Strategy

How Airbnb is disrupting the hotel industry

Airbnb’s growth history 

Airbnb was conceived in 2007 when founders Brian Chesky and Joe Gebbia found themselves unable to afford rent (Crook & Escher, 2015). They decided to set up three airbeds to rent out to lodgers (thus the original name of the company, Airbed and Breakfast). After significant struggles to raise funds, Airbnb grew from a startup into a full-blown global company and serious threat to the hotel industry. The platform allows private homeowners to rent out their homes as if they were hotel owners.

To illustrate Airbnb’s growth and severity of the threat to the hotel industry, let us take a closer look at number of rooms available and number of bookings made. Rooms available in December 2014 jumped up from 300.000 in February to approximately a million, a 233 percent increase in 11 months (Mudallal, 2015). In contrast, some of the largest hotel groups reportedly manage slightly under 700.000 rooms (InterContinental Hotels Group, Hilton, Marriot) making Airbnb the largest provider of rooms in the world. Marriot is expecting to surpass the one million mark by the end of 2015. In terms of room-nights, in 2015, 80 million nights were booked via Airbnb, 100 percent up from 2014’s approximately 40 million nights (Somerville, 2015). For 2016, it is projected that this number could grow to 129 million room-nights (Barclays, 2015).

Airbnb’s growth in number of rooms and reservations clearly is a sign that it’s able to scale up its business model fast due to that it in essence is not a hotel business model. Airbnb can be better compared to Booking.com (a booking website enabling customers to find the ideal hotel for their planned travel). Both Booking.com and Airbnb create market efficiency and transparency with their two-sided business models.

Comparing valuations across hotels and Airbnb, in 2014, Airbnb was valuated between Wyndam Hotel Group and Accor (see figure 1). However, with its last equity fundraising, Airbnb was valuated at 25,5 billion in 2015, surpassing Hilton Worldwide (O’Brien, 2015).

Airbnb1

 

 

 

 

 

 

 

 

 

 

 

 

 

Value proposition

Just like Uber and Spotify, Airbnb’s value proposition and its benefits are two-sided. Individual hosts are able to tap into the shared economy by offering their homes for a fee and guests are able to book rooms and apartments in an easy way with lower prices.

To elaborate on the benefits of the value proposition, let us look into the benefits to the hosts and guests:

  • Easier: Without Airbnb, subletting or lodging your home or a room is a lot more complicated. Challenges that are overcome with Airbnb are, amongst others, having guests find you and dealing with payment. For guests, the process of booking a room via Airbnb is similar to booking a hotel room via, for instance, Booking.com.
  • Better: Risks of having issues with guests are minimized by Airbnb’s two-way evaluation process, similar to Uber’s, which creates a self-controlled quality assurance system. For guests, the quality of Airbnb rooms are more variable; some Airbnb hosts provide all amenities and facilities like hotels, whereas other hosts provide basic lodging.
  • Faster: The end-to-end process from potential guests finding the host until payment are faster than without using Airbnb’s value proposition. However, comparing Airbnb with Booking.com, the difference is negligible.
  • Cheaper: Airbnb’s average daily rate is lower than the average rate of hotels. Considering fewer amenities and facilities offered this should not come as a surprise. Besides, hotels have a high cost structure whereas private homeowners have costs that they would have to make regardless of whether they are or are not able to rent out their homes. To illustrate, on average, Airbnb apartments in selected U.S. cities were 23 percent cheaper and Airbnb rooms 54 percent lower in price (see figure 2).

Airbnb2

Pricing model

Similar to hotels, Airbnb rooms and apartments are priced per night. Airbnb acts as a platform and marketplace where supply and demand meet. Airbnb’s two-sided business models generates revenue from host fees (typically 3 percent of the reservation value (Airbnb, 2015)) and from guests fees (6-12 percent of the reservation value (Airbnb, 2015)).

Future of Airbnb

Airbnb’s ambition is to further expand the portfolio of products and services to their customers to satisfy their travelling needs (Curry, 2015). In December 2015, Airbnb trialed a new feature in San Francisco, where it offered host-customized trips to guests. In this trial, Airbnb offered three options: hiking trips, best restaurants and a tour of the city’s hotspots.

The host-designed trips would fill the growing need from travelers to be able to experience city trips like locals, instead of using a more generic guidebook or commercial tour guide. In other words, maybe it is time for commercial tour guides and publishers of guidebooks to rethink their value proposition before the next Airbnb disruption starts.

Sources:

Airbnb (2015), What are guest service fees?. Available: https://www.airbnb.com/help/article/104/what-are-guest-service-fees. Online.

Airbnb (2015), What are host service fees?. Available: https://www.airbnb.com/help/article/63/what-are-host-service-fees. Online.

Barclays (2015), Hotels: Is Airbnb a game-changer?. Print.

Crook & Escher (2015), A brief history of Airbnb. Available: http://techcrunch.com/gallery/a-brief-history-of-airbnb/. Online.

Curry, D. (2015), Airbnb wants to book your entire trip in the future. Available: http://www.digitaltrends.com/mobile/airbnb-handcrafted-trips/. Online.

Mudallal, Z. (2015), Airbnb will soon be booking more rooms than the world’s largest hotel chains. Available: http://qz.com/329735/airbnb-will-soon-be-booking-more-rooms-than-the-worlds-largest-hotel-chains/. Online.

O’Brien, S.A. (2015), ‘Crazy money’ – Airbnb valued at over $25 billion. Available: http://money.cnn.com/2015/06/27/technology/airbnb-funding-valuation-update/. Online.

Somerville, H. (2015), Exclusive: Airbnb to double bookings to 80 million this year – investors. Available: http://www.reuters.com/article/us-airbnb-growth-idUSKCN0RS2QK20150928. Online.

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