AirBnB Reshaping Travel And Tourism Industry: Beyond Peer-To-Peer Model

AirBnB has significantly altered the landscape of the hotel industry. Since its launch in 2008, AirBnB has brought the peer-to-peer economy model into social consciousness. The timing was perfect – a slowdown in the economy, maturing technology, and a stagnant hotel industry. AirBnB’s business model was predicated on connecting hosts and guests via a ubiquitous easy to use technology platform. They charged both parties a small percentage of the booking fee. AirBnB has grown exponentially to become the most valuable company in the hotel sector even surpassing more established corporate hotel chains like Hilton and Marriott. While lower end hotels are facing significant threat, AirBnB is extending an olive branch to them to be part of AirBnB’s platform. Regulatory, legal, and, competitive pressures notwithstanding, it is launching new series of products, extending its portfolio well beyond home sharing to specialized tourist and restaurant experiences. AirBnB’s platform of the future is projected to be like the internet retailer Amazon for the tourism and travel industry. The current eco-system will be unrecognizable in ten years as AirBnB successfully marches ahead with its plans.

Throughout history, man has travelled great distances for food, for purposes of trade, to avoid war or religious persecution, or economic gain. Hospitality industry became a business in 1758 when Cox & Kings introduced their first travel agency which was followed after almost 100 years by Thomas Cook. Hospitality industry evolved into the modern Travel and Tourism industry in the twentieth century. It is an amalgamation of accommodation, food & beverage, recreation & entertainment, transportation, and travel services. The industry has enjoyed the benefits of globalization and falling travel costs. Access to easier visa regimes, mobility options, and improving accommodation standards have contributed to the increasing penchant for travel – be it for pleasure, education, or business. Tourism and Travel is one of the largest contributors of global economic growth. In 2016 it contributed over $7.8 Trillion. During the same time, hotel industry generated around $550 billion in revenue. Tourism industry has been growing steadily and international tourist arrivals in 2015 reached 1.19 billion from 528 million arrivals in 2005. The number of arrivals is expected to cross 1.8 billion by 2030 contributed by specialized tours like ecological, medical, senior citizen, and wildlife tourism. As of 2016, there were about 15.9 million hotel rooms (“Overview of Marriott Business Model”, 2016). The demand as measured by two key factors Revenue per available room and Rooms supply Growth have grown steadily and has outpaced supply. The differential was especially acute during large events, in popular destinations, and in travel seasons.

Evolution of AirBnB

In 2007, Brian Chesky and Joe Gebbia were struggling to make ends meet. There was a design conference in San Francisco where they lived where there was shortage of hotel rooms. They took this opportunity to create a website airbreadandbreakfast.com that offered customers a new experience. They offered air mattresses and hot home cooked breakfast. The first three customers were found within days who slept on their loft floor and enjoyed a new experience in home sharing. That initial success spurred them on to creating a technology-based platform that allowed homeowners to share their spare rooms to travelers who were looking for a different experience – more than an impersonal hotel room. Brian and Joe brought in Nathan Blecharczyk to spearhead the technology solution. In 2008, during the Democratic national convention in Denver, about 80,000 people were expected to assemble and again there was shortage of hotel rooms. The three of them launched their new website AirBnB.com and had over 800 listings. While they did not make money off the website, the entire experience proved that their idea was worth pursing further.

Peer-to-Peer model

Concept of sharing goods and services dates back to 6000 B.C. From early civilization, bartering has been used for like valued items between people. The first ever hoteling accommodations dates back to 13th century and were offered by religious monasteries. Bartering and Cooperatives were formed from the fundamental principle of sharing. This has evolved over time when individuals have shared goods and services for a conceived market rate. Private parties used to rent their homes based on recommendations from friends and family. Availability, price, and terms and conditions were usually agreed verbally. The latest incarnation of the shared economy is the peer-to-peer model as adopted by AirBnB. Alex Stephany in her book The Business of Sharing: Making it in the Sharing Economy defines the sharing economy as “the value in taking an underutilized asset and making them accessible online to community leading to reduced need for ownership of those assets”. It tends to increase overall asset utilization in the economy. AirBnB differentiated itself from other industry offerings by a) Intermediating between the customer and provider through a technology platform b) providing the trust factor c) establishing service levels in advance to reduce surprises and anxieties and d) ensuring appropriate checks and balances by establishing a consistent quality rating and review system.

Over the past 10 years, AirBnB has grown to a company with a market capitalization of about $38bn, operating in 81,000 cities across 191 countries with over five million lodging options. About 164 million guests is expected to have used AirBnB facilities by end of 2018.

AirBnB business model

AirBnB uses an Aggregator business model. AirBnB creates a marketplace by connecting homeowners with travelers. Owners who wish to rent out a part of their house or their entire property registers with AirBnB. Guests search on a mobile or online platform based on their location and preferences. Both the owners and guests are initially vetted by AirBnB to create a trusted shared platform. There are five elements to the AirBnB business model – Customer Segment, Trust, Revenue Model, Regulations, and Retention.

