Airbnb Case Study

Summary

Airbnb, the hospitality giant, started with a simple air mattress in 2007 and has since grown into a platform with over 7 million listings worldwide. The company primarily earns revenue from service fees charged to both guests and hosts. Despite the pandemic's impact, Airbnb's variable cost model and focus on booking volume could lead to a strong recovery. The company's success hinges on maintaining pricing power and avoiding trust issues that could drive users to competitors.

Takeaways

• 🛏️ Airbnb started in 2007 when two roommates, Brian and Joe, offered an air mattress in their living room during a conference season in San Francisco.
• 💡 The founders recognized a need for travelers seeking unique and affordable accommodations, leading to the creation of Airbnb as a platform for home sharing.
• 💼 Airbnb's primary revenue comes from service fees charged to both guests and hosts on bookings, with an average fee of around 14.2%.
• 🏨 The company differentiates itself from traditional hotels by not residing on third-party booking platforms and serving its own ecosystem.
• 🌍 As of spring 2021, Airbnb boasts more than 7 million listings across over 200 countries and has over 150 million active users.
• 📊 The company's gross booking value peaked at about $38 billion in 2019 but dropped to $24 billion in 2020 due to the pandemic.
• 📉 Nights booked on Airbnb saw a significant drop in 2020, reverting to levels similar to those of 2017, with approximately 193 million nights booked.
• 💰 Airbnb's revenue is not based on the gross bookings but on the service fees they collect, making it a variable cost business model.
• 🏢 The pandemic led to significant challenges for Airbnb, including a major layoff to manage fixed costs such as marketing, legal, and platform management.
• 💹 Despite the challenges, Airbnb has pricing power and aims to focus on driving volume in bookings, nights, and users to sustain growth.
• 🔮 The company's future success hinges on maintaining pricing power, warding off competitors, and ensuring a high-quality user experience to avoid attrition.

Q & A

What was the initial concept behind Airbnb's creation in 2007?

The initial concept behind Airbnb was to provide a makeshift bed and breakfast during a conference season in San Francisco when all hotels were booked. Two roommates, Brian and Joe, put an air mattress in their living room and recognized the demand for travelers searching for something unusual and cheap.

How does Airbnb primarily generate its revenue?

Airbnb primarily generates its revenue from service fees charged to both guests and hosts on bookings. The fees are non-refundable for guests and usually amount to about 14-14.2% on average, while hosts are charged a fee not more than 3% of each completed booking.

What is the significance of Airbnb's IPO in December 2020?

Airbnb's IPO in December 2020 is significant as it marked the company's transition from a startup to a publicly traded entity, reflecting its growth and success as one of the world's largest hospitality companies.

How does Airbnb differentiate itself from traditional hotel companies?

Airbnb differentiates itself by not residing on third-party booking platforms and by serving its own ecosystem with unique accommodations, experiences, and a variable cost business model where it only makes money when a booking occurs.

What was the impact of the pandemic on Airbnb's operations and numbers?

The pandemic significantly impacted Airbnb's operations, leading to a major layoff and a decrease in the number of nights booked, which reverted back to 2017 levels. However, the average room rate per night increased, suggesting people were opting for nicer homes or more expensive locations.

How many listings and active users does Airbnb have as of spring 2021?

As of spring 2021, Airbnb has more than 7 million listings in over 200 countries and serves over 150 million active users.

What was Airbnb's gross booking value at its peak and during the pandemic?

At its peak, Airbnb's gross booking value was about 38 billion dollars. However, during the pandemic in 2020, it reverted back to about 24 billion dollars.

What is the average service fee Airbnb charges for a booking?

The average service fee Airbnb charges for a booking is about 14-14.2% for guests, and hosts are charged a fee not more than 3% of each completed booking.

How does Airbnb's business model compare to that of Uber in terms of cost structure?

While both Airbnb and Uber have variable cost structures where they only make money when a booking occurs, Airbnb has more pricing power due to the differentiation in its offerings compared to Uber, where switching costs are low and the service is more homogeneous.

