Airbnb Case Study
Summary
TLDRAirbnb, 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
- ๐๏ธ 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.
- ๐ก The founders recognized a need for travelers seeking unique and affordable accommodations, leading to the creation of Airbnb as a platform for home sharing.
- ๐ผ Airbnb's primary revenue comes from service fees charged to both guests and hosts on bookings, with an average fee of around 14.2%.
- ๐จ The company differentiates itself from traditional hotels by not residing on third-party booking platforms and serving its own ecosystem.
- ๐ As of spring 2021, Airbnb boasts more than 7 million listings across over 200 countries and has over 150 million active users.
- ๐ The company's gross booking value peaked at about $38 billion in 2019 but dropped to $24 billion in 2020 due to the pandemic.
- ๐ Nights booked on Airbnb saw a significant drop in 2020, reverting to levels similar to those of 2017, with approximately 193 million nights booked.
- ๐ฐ Airbnb's revenue is not based on the gross bookings but on the service fees they collect, making it a variable cost business model.
- ๐ข The pandemic led to significant challenges for Airbnb, including a major layoff to manage fixed costs such as marketing, legal, and platform management.
- ๐น Despite the challenges, Airbnb has pricing power and aims to focus on driving volume in bookings, nights, and users to sustain growth.
- ๐ฎ 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
๐๏ธ 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.
๐ฐ 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.
Mindmap
Keywords
๐กAirbnb
๐กIPO
๐กHospitality
๐กService Fees
๐กBooking Platform
๐กVariable Cost Business
๐กGross Booking Value
๐กEBITDA
๐กPricing Power
๐กMarket Competition
๐กTrust and Experience
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]
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