Airbnb Business Model | How Does Airbnb Make Money?

You probably know or have used the services of Airbnb if you enjoy traveling. Airbnb is a marketplace that connects landlords with guests who need a place to stay.

The business, however, was just an idea initiated by two buddies trying to pay their rent when it was launched in 2008. 

They put together three air mattresses and rented them out. When they realized it might be more than that, they became excited.

Airbnb Business Model is a multifaceted service that connects tourists with hosts around the world. 

With Airbnb, property owners and short-term guests can commoditize trust among themselves in a way that other hospitality businesses cannot.

Airbnb currently operates solely through an application and website. Therefore, you will not interact directly with anyone, nor will you be required to attend physically.

Airbnb owns no properties. It allows people who can offer to reach out to people interested in what they can offer.

Airbnb makes 80,000 reservations per day without owning any rooms. Much like Uber delivers 1 million trips per day without owning a single car. Consider the Airbnb business model.

What is Airbnb?

Airbnb is an online platform for tourists to book apartments, hotels, and activities. Accommodations and experiences are provided by hosts (either online or offline).

Airbnb generates revenue by charging a service fee to guests and hosts alike. A typical cost range might be between 3% and 20%. 

Airbnb Business Model

The Airbnb company operates using a marketplace business model, which means that it has guests (guests) and hosts (hosts), which help develop liquidity.

Airbnb is now present in more than 34,000 cities across 190 countries. The company currently has 1.5 million listings and has served over 35 million people. More than 140000 people are staying at Airbnb’s homes every day. It surpassed Hilton Hotels in 2012 in terms of nights booked.

Airbnb, founded in 2008 and headquartered in San Francisco, California, is once again leading the world in online travel. The company has raised $6.4 billion in capital and went public on December 9, 2020.

How Does Airbnb Work?

Airbnb offers vacation rentals that allow guests to book apartments from peers (also known as hosts) rather than hotels and other accommodations.

You can access Airbnb’s platform through its website or its Android and iOS mobile applications.

A user can simply specify the destination, the date, and duration of the trip, as well as the number of companions they wish to bring.

Airbnb then creates a list of options for users to select. In addition, a user has the option of applying additional filters throughout the interface, such as amenities (such as a parking lot or a bathtub), type of location (such as a private or shared room, an entire location, or a hotel room), price, and more.

Airbnb provides guests with 24-hour service as well as a hassle-free return policy.

Airbnb Plus and Airbnb Luxe are available to travelers who are interested in improving their stays. 

Thus, they are more expensive. Airbnb For Work also offers long-term accommodations for working professionals.

Along with hotel rooms, users can book experiences and activities online. Cooking lessons, yoga sessions, excursions, photoshoots, and other activities are also available.

Airbnb now has over 150 million users. In addition, the company works with approximately 4 million hosts and experience providers. 

Airbnb is now one of the world’s largest online travel platforms, alongside giants like Booking.com and Expedia.

Airbnb Business Model

Like Uber and Oyo Rooms, Airbnb operates on the aggregator business model. On the other hand, hotel chains like Marriott and Hilton work on a linear business strategy. 

Hotel companies must invest millions of dollars in the construction and maintenance of their facilities. 

The primary resource of Airbnb is people; therefore, none of these things are required. Thus, it can grow at a breakneck pace without incurring any marginal costs.

Airbnb Business Model

People can list their available space on the site and earn extra income from the rent they receive for their houses. Guests can also connect with local hosts and book homestays instead of pricey hotels, saving money and living “like a local.” 

Personal profiles and rating/review systems can help travelers make informed choices about the accommodations and hosts. 

Additionally, hosts have the option to determine who uses their space for rent. This contributes to the reputation and trust of the community.

Airbnb includes more than just passengers and hosts. It also employs freelance photographers in all major cities around the world. 

Photographers take high-resolution images of properties. A high-resolution image enhances click-through rates and encourages more responses. Airbnb pays these photographers directly.

How Does Airbnb Make Money?

Airbnb earns money by charging customers and hosts a service fee. Airbnb’s commission is determined by who pays it (hosts versus visitors), the location, the length of time, and the kind of service provided.

Airbnb charges two different service fees. The first type, split fees, requires that both the host and the guest pay. Host-only fees, on the other hand, are paid by the host only.

The hosts usually pay 3 to 5 percent of the rent when renting out their homes. A surcharge of 10% to 14% is added to the booking amount in the meanwhile.

The owner will have to pay a service fee of between 14 and 16 percent when paying as a host-only guest, which generally falls under the hotel category. Additionally, hosts may have to pay up to 20% extra for their experiences.

Although the pricing structure may seem excessive, it is actually in line with the rates charged by competing platforms. Hosting companies, such as Booking.com, set between 15 and 20% of the room rate to hosts.