What are some potential risks or challenges that Airbnb faces?

Potential risks for Airbnb include lawsuits, loss of trust, or competition from other platforms that could capitalize on consumer trust and offer lower fees or better experiences.

What is Airbnb's focus in terms of business strategy moving forward?

Airbnb's focus is on driving volume, which includes increasing the number of nights booked, the number of people booking, and the overall number of bookings, rather than solely focusing on pricing growth.

Outlines

00:00

🛏️ The Birth and Growth of Airbnb

This paragraph delves into the origins of Airbnb, starting from the humble beginnings of two roommates in 2007 who offered an air mattress in their San Francisco living room during a conference season when hotels were fully booked. It outlines the company's evolution from this makeshift bed and breakfast to becoming one of the world's largest hospitality companies. The primary revenue source is detailed, which is the service fees charged to both guests and hosts from bookings. The paragraph also touches on Airbnb's business model, distinguishing it from traditional hotels by not relying on third-party booking platforms and highlighting its substantial user base and listings worldwide. The impact of the pandemic on Airbnb's booking numbers and the company's financial performance, including its IPO and variable cost structure, is also summarized.

05:02

💰 Airbnb's Business Model and Challenges

The second paragraph focuses on Airbnb's business model, emphasizing its variable cost nature and how it differs from companies like Uber. It discusses the company's revenue recognition, which is based on the service fees rather than the gross bookings. The paragraph also explores Airbnb's pricing power and how it leverages the uniqueness of its offerings to create a 'stickier' platform with high fees. The focus shifts to the company's strategy, which is centered on driving volume rather than just pricing growth. The challenges that Airbnb faces, such as the potential for lawsuits, loss of trust, and competition from other platforms, are also highlighted. The paragraph concludes with an optimistic view of Airbnb's future, considering its durable business model and the potential for growth as travel resumes post-pandemic.

Keywords

💡Airbnb

Airbnb is a platform that allows individuals to rent out their properties to travelers. It is central to the video's theme as it discusses the company's history, business model, and financial performance. The script mentions Airbnb's humble beginnings with two roommates offering an air mattress in 2007 to its growth into one of the world's largest hospitality companies.

💡IPO

An IPO, or Initial Public Offering, is the process by which a private company goes public by offering its shares for sale to the general public for the first time. The video notes that Airbnb IPO'd in December 2020, which is a significant milestone in the company's history and financial journey.

💡Hospitality

Hospitality refers to the business of providing lodging, entertainment, and other services to guests. The script discusses Airbnb's role in the hospitality industry, emphasizing its unique approach to providing accommodations and experiences beyond traditional hotel stays.

💡Service Fees

Service fees are charges that Airbnb collects from both guests and hosts for the use of its platform. The script explains that Airbnb's primary revenue source comes from these fees, which are charged as a percentage of the booking value and are a key component of its business model.

💡Booking Platform

A booking platform is an online service that facilitates reservations for accommodations, experiences, or services. The video mentions that unlike many hotels, Airbnb does not reside on third-party booking platforms but operates its own ecosystem, which is crucial to understanding its market positioning.

💡Variable Cost Business

A variable cost business is one where costs vary directly with the level of production or the number of units sold. The script describes Airbnb as a variable cost platform because it only incurs costs when a booking is made, which is a fundamental aspect of its financial structure.

💡Gross Booking Value

Gross Booking Value (GBV) is the total amount of money generated from bookings before any fees or commissions are deducted. The video uses GBV to illustrate the scale of Airbnb's operations, noting a peak of about 38 billion dollars in 2019.

💡EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company's profitability. The script mentions an adjusted EBITDA loss for Airbnb in 2020, indicating financial challenges during that period.

💡Pricing Power

Pricing power refers to a company's ability to set prices for its products or services without losing significant market share. The video discusses Airbnb's pricing power as a differentiator from other businesses, highlighting its ability to maintain high booking fees.

💡Market Competition

Market competition refers to the rivalry among firms in a market trying to achieve a higher market share. The script suggests that maintaining pricing power and warding off competitors are critical for Airbnb's continued success.

