The Airbnb Business Model – How Does Airbnb Make Money?

Executive Summary:

Airbnb is a platform that allows travelers to book apartments, hotels, and experiences entirely online. Accommodation and experiences (both online and offline) are provided by so-called hosts.

Airbnb makes money by charging a service fee to both the guests as well as the hosts. These fees range anywhere from 3 to 20 percent. Airbnb operates on a marketplace business model and as such caters to both buyers (guests) and suppliers (hosts) to build up liquidity.

Founded in 2008 and headquartered in San Francisco, California, Airbnb has grown to become one of the world’s most valuable online travel companies. It has raised $6.4 billion in funding and is expected to go public by the end of 2020.

What Is Airbnb?

Airbnb is an online vacation rental marketplace that allows travelers to book apartments (and other stays) from so-called hosts.  

The platform can be accessed via Airbnb’s website as well as its Android and iOS applications, which are available on mobile phones and tablets.

what is airbnb
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Once on the platform, users can simply specify the location they want to visit, the date duration, and the number of guests joining that trip.

Airbnb then spits out a number of offerings from which users can choose from. Users can set additional filters on aspects such as amenities (e.g. parking lot or bathtub), type of place (e.g. private or shared room, an entire place, or hotel room), price, and many more.

Airbnb offers 24/7 support as well as a guest refund policy in case there are any issues during the trip.

If travelers want to upgrade the quality of their stays, they can do so by opting into Airbnb Plus and Airbnb Luxe, respectively. Consequently, these offerings come in at a higher price point. Furthermore, working professionals can book long-term stays through Airbnb For Work.

Apart from stays, users can also book online and offline experiences. These include activities such as cooking classes, yoga sessions, city tours, photoshoots, and many more.

Over 150 million users are now part of the Airbnb platform. Moreover, the company works together with more than 4 million hosts and experience providers. This makes Airbnb one of the largest online traveling platforms across the globe, next to industry juggernauts like Booking.com and Expedia.  

A (Not So) Short History Of Airbnb

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

Chesky and Gebbia first met during their college studies at the Rhode Island School of Design. They both eventually graduated with a Bachelor of Fine Arts in Graphic and Industrial Design.

After graduating in 2005, both Chesky and Gebbia dabbled in a few roles, mostly doing freelance design work for others. In 2007, they moved to San Francisco to connect with the rising design community and the job opportunities that come with it.

The idea for Airbnb was born out of necessity, when Chesky and Gebbia, who ended up becoming roommates, we’re struggling to pay their rent.

Around the time, a local design conference was about to take place in San Francisco. Gebbia noticