Chances are high that you have a neighbor on your street or in your apartment complex who is an Airbnb host. Airbnb is an affordable and flexible travel option both for potential destinations and what you want to do when you travel. So how does Airbnb work? How does the company make money, and how does it give you an incentive to host and/or travel with Airbnb?
Airbnb makes money by charging fees to guests (upto 14.2%) and through commissions charged to the host (3%) for each booking. It operates on a peer-to-peer platform business model based on connecting guests and hosts.
Airbnb provides varying levels of service, experiences offered with the stay, and competitive pricing. Together these features provide a unique travel experience to all its customers.
Read on to see how Airbnb generates profits. In addition, discover how the company has positioned itself for explosive growth in the post-pandemic world.
Business Model of Airbnb
The business model of Airbnb began in the living room of two entrepreneurs nearly 15 years ago.
Origins of Airbnb
Airbnb started in 2007 when two friends had an idea to supplement their hefty San Francisco rent. Upon hearing that a massive conference was in town, they opened their home to participants who couldn’t find a hotel. Blowing up their airbeds, they charged a small fee for three guests to stay.
The roommates (Brian Chesky and Joe Gebbia) quickly discovered that they not only received needed income but also an idea for a service that was desperately needed.
They believed that a vastly untapped market existed for people looking to travel more economically. The challenge, however, was finding investors who were sold on the idea. Ultimately, venture capitalists shied away from it. What’s more, they were looking to do a startup in the turmoil of the 2008 economic crisis.
Their initial capital investment came from an unlikely source – collectible cereal! Amid the 2008 presidential election, Chesky and Gebbia concocted an eccentric plan. They created special cereal known as “Obama O’s” and “Captain McCain,” complete with customized packaging. This out-of-the-box idea wound up generating over $30,000 for them, enough for them to begin the initial phases of marketing.
The Product of Airbnb – Connections
Contrary to what investors told them, Chesky and Gebbia believed people were looking for alternative lodging. Their business model launched from the premise that people would be comfortable staying in strangers’ homes under the right circumstances.
Their product was not simply WHERE people stayed but HOW they stayed. The central mission of the organization was to help people make connections as they travel.
For Chesky (who is now the CEO of Airbnb), the greatest marketing tool of his business is selling the experience of traveling. When you travel, you want to see new things and meet new people.
The foundation of Airbnb’s appeal is in intentionally building relationships with the hosts where a traveler has their home base. It took the intimacy of a traditional B&B even further by staying in the host’s own house.
Airbnb offers dual advertising both to guests and hosts. Guests obviously pay the bulk of the cost. But for connections to work, Airbnb has to recruit and retain top-notch hosts.
Hosts are asked to provide details about where they live, photos of their home, and accept Airbnb’s policies on items such as cleanliness. The company also makes hosts aware that they need to know their local and state laws regarding permits, taxation, etc.
Airbnb encourages reviews for both guests AND hosts. For hosts, this is the primary way guests can see the quality of their listing. But hosts can also leave reviews for guests that other hosts can see.
This model aims to increase the quality of the relationships that are enjoyed in an Airbnb stay.
Airbnb Expenses and Plan For Profit
On the expense side, the top costs for Airbnb are administrative and tech support.
Before the pandemic, the company counted approximately 7,500 employees. Administrative overhead costs were reported to be approximately $175 million in the third quarter of 2019. Due to the drastic decrease in travel revenue during COVID, the company had to lay off over 1,900 employees. As of 2020, the company reported 5,597 employees.
In addition, the other significant expense is the company’s rapidly expanding technological platform. In addition to booking rooms, the platform allows guests increasing ability to customize experiences and other elements of their Airbnb travel. Most of the properties on their platform do not belong to Airbnb.
While still reporting a loss, Airbnb rebounded at the end of 2020 after a slow start. Despite not turning a profit, the company went public in 2020 to help increase its revenue streams. This was to boost the sagging travel industry, from which Airbnb’s income came solely from the service fees it collected from hosts and guests for each booking.
How Does Airbnb Make Money?
Until the company went public, Airbnb relied entirely upon its fees from rooms. For the fiscal year 2020, Airbnb generated $3.38 billion in revenue. Majority of their revenue comes from platform service fees charged to guests and hosts.
The following gives a short breakdown of each of their revenue streams:
When a guest books, the fee can run up to 14.2% of the booking subtotal. These fees are designed to help cover customer service and platform fees. But they also contribute significantly to the company’s profit margin.
The standard host fee is 3% of the subtotal booking cost. However, this rate increases for Plus Hosts and those who offer experiences (more below).
Experiences Service Fees
Hosts may offer additional services called experiences. These are activities designed to facilitate the company’s mission of increasing connections. Experiences can range from cooking classes to tours of local landmarks.
During the pandemic, online experiences were offered while in-person travel dropped substantially. Airbnb charges the host a 20% fee that covers things such as advertising and liability insurance.
Airbnb Funding, Valuation, and Revenue
The following table gives the previous two fiscal-year comparisons of revenue and adjusted EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization).
Equity – As of Nov 2021, Airbnb has 635.39 million shares outstanding, an increase of 134% over the last year.
The Future Potential of Airbnb
CEO Brian Chesky has made two substantive statements regarding Airbnb’s future coming out of COVID. First, he proclaimed that “great companies are defined by a crisis.” He also stated that the recovery of the travel industry would look more like a revolution in travel.
Like many industries post-pandemic, he believes strongly that a new business model is already emerging for Airbnb. This new model will not only help the company become profitable again. It will also ensure that Airbnb is on the cutting edge of travel innovations.