💡Trust and Experience

Trust and experience are important factors for customers when choosing a service. The video implies that maintaining trust through genuine experiences is vital for Airbnb to prevent customer attrition and to keep its platform competitive.

Highlights

Airbnb's IPO took place in December 2020, during a challenging time for the travel industry.

Founded in 2007 by two roommates offering an air mattress in San Francisco during a conference season when hotels were fully booked.

Airbnb's initial focus was on providing a cheap alternative to traditional hotels.

The company's revenue primarily comes from service fees charged to both guests and hosts on bookings.

A non-refundable service fee of about 14-14.2% is charged to renters, regardless of cancellation.

Hosts are charged a service fee of up to 3% of each completed booking to cover credit card processing costs.

Airbnb operates its own ecosystem and does not reside on third-party booking platforms.

As of spring 2021, Airbnb had over 7 million listings in more than 200 countries and 150 million active users.

The company experienced a significant drop in nights booked in 2020, returning to 2017 levels due to the pandemic.

Airbnb's gross booking value peaked at $38 billion before the pandemic and dropped to $24 billion in 2020.

The average room rate per night increased during the pandemic, suggesting a shift towards more expensive accommodations.

Airbnb's revenue is calculated as a slice of the total bookings, not the gross bookings.

The company operates as a variable cost platform, only making money when a booking occurs.

Airbnb underwent significant layoffs during the pandemic to manage its large fixed costs, including marketing and legal.

The company has pricing power, which is a key differentiator from other variable cost businesses like Uber.

Airbnb's focus is on driving volume, including the number of nights booked and people booking, rather than just pricing growth.

Airbnb reported a net loss in 2020 but was projected to grow out of it before their IPO.

Potential threats to Airbnb include lawsuits, loss of trust, and competition from other platforms that could capitalize on networking effects.

The company is considered durable with significant upside potential as travel resumes and unique experiences are sought after.