There are also additional fees for payment processing. Furthermore, Airbnb offers $1 million in property damage insurance, which is not available on many other web marketplaces.

Airbnb’s marketplace business strategy includes lower fees and insurance. An online marketplace has the requirement to accumulate liquidity on both the supply side and the demand side.

The company attempts to elicit trust from consumers through branding, carefully curated content (such as showcasing some of their most unique stays), social proof (through user reviews), and by reducing any friction from the booking process (bookings can be completed within 10 clicks).

The marketplace can begin cross-selling into other industry verticals when it reaches a certain level of liquidity. For example, Airbnb has done this well by offering additional goods such as business travel and (both offline and online) experiences.

There have previously been rumors that Airbnb may introduce more verticals, like flight reservations (where it will compete against KAYAK and Trivago) and establishing its hotel chain in specific cities.

Airbnb provides free listings to owners, and tourists may then browse to find the right property for their needs and budget in a specific locality. 

Airbnb handles bookings and monetary transactions. The firm derives a portion of its revenues from these transactions from two sources:

Commission From Owners/Hosts

Airbnb charges hosts a flat 10% commission on all bookings made through the platform. For the processing of guest payments, hosts must pay an additional 3% fee.

Transaction Fee From Guests/Travelers

Airbnb charges a service fee of 6-12 percent of the booking value for each confirmed booking. Costs are non-refundable. Airbnb claims that booking in bulk will save users money on booking fees.

According to local tax laws, users may also be charged a value-added tax (VAT). Goods and services are subject to taxation based on their total costs. Airbnb does not charge VAT because tax rules differ from country to country. 

Airbnb imposes variable exchange rates on visitors who pay in currencies other than those of the host. Hosts pay VAT depending on how much money they make from bookings.

Business Travel

Airbnb also offers businesses-ready properties that meet specific criteria for the type of property, the amenities, the check-in process, reviews, and the hosts’ responses. A company travel manager can use this tool to provide more transparency and to generate more accurate reporting.

Airbnbmag

Airbnb’s mission is to make visitors feel at home in the places they visit. The new product Airbnbmag, which is more than just a guidebook, is part of Airbnb’s business strategy to meet this ambition. 

Airbnb and Hearst collaborated to produce this $15 magazine. As a result, visitors can discover the area through the eyes of a local, avoiding tourist traps.

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Success Story of Airbnb

Airbnb was founded in 2008 by Brian Chesky (CEO), Joe Gebbia (CPO), and Nathan  Blecharczyk in San Francisco, California (CSO).

Gebbia and Chesky first met as students at the Rhode Island School of Design. They both earned their Bachelor’s degrees in Graphic and Industrial Design in the end.

The two of them tried their luck in a few professions after graduating in 2005, mainly doing freelance design work for others. Then, they moved to San Francisco in 2007 to take advantage of the burgeoning design community and its numerous career opportunities.

The idea for Airbnb came to Chesky and Gebbia after they had difficulty paying their apartment rent.

At the time, a design conference was scheduled for San Francisco. The hotels in the area were all completely occupied, according to Gebbia. So he sent Chesky an email suggesting they sublet their apartment to the designers.

They built an air mattress website, bought some air mattresses, and used them in their flat to make beds.

The first three bookings came soon after. The guests paid a total of $80 for breakfast, lodging, and transportation. Moreover, they provided a complimentary city tour.

For that four-day stay, they earned over $1,000, and it helped the couple realize how huge this idea could be. After that, the only thing they needed was some technical know-how to continue developing the platform.

Gebbia’s former roommate and Harvard Graduate Nathan Blecharczyk helped them with the required expertise.

Aaron Greenspan, a former roommate of Blecharczyk, informed that Blecharczyk was one of the world’s top spammers.

He created software that sent millions of spam emails a week, so he could pay for college (until the Federal Trade Commission shut him down when he was a junior).

For six months, they relaunched the website several times, but no one seemed to notice. Finally, the company launched at SXSW, but only four clients showed up. One of them was Chesky, the co-founder.

Several investors turned down the team. Furthermore, they had credit card debt of nearly $40,000. Nevertheless, they chose to continue because they wanted to recapture the enchantment of the first conference.

Air Bed & Breakfast had a watershed moment at the 2008 Democratic National Convention (DNC) in Denver, Colorado. An opportunity to capitalize on a highly likely to attract the team spotted many people.

The team contacted niche bloggers who might be willing to write about the firm to gain press coverage. This led to even more publicity, including interviews with national news networks such as NBC and CBS.

Even though Air Bed & Breakfast benefited from media coverage, the effects were only temporary. So the team decided to exploit the political situation by selling cereal, just like any rational travel platform founder would.

Chesky and Gebbia created fake cereals called Obama O’s and Cap’n McCain’s graphic design skills. One student from UC Berkeley printed 500 boxes for them, which they then distributed to bloggers who would promote them.

