Airbnb and The Sharing Economy: Creating Value for Everyone
In just seven years, Airbnb has disrupted the 1300-year-old hotel industry by creating a “collaborative travel revolution” where everyone finds great value.
Founded in 2008, Airbnb has created an online marketplace connecting travelers to potential hosts. Today, Airbnb has over 1,500,000 host listings offered in 34,000 cities and 190+ countries. That is over twice as many rooms as the biggest hotel chains, and three times the international coverage. And for CEO, Brian Chesky, this is “just the beginning”.
It all starts with the basic assumption that home owners have vacant rooms that may be sitting idle, either because they have extra space or because they are travelling. Airbnb allows them to make some extra cash by posting these rooms on listings, along with photographs and descriptions, connecting with potential guests and renting them out.
Airbnb is a marketplace that facilitates the exchange between the two and provides an online reservation system that facilitates transactions in a trustworthy and reliable manner.
From the traveler’s point of view, he will have a wide array of options that can be filtered by neighborhood, price range, size and luxury level, and will have a customized experience with an authentic feel. Moreover, the overflow of lodging supply over time bring prices down.
Security and Self-regulation
“Our starting premise is that people are good. But we are proactive in eliminating the occasional bad apple” says Merchiers, General Manager Europe. 
Feeling safe in someone else’s home and trusting your guest are central issues that Airbnb have had to battle with. Airbnb’s reputation relied on ensuring user confidence. Small incidents, like the widely-publicized experiences in 2011, could have dramatic implications on the viability and the scalability of their business.
To make sure travelers feel safe in other people’s homes and hosts trust their guests, Airbnb has put in place a variety of systems:
- Verified ID forces members to link a Facebook/Google+ account to their Airbnb profile and add personal information
- Payment collection, verification and delivery
- Deposits retained until the guests leave
- Insurance possibilities, for both the guests and the hosts
- Controlled messaging, where communication between the host and the guest is tightly moderated (no contact information exchange), and reporting features (to signal uncomfortability)
- Online reviews and ratings which would help guests and hosts judge the reliability of their counterpart
“Personal opinion is very important when it comes to evaluating accommodation” (Merchiers) . User experience, word of mouth and self-regulation are at the center of its strategy. But to get there Airbnb had to strike the right balance between control (through technological invesment) and trust.
The Network effect
From accomodating 3 guests on air mattresses to providing shelter to over 300,000 people on any given day, Airbnb has gone a long way. Operationally, it had to find a sizeable niche to get to critical mass. And this is where they got lucky.
In 2008, with Obama scheduled to speak at the Democratic National Convention in a 76,000 seat stadium in Denver, a city with 28,000 hotel rooms, Chesky saw an opportunity. “We looked for high profile events and said ‘We’re going to solve a high-profile solution to a high-profile problem.'”  Chesky only had one variable to solve in the “chicken and egg” problem of supply and demand, and focused his efforts on finding homeowners with extra space. Airbnb gave the opportunity for Obama supporters to host other Obama supporters from around the world. Supporting the same candidate made people feel related to each other. Airbnb managed to capitalize on this experience, and built a critical mass rapidly. A crucial requirement for a network, allowing customized demand to be met by the right offer, and users to find their match and want to come back.
Starting there, with an adaptable platform, transparency, reliability and trust, Airbnb has managed to rely on user-generated listings and content. Its role is to facilitate and assist other people’s value creation, and by doing so multiply that value exponentially. For that, it charges a 3% host service fee for each booking, and 6 to 12% of the reservation cost to the guest.
Unlike linear businesses in the hotel industry, Airbnb can scale at an incredibly fast rate at little to no marginal cost. By making their customers partners, it has created a platform which creates value for everyone: hosts (that create value out of an unused asset), guests (that get a customized, affordable and authentic experience), and share that value by orchestrating the network and facilitating connections.
Still, Chip Conley, founder of Joie de Vivre Hospitality, who was hired in 2013 as Head of Global Hospitality and Strategy identifies 4 main risks:
- Regulatory, which can affect supply, although Airbnb has already won a dozen lawsuits and has been gaining momentum in changing laws
- Trust and Safety, managed by a 200 person team, which is at the heart of the equation, for the operations to continue running smoothly
- Quality and its effect on brand reputation, although data shows that guest satisfaction is comparable to the world’s leading hotel chains
- Competition from other homesharing economies (such as Priceline and HomeAway)
That being said, with a solid platform, a good reputation and a growing community, Airbnb finds itself in a strong position to sustain its competitive advantage. With innovation and proven reliability, Airbnb will continue to create value thanks to its customers that they are slowly turning into passionate brand advocates.