Transcripts

airbnb

a company that many of us have used and

some of us even have hosted on

it's a company that has an endearing

story an incredible background and just

ipo'd in december of 2020. what a time

for airbnb i'm really excited to talk

through some of the history some of the

experience and some of the numbers for

this pretty storied company let me just

begin at the beginning in 2007 two

roommates brian and joe put an air

mattress in their living room in san

francisco it was conference season and

all the hotels were booked

and they were able to create a makeshift

bed and breakfast

they recognized that travelers were

searching for something that was unusual

and in their situation cheap which was

their initial focus for airbnb

it started with an email between the two

guys and

moved on to become what is one of the

world's largest hospitality companies

now we took a look at airbnb because we

were curious does airbnb think of itself

as more of a hotel company or an

experienced company does it think of

itself as a company that's a platform or

a total hospitality experience and we

found out some pretty interesting things

the primary source of airbnb's revenue

comes from service fees from bookings

that are charged to both guests and

hosts and while there are experiences on

airbnb the majority of these booking

fees come from hospitality from the stay

the residence itself depending on the

size of the reservation the renters are

charged a non-refundable service fee so

even if they decide to cancel their

rental airbnb keeps it usually it's

about 14

14.2 on average

hosts are also charged a fee tricky

tricky no more than three percent of

each completed booking and this is

largely said to cover some of the credit

card processing fees

because of this aggregate fee that's

about 17 airbnb takes quite a large cut

of each one of the booking fees now

airbnb doesn't reside on third-party

booking platforms which most hotels do

so it really serves its own ecosystem

airbnb has more than 7 million listings

as of the spring of 2021 in more than

200 countries and they have more than

150 million active users

so let's go and take a look at the

numbers for airbnb it's pretty

interesting we can look at them now

because they just filed their first 10k

in fact in 2016 they had 125

million nights and experiences booked in

2019 which was a peak um for them they

had

327 million um nights booked and in 2020

they actually reverted back to 2017

levels returning about three years

backward um to about 193 million uh

their gross booking value was

exceptional at the peak of about 38

billion dollars in revenue booked

through the airbnb platform

and um reverting back in 2020 to about

24 billion dollars when we look at all

those numbers what we can see is that

there is a pretty high

room rate per night on average that a

lot of the rooms actually in the

pandemic were slightly more expensive

than they were prior which probably

means that people were staying in nicer

homes or more expensive

locations when they were choosing where

to stay in the pandemic not in for

example shared homes where you would

have a a single room

and then we go through and we look at

revenue and we see a slightly different

story because airbnb actually doesn't

count revenue from the gross bookings

they only count their revenue as the

revenue that they take as a slice off of

the top

we've talked before about uber and about

how uber is a variable cost business

well in many ways this is a variable

cost platform that airbnb has built up

as well now there's tech enabled

services the headquarters at airbnb um

suffered significantly during the

pandemic and there was actually a major

layoff that happened early in the

pandemic simply to keep airbnb afloat

because there is a large fixed cost that

separates airbnb from a lot of its hotel

operators

in fact that fixed cost includes

marketing and legal the platform

management hospitality crews even

picture takers that are inside the

airbnb framework

but ultimately this is really more of a

variable cost business because airbnb

only makes money when there is a single

booking that happens what does this mean

it means that they should have pricing

or costing power to be successful in the

industry and we actually find that they

do have one of those now airbnb doesn't

have a lot of cost power the real cost

from the variable side is on the um

acquisition for credit card companies

they're paying a credit card fee each

time they're paying and they do have

some customer acquisition costs which

they they use their network to expand

but ultimately the big costs they don't

have a lot of control over how much they

spend on those there's not a lot of

negotiating or collective power that

they have

however the pricing airbnb does have

power and this is one of their major

differentiators between airbnb and a

company like uber instead of having very

low switching costs and very easy

instantaneous switching for airbnb of

course you could make the selection

between a

single home that was on the airbnb

platform and a hotel but those are two

different products it's not really a

replacement or a full substitution when

you're in an uber or a lift

the first car that comes at the lowest

price will totally work for your ride

but for an airbnb there's a few more

particulars but if it has a king bed or

does it but if it has a pool or doesn't

what if it's open more now or closed

what if it's on a street with parking or

it doesn't have one the differentiation

inside the portfolio and the

differentiation of an airbnb versus a

hotel makes this a much stickier

platform where the fees are incredibly

high

so what's the focus for airbnb well

their focus isn't on pricing growth and

on sustaining a high price their focus

is on developing an acceleration in the

numbers both the volume booked as well

as the number of nights booked as well

as the number of people booking

and so this is one of those really

fascinating businesses that while their

business model and their compensation

comes from variable bookings

you see a really significant

focus for the company on being driving

volume which is what you would normally

see in more fixed cost business

um ultimately what we saw is that airbnb

did endure a net loss um an adjusted

ebitda that was a loss inside um 2020 we

we saw that they actually were there in

2019 but were projected to grow out of

it before their ipo

we do expect that if airbnb is able to

achieve its goals to keep

at bay other competitors that would

think about joining into the market and

if they're able to maintain the pricing

power that they have especially on the

booking fee side then they're going to

have a pretty unicorn experience in just

a couple of years what are some of the

things that could really endanger a

company like airbnb well one would be

really major problems um lawsuits or

loss of trust so if all of a sudden on

airbnb everything was a five-star rating

and airbnb started promoting people by

following a second revenue stream

allowing them to pay their way to the

top of the platform and you didn't feel

like you were actually getting the best

search results or the best experiences

if it felt like it was favoring things

that then you didn't have a good

experience with people might begin to

have attrition off the airbnb platform

or if another platform like verbo was

able to really capitalize on some of the

networking effects and the consumer

trust experiences that airbnb has been

able to have if you could have more

switching costs between one platform and

another and they were able to compete on

the fees you might find um that airbnb

would be in a different class however i

would say that i think that this is a

pretty durable business with a lot of

upside as more people begin to book

airbnbs and other accommodations around

the world as we return to traveling and

as we get excited about going new places

and having really creative curated

experiences while we're there

thanks so much for listening to this

episode of strategy simplified

[Music]

you