Within a short time, cereal boxes began to sell for $40 each. It took only a couple of weeks for the crew to sell $30,000 inboxes.

The Obama boxes quickly sold out, so the McCain boxes were given away for free with each transaction.

Y Combinator founder Paul Graham allowed the team to pitch their startup a few weeks later. Gebbia showcased his Obama O’s from his luggage as the founders were about to leave after a dismal pitch.

Graham merely said, “Wow,” after recounting the story of their cereal venture. People like you are cockroaches. “You won’t die.”

If they could probably convince people to spend $40 on cereal boxes, they could persuade them to sleep on someone else’s airbed. So Y Combinator provided $120,000 in funding to continue building Air Bed & Breakfast.

The business performance of companies in Y Combinator, however, remained unchanged at $200 per week. A regular mentorship relationship developed between Graham and the team during the program. As they looked through their New York listings one afternoon, they noticed something: almost all of the apartment photos had been taken on cell phones.

He suggested that Graham fly to New York, rent a camera, and spend time with the hosts so that he could take better pictures of their apartments. Despite its insufficiency and contrast with what they had observed in Silicon Valley, the founders decided to go ahead with this plan.

They also spoke with their hosts and fixed more issues found on the website after taking the photos in New York. This led Air Bed & Breakfast to quadruple its weekly revenue to $400, marking the first improvement in the business in months.

They knew they were on to something when they founded the company. They renamed the company Airbnb in March 2009 to avoid confusion with air mattresses. Sequoia Capital invested $600,000 in the seed round of the company one month later.

Founders Chesky and Gebbia, who lived in Airbnb for the next year after moving out of their apartment in 2010, illustrate their dedication to their business. To put it another way:

“I am either homeless, or I have 650 residences in San Francisco. It all depends on your perspective.”

There was no indication that the constant movement affected growth at the company. Airbnb was able to raise $7.2 million in its Series A round by late 2010. The company was by then operating in over 8,000 cities in 166 countries. Moreover, it booked 700,000 rooms, with 80 percent taking place in the past six months. Our topic is the development of hockey sticks.

A slew of imitators followed Airbnb’s lead by 2011, making it the darling of Silicon Valley. At the same time, entrepreneurs were branding themselves as the “Airbnb of … ” to attract investors (for example, DogVacay, “The Airbnb for Dogs”).

Meanwhile, competition from other countries emerged. For example, Berlin-based and Rocket Internet-backed Wimdu, which received $90 million in its first few months, became Europe’s Airbnb.

An Airbnb host’s residence was extensively smashed during a public inspection in July 2011, and all valuable objects were meticulously removed.

A spokesperson for Airbnb responded by helping her find a new place to stay. The company also provided a blanked $50,000 insurance policy against any damage done by guests (later increased to $1 million) and a 24-hour helpline.

Airbnb did not only have to deal with apartment destruction guests. Its global expansion has also caused backlash from cities themselves. Airbnb’s most extensive (and still ongoing) conflict has been with the town of New York.

A subpoena was issued in 2013 by the Attorney General of New York to Airbnb requesting information on over 15,000 residents with houses for rent.

Residents could only rent out their apartments for 30 days a year if they weren’t living in them. The new rules passed in 2010 limited the number of days residents could rent out their apartments.

The firm set out to screen out users performing unlawful activities and to collect tax owed by its hosts. Portland became the first city to implement the policy in 2014. San Francisco, its hometown, followed soon after (collecting the 14 percent hotel tax on behalf of users).

Airbnb’s marketplace grew so large in that same year that entrepreneurs could set up businesses on top of the platform. Startups such as Guesty and Properly raised millions of dollars in capital by cleaning, photography, and listing optimization services.

The primary objective of Airbnb’s new branding campaign was to promote different lifestyles, rather than specific residences, rather than the types of accommodation that you could rent.

Airbnb also launched a new logo, switching from light blue letters to a pink design depicting the symbiotic relationship between a heart and a home.

Some saw it differently. According to media sources, the new logo, dubbed the Bélo, resembled female genitalia instead of a warm and welcoming house.

Although a PR blunder slowed Airbnb’s hypergrowth surge, it still would not stop its fast-paced expansion. 

As of 2015, the company began to focus on other services and ventures outside of listing properties, such as business travel and experiences.

At that point, the company had raised thousands of millions of dollars and amassed a valuation of more than $30 billion. A better price for Airbnb would require it to identify additional categories within which to expand.

It acquired more than 500 corporate clients within the first 24 hours of opening, including big businesses like Google, Salesforce, and SoundCloud.

Airbnb also began collaborating with towns around the world. As a result, tourism taxes were first collected in some of the best-known tourist destinations, including Barcelona, Paris, and London, in 2015. The taxation contributed millions in additional revenues as well as other indirect benefits.