- Harvard Business School Case: Airbnb, by B. Edelman and M. Luca
- Harvard Business School Working Paper: Efficiencies and Regulatory Shortcuts: How Should We Regulate Companies like Airbnb and Uber? by B. Edelman and D. Geradin
- Boston University case: The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry, by G. Zervas, D. Proserpio and J. Byers: http://people.bu.edu/zg/publications/airbnb.pdf
Student comments on Airbnb and The Sharing Economy: Creating Value for Everyone
I’ve always wondered why AirBnb caught on so quickly. Prior to AirBnB, I’d used homeaway.com, but no one in our peer group really uses that site. However, many of the same listings are on both sites, which seems to indicated that the homeowners see value in both. Any thoughts on why homeowners might list on both but users prefer AirBnB?
Interesting point. According to Chip Conley, head of Global Hospitality and Strategy at Airbnb, “HomeAway is strong in Vacation Rentals but hasn’t been able to grow much in urban areas” (Source: http://blog.ehl.edu/interview-chip-conley-airbnb-hospitality-strategy).
My guess is that it has been difficult for HomeAway to scale, as it has never managed to benefit from the momentum that AirBnb had caught early on (with the 2008 Democratic Convention in Denver), which allowed it also to gain a high market share within a smaller segments (Obama supporters living in the region).
Similarly to Facebook, that started in Ivy-league universities then slowly widened the scope of their target audience, I feel that Airbnb has benefited from having a big market share in a smaller segment first. This helped its users find what they are looking for, and made them want to come back, which then multiplies the network effect (more demand to answer the offers and vice-versa).
This is great Michael! The diagrams are incredible and provide a lot of interesting information. I especially enjoyed the Timeline and seeing how much the company has achieved since 2007…WOW! I am always fascinated by Airbnb and especially people’s willingness to use it. Personally, I have always struggled with the idea of either “renting” out my home or staying at someone else’s but clearly it works and provides a great option for travelers everywhere. I do wonder as legal issues continue to arise if they will catch up to Airbnb resulting in bigger issues.
So was I actually, but now I’ve used it several times as a guest (Stockholm, NYC, SF), and it really makes a difference to have that authentic touch. It is also actually more comfortable than hotel rooms (more space!)
Legal issues are always at the forefront of their concerns for the future, but I must say I was impressed to hear that they have actually managed to change laws and regulations in certain states, just because everyone was aligned that they were bringing superior value to all parties involved. If you do that, I guess, even the state and the law bend in your favor!
I am a huge fan of Airbnb and have stayed in properties I found on the site in Chicago, Washington DC, Madrid, Marrakech, Paris, and even Trogir, Croatia. What I’ve found lately is that there has been a shift from individual homeowners renting out their own rooms and properties to third-party companies like Pillow who make a business out of managing almost all aspects of the rentals for many different owners.
Do you think that this move to third-party company management of the rentals goes against what Airbnb was originally about? In my personal experience, rentals I’ve found that are managed by these third-party companies tend to be less personal since oftentimes the true owner or host is completely removed from the process.
Super interesting. That is actually true, and I have found (in my research) the Airbnb management team to be quite discrete about it, when they were asked about the subject.
In my personal opinion, they are probably evaluating this new way of functioning, and will soon collect feedback / market survey to make sure they make it clear to their customer: 1) either to integrate it or allow it ; 2) or restrict it and try to prevent this from happening ; 3) potentially keep it the way it is, but in a more open and transparent way so that the user can make an informed decision in full knowledge of those facts.
It will be interesting to see what they do in the next few months about it!
A suivre… (to be continued)
What a cool post. Thank you Michael! I am total Airbnb fan as well… and the description of the business and operating model is great! Thank you.
Glad to hear! Thank you for the nice words!
Michael – I’m a big Airbnb fan. I have a few questions about how you see the future of Airbnb:
1. On the regulatory point, how effective do you think Airbnb are being in getting ahead of this curve
2. A recent HBS study found that there was discrimination in Airbnb hosts (http://www.bbc.com/news/technology-35077448) – do you think there are things within the operating model that they could change to try to minimize that? Would that break some of the trust between hosts, guests and Airbnb?
3. What do you see as the end goal for Airbnb? Is it to stay as a place where people find somewhere to stay or do you think they can break into more of the travel market than that?
Very interesting questions indeed.
1. I think they are way ahead of the curve, and was actually very pleasantly surprised to hear that Airbnb had actually “changed” laws and regulations in some states, just because everyone was aligned that they were bringing superior value to all parties involved. If you do that, I guess, even the state and the law bend in your favor!
2. I had also read that. I am sure some things can be found about trying to hide profiles or pictures. But, here, as everywhere, there is a fine balance to be made between not providing enough information to the host and providing too much of it
3. Good question. All I can say, from what I’ve read, is that they don’t intend to stop there. I’d hate to put words into Chesky’s mouth, but I don’t even think they need to stop at the travel market. For me, Airbnb is about trying to maximize the utilization of assets that don’t get utilized (in your absence or because the room is empty). And I can see that happening with so many different things: you have season-tickets to go see the latest Arsenal game – BOOM! Airbnb! ; you are going away and have an adorable pet – BOOM! Airbnb! ; you have a tuxedo that you only wear once a year – BOOM! Airbnb!