Here are some of the ways in which Airbnb looks to increase its viability and profitability:
Expanding the Core Mission
The original consumer question Airbnb sought to answer was, “Where are we staying?” Since 2016, the company has introduced a new question, “What are we doing?” This question drove the increased emphasis on experiences that have become a staple of the company.
Going forward, the company looks to address two new questions. These are “Where are we going?” and “How do we get there?” For Brian Chesky, the 10-year goal of the company is how to create a total end-to-end experience for the guest.
These questions come from the company’s read of its customers that they want additional services. These potential services center around giving guests resources to help them figure out their next vacation destination.
The company also envisions providing travel services on par with companies such as Expedia. This would allow them to directly compete with these companies while maintaining the core principle of building connections.
New Travel Frontiers
Chesky believes that the fundamental cause of this travel revolution is simple.
As COVID has shifted work habits, business travel has seen a sharp decline. Many people now benefit from more flexible work policies coming out of the pandemic. This allows people to work remotely and often enjoy longer weekends. These new work realities are contributing to a substantial rise in 2021 of shorter-distance leisure travel.
Airbnb has expanded to over 100,000 towns worldwide over its existence. However, in the U.S., these new travel habits mean that people are exploring towns within driving distance off the beaten path. Rural areas and places devoid of “standard” tourism are becoming more popular for Americans post-pandemic.
The company is in a prime position to capitalize on this travel revolution. Hotels are hesitant to invest capital into new brick and mortar in less-traveled areas. Traditional bed-and-breakfasts in these areas cannot compete with the marketing apparatus at Airbnb’s disposal. Airbnb can recruit hosts who already live in these areas and use their massive online platform to help people find lodging in these rural areas.
Airbnb has the tools in place to capitalize on Americans’ desire to finally get out of the house. And the company, with its long-term vision, has the opportunity to increase its profits over the long haul by facilitating a greater volume of tourists into new areas.
Growing Partnerships with Local Governments
A key strategy to Airbnb’s entrance into a given market is its ability to communicate its business model to local government leaders.
Specifically, Airbnb negotiates with cities regarding local taxes and regulations that hosts in that given area will need to know. As of 2016, Airbnb had agreements with 200 cities worldwide as to parameters for operating in those individual markets.
But as the travel market has drastically changed since the beginning of 2020, these partnerships can benefit local communities even more.
Tourism is rapidly becoming one of the leading industries in the U.S. In 2019, the World Travel and Tourism Council (WTTC) reported that tourism accounted for 8.6% of the U.S. economy, totaling nearly 17 million jobs.
Smaller and rural communities in the U.S. who are in decline due to the erosion of industrial and tech jobs are increasingly turning to tourism as a viable revenue generator.
A crucial component of tourism for any community is possessing lodging that is affordable, available, and of good quality. The business model of Airbnb has limitless potential for injecting this key ingredient into places that very likely could not support the traditional lodging model.
Doubling Down on the Core Principles
As Airbnb tackles the changing landscape of tourism, they remain true to themselves. Brian Chesky repeatedly said pre- and post-pandemic: “Make something people want.” Other company executives reiterated, “Airbnb is about community, not commodity.”
The profitability of Airbnb lies in its ability to understand itself, how it got to this point, and where it wants to go. The company consistently centers its marketing strategy around collecting, interacting, and making changes off of user experience.
As the company begins to increase its revenue once again coming out of the pandemic, it is doubling down on the qualities it seeks in both its employees and its hosts. These innovative characteristics put them in a prime position to make a rapid reascent in the travel market.
Some of those principles are as follows:
- Be a Serial Entrepreneur – Like the experience of the founders’ first capital generator, the company stresses an ethos of creativity and outside-the-box thinking. Not all ideas work, but Airbnb pursues a culture of looking at the big picture and taking risks to get there.
- “Every Frame Matters” – As the big picture is considered, the business model Chesky pushes is that the end-to-end experience is like a Walt Disney storybook. Every frame, every detail of the guest’s experience matters. From check-in to check-out, every nuance should make the guest want to come back for more.
- Everyone belongs – The company preaches to its employees that everyone should feel like they belong. Connections are not just important for the guests and hosts. The company can’t promote this connectivity to its customers unless those who shape the mission of the company also feel like they are valued guests as well.
Is Airbnb Profitable?
Despite its downturn during the pandemic, Airbnb is poised to take drastic leaps forward in profitability. It has the tools to be a leading innovator in recreating the travel industry. Its new standing as a publicly-traded company gives them the capital to establish new relationships in new places.
Conclusion: How Does Airbnb Make Money?
Airbnb has now become one of the most recognizable brands in the rental space.
With over 13 million listings, billions of room nights booked, and millions of reviews and renters, Airbnb is outstanding example of how to build a global business from scratch. Airbnb has given us so much insight into how the sharing economy works – and how to grow a business rapidly with innovative strategies and tactics.
Well, that about wraps it up for this case study. We hope this post helped you understand the way Airbnb makes money, and why that’s critical for you to know as an investor, customer or Airbnb host.
Basically, it boils down to the fact that Airbnb needs both home owners (suppliers) and guests (customers) to be successful, hence their practice of making owners and guests feel like they can depend on each other through exceptional customer service practices and leveraging technology.
We were actually really impressed with Airbnb (we’ve had great experiences using them and hope you do too!). The company and co-founders really have things figured out. Sure they’ve experienced controversy in the past, but now there’s little left to doubt — they’re making money hand over fist and their business model shows that this isn’t slowing down anytime soon.
If there is anything you would like to add or if you have any insightful questions, comments, or criticisms, please feel free to contact us.