Airbnb (and its supporters) frequently claim that the vacationers attracted through the website help bolster the local economy by reducing the amount of money spent on hotel stays.

Therefore, Airbnb suggests that travelers form so-called clubs or groups of customers who advocate for Airbnb. Then, local officials would be met and tried to persuade them not to control the platform in any way.

Michael Nutter (Philadelphia), Annise Parker (Houston), and Stephen Yarwood (Adelaide, Australia) are three former mayors who have assisted Airbnb in promoting its presence locally.

Airbnb has also faced criticism, which is mainly led and funded by the hotel industry. They assert that fewer host businesses will avoid the necessary taxes since fewer hosts will operate like hotels.

Their postings are also said to have a detrimental effect on the supply and prices of homes. For example, the company’scompany’s rental of hundreds of flats to tourists would take them off the market because locals cannot afford them. In addition, Airbnb was more profitable to run (and still is) than other means of renting, so prices in high-traffic areas would often rise dramatically.

Nonetheless, it is essential to mention that many of the research papers and politicians who exposed these problems were actively supported and pressured by the hotel industry. Thus, the charges have not been definitively substantiated.

Many cities tightened their rules on hosts who violated them, however. For example, Barcelona fined platforms and hosts for breaking local laws, often requiring them to pay millions of dollars in fines. 

Amsterdam, for example, has simply limited the number of times its residents can rent out their flats each year.

Similarly, Airbnb’s platform also began to be politicized by 2016. Chesky and many other executives criticized the Muslim restrictions. 

Moreover, the corporation provided free shelter as part of its disaster aid program (originally designed to rescue and assist those affected by hurricanes and other natural disasters).

Additionally, the corporation punished a host with $5,000 after discovering that he had been racially discriminated against. A new regulation was even implemented that disqualified anyone engaging in discriminatory behavior from using the platform.

The public outrage against Airbnb led to its management receiving praise for its outspokenness and social awareness. The company consistently showed empathy toward hosts, local communities, and guests, unlike other Silicon Valley tech companies that fiddled with election results and fired employees who sexually abused their coworkers.

The firm was able to continue expanding its business because of its leverage along the way. For example, Airbnb acquired HotelTonight for $400 million as its largest M&A deal. Throughout the company’s history, it has completed 21 acquisitions related to travel.

A year later, Airbnb hosted its 500 millionth guest. Unfortunately, some of them were not able to survive. An Airbnb host in Melbourne, Australia, strangled his visitor to death after being unable to pay for his stay.

Airbnb Business Model

During a Halloween party thrown by an Airbnb in Oakland, five people died (and numerous others were injured). In response, the company took swift action to prohibit ‘party houses,’ including stricter screening and kicking out violators of guest rules.

During the Coronavirus outbreak in early 2020, all companies involved in the tourism industry were negatively affected. As a result, Airbnb announced in May 2020 it would be forced to lay off one-quarter of its workforce, or 1,900 employees, out of its 7,500 workforces.

This company demonstrated a conscience even under such challenging circumstances. Airbnb created a $250 million disaster relief fund to help impacted hosts recover some of their losses.

Airbnb has chosen to go public despite the negative repercussions it has endured throughout most of 2020. The company filed a confidential registration statement with the SEC in November 2020, which was completed by December 2020.

Airbnb currently lists more than 5.6 million apartments. Now, the company operates in over 220 countries and over 100,000 cities. Airbnb’s host community has made $110 billion in total earnings since the company founding, and its average income is $7,900 per year.

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Who is the Owner of Airbnb?

Airbnb’s S-1 filing contains another fascinating insight into its ownership structure.

Its founding team maintained a combined 43.8 percent share even after multiple investment rounds.

CEO Chesky holds the most power, showing 15.4 percent, followed by Gebbia and Blecharczyk, both with 14.2 percent.

Airbnb’s largest institutional shareholder, Sequoia Capital, owns 16.6 percent of the company. Sequoia Capital was an early investor in Airbnb, investing $600,000 in their Series A round in  2009. This second-largest holder controls 5.4 percent of the company, followed by Founders Fund.

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What is the Funding and Valuation of Airbnb?

The Crunchbase report shows Airbnb has raised $6.4 billion in venture capital over 19 rounds.

The company’s investors include Greylock,  Sequoia Capital, Founder Fund, BlackRock, Andreessen Horowitz,  etc.

A public offering of Airbnb brought in a valuation of $47 billion in December 2020 (following a $3.5 billion raise). Airbnb’s market value has stabilized at about $86 billion after its stock price initially surged to more than $100 billion.

What is the Revenue of Airbnb?

Airbnb’s annual revenue decreased 30% from $4.8 billion in 2019 to $3.4 billion in fiscal 2020.

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