 2020, due to the pandemic, the company valuation fell to $18 billion.
  • While its core business model is still sustained by two key strategic partners: hosts, guests. Airbnb has been also testing the expansion of its business model toward online experiences.

In an interview in late June 2020, Airbnb’s CEO remarked a few key findings for the future of the company and of the overall travel industry.

He explained how he learned “not to try to get in the business of predicting the future.” And the only way to do that is to run a super lean organization (Airbnb cut over a billion in marketing expenses throughout the pandemic).

This key lesson came as Airbnb risked to lose it all in the space of a few weeks. While Airbnb’s CEO remarked the trend in travel was still very strong. He also explained how things had changed for Airbnb.

Safety comes first, this makes still people concerned about getting on planes or traveling to crowded cities. Instead, as he explained, “they are willing to do is to get in a car and drive a couple hundred miles to a small community where they are willing to stay in a house.”

Airbnb’s CEO explained how “one trend that is going to happen is that travel as we knew it is over. It doesn’t mean travel is over, just the travel we knew is over… and it’s never coming back. It’s just not.”

And he continued, “Instead of the world’s population traveling to only a few cities and staying in big tourist districts we are going to see a redistribution of where people travel. They’re going to start traveling because they are going nearby to thousands of local communities.”

That changes the whole Airbnb strategy. Skewed more toward digital experiences and local expansion, rather than just growing quickly in large crowded cities.

Airbnb first-ever pitch deck

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here

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