Doesn’t seem too unreasonable to me.. Thoughts?
Michael – very interesting post & informative graphics! As an AirBnB user, I loved learning more about the details of their operating and business models. A few things that I find particularly interesting:
1) That there is variability in the % fee charged to guests (6 to 12%) but the 3% host fee is fixed… I’m curious if you have any idea what drives this variability?
2) Their growth just stuns me, especially in their ability to raise capital. From $20,000 in January ’09 to $7.2 million in November ’10… unbelievable!
3) I think to your point, this is just the ultimate example of a network effect… not just in terms of value for customers & partners but AirBnB has successfully raised the barrier so high for potential competitors!
4) I’m really glad that you finished the post by highlighting the risks that AirBnb recognizes and is getting ahead of from a strategy perspective, because this is top of mind for me. It’s really a tradeoff… for instance I used VRBO this year and it was way more work in terms of providing financial information, faxing contracts, etc., but then again, I’m likely less skeptical of their platform because I know they make everyone jump through these hoops to ensure a quality, trusted, regulatory-proof experience.
Thanks for sharing!
Thanks for the insights Charlotte, and thank you for the nice words!
To answer your question, it feels like the variability comes with the price charged and the effort required in the back-end by Airbnb. Indeed, it seems unfair that Airbnb be paid only 6% on a very small transaction that requires a lot of back-end effort from their side. So it really varies with the volume (days, weeks, months) and the amount paid by the guest. It would be great to find out if your “user rating”, which requires them to check your profile in more depth, has anything to do with the rate that you pay. I reckon it doesn’t, or at least that’s what they communicate. I see the dangers of it (host-guest collusion), but I can see the benefits of it too.
About the 3% host fees, this often doesn’t even cover their costs. They really make their money out of the guest. And that’s for one particular reason: they’d like to incentivize as many hosts as possible to participate: the bigger the offer, the best one can find what he’s looking for. So they try to attract as many hosts as possible at a very minimal fee!
Loved this post – I actually worked briefly with Airbnb from an investor perspective over the summer and am a huge fan. One longer-term critique that I’ve heard some in the industry make is that larger booking sites (e.g., Priceline, Orbitz) are just waiting for Airbnb to “establish” the market before coming in and taking market share for themselves by using their existing scale. Would love to hear your thoughts around how you think the longer-term ecosystem looks!
That’s very interesting to hear, Kathy. Obviously, I am not privy to that information, but it would make sense for larger booking sites to come in and benefit from Airbnb’s larger efforts. However, it all comes down to loyalty and data.
And today, having used Airbnb time and time again, with positive experiences, and having an account opened with them, it will probably be just ‘easier’ for me to always go through Airbnb. So, I consider myself a loyal user, even though I’ve only used it 3 times… And I don’t know how easy it would be for others to reproduce that level of trust and ease.
Then, Airbnb must have TONS of data that they’ve developed on all of us (cf. today’s Google case, or last Thursday’s Facebook case). Really, the big question is how they will use this data to adapt, evolve, and make my experience more customized and relatable so that I just don’t want to go elsewhere.
Facebook and Google have both gotten competition, by players that we thought were much bigger initially (Microsoft, Yahoo!). But they just managed to leverage their knowledge and kept being one step ahead of the curve all the time!
Let’s see, only time will tell how they manage to confront this. If it were me, if I were Chesky/Airbnb, I would keep myself on the tip of my toes, and try to keep evolving, but I certainly would NOT be scared!
Michael–great post. Clearly Airbnb has succeeded in aligning its business and operating models. I wasn’t aware of the 2008 Obama “boost” that the company received, and it seems to have been instrumental in at least accelerating the company’s progress in that is helped them overcome the trust issues/spread word of mouth/etc. I’d be interested in knowing how much of the “trust equity” that this company relies on to continue to scale is now tied to its brand name as opposed to its operating model. The model can obviously be copied, but the brand now seems formidable.
Yes, very interesting indeed. I would say a lot of “brand” and “trust equity”, which would make it a huge barrier to entry for others.
Funny how the Obama campaign actually made a world of a difference for them in the very beginning: in the game of supply and demand, they didn’t have to chase their tail. Instead, they had demand at a maximum and had to create supply (Obama hosts) as much as possible. Which made it easier for them, especially that Obama supporters were ecstatic about hosting other Obama supporters. They felt they had something in common.
The self-regulation initiatives are really interesting. I’m intrigued to see how they will evolve over the coming years.