Customer Segment

There are three main customer segments for AirBnB – hosts, travelers and free-lance photographers. People who wishes to rent out a part or their entire house, provides property details, availability, and listing price of their available space. Hosts also add any interesting facts about themselves and their property – be it information about their pets, their hobbies, or the location. This attracts a certain target segment of the travelers who are likely to prefer them over other similar listings purely based on these personal details. Superhosts are those who have achieved a certain status with AirBnB. Being a Superhost badge increases the benefits by 22% compared to other hosts

Travelers. Individual travelers, business travelers, or families search for available properties based on their preferences, time, and location. All available properties are showcased on a user-friendly platform. The traveler has the option to contact the host via the AirBnB platform. The platform ensures that the contact details are hidden to ensure that AirBnB’s interests are protected. Once the traveler decides on a property, payments are made through a secure gateway and handled by AirBnB.

Freelance Photographers. AirBnB engages freelance photographers in all major cities to ensure that their properties get better responses. These photographers curate and assemble an authentic representation of the property and its environment in an aesthetic and beautiful manner. These photographers are paid by AirBnB directly, but is charged to the hosts as additional service.

Trust

AirBnB’s business model is predicated on ensuring that both sides of the marketplace feel comfortable and secure with the transaction. The hosts want to ensure that the guests they are inviting to their house will maintain the house clean and secure. Likewise, guests want to ensure that their privacy is maintained while staying in a comfortable setting. AirBnB achieves this through a registration process for hosts and guests. The parties have to provide government issued identification that is used for running several background checks against terrorist and other watchlists. AirBnB also runs safety workshops for hosts to ensure they are prepared for eventualities including fire and carbon monoxide. Account transactions including payment information is stored securely. In June 2017, AirBnB acquired Trooly that provided identity verification and trustworthiness score based on personality and behavior traits. Even before a transaction between a host and the traveler is completed, AirBnB’s predictive risk scoring model identifies potential suspicious activities.

Revenue Model

The collaborative consumption of services in this peer-to-peer model allows AirBnB to generate income primarily through the booking fee it charges its customers and the hosts. The hosts pay a flat 3% service fee for every booking and in addition also pay a 3% payment processing fee similar to how credit card companies charge merchants for use of their system. The guests are charged anywhere from 0 to 20% transaction fee. Depending on the jurisdiction, appropriate taxes are charged as per the country regulations. Currency exchange rates, if any, are determined by AirBnB at the time of booking.

Regulations

As AirBnB continued to grow within the US and expand into other regions of the globe, the company faced mounting pressure from regulators and the hotel industry. The reasons for these regulatory pressures were many – from city zonal development plans, traffic and social service’s needs, to increased property values in tourist spots. Hotel Association of New York city projected a $2.1 billion loss to the Hotel industry, tax revenue loss of $226 million, and loss of 2,800 jobs due to AirBnB.

Specifically, few cities like New York, Santa Monica, Barcelona, Berlin, and Paris have come down heavily on AirBnB to register their properties or face being de-listed. For example, in New York city, AirBnB hosts cannot advertise as it violates New York Multiple Dwelling Law. Likewise, Berlin banned hosts from renting out their properties unless they occupied at least 50% of the property. Spanish regions like Catalonia upped the ante by putting more restrictive regulations that prescribed by Spanish Urban Tenancy Act.

The impact of these regulatory pressures was reduction in AirBnB’s growth when the regulations were passed. It was found that the number of listings fell significantly in Berlin and Santa Monica fell by 49% and 37% after heavy fines were levied in 2016. The same report analyzed the regulatory impact and found that while the listing went down across some of the major cities, the most impacted for rental of full property than shared property or room. The impact of these regulations is somewhat inconclusive. If the cities targeted the hosts, then it had a direct impact on the number of listings. If the regulations were directed at specific areas or city centers then the impact was felt across the lodging industry.

Regulations are growing and becoming more punitive. Amsterdam, Japan, and other cities in the United States are introducing stricter regulations in 2019. To counter the growing regulatory pressures, in June 2018, AirBnB partnered with real estate agency Century 21. This allowed renters to avoid time limited restrictions imposed on AirBnB. This enabled AirBnB, Century 21, and the hosts to generate new revenue based on services rendered. Century 21 can become a strong marketing channel for AirBnB in the future.

Retention

During the initial phases of AirBnB’s growth, the company focused on the supply side to ensure that there were enough hosts and that they appealed to potential customers. They hired professional photographers to ensure that the listed property was attractive and pleasing to the eye. As the number of customers grew, they relied heavily on digital and social media marketing. The focus shifted to addressing the customers from the demand side. Guests provided feedback on what they wanted and how they wanted. To address cleanliness of the host property, AirBnB offered cleaning and laundry services. AirBnB’s Engineering and Data Science group believed that trust is an indirect but a key factor in improving retention. There are three elements of trust that influences the behavior and stickiness of both hosts and guests - Fostering Identity of the hosts, providing 24x7 customer service thus improving confidence, and finally connecting communities across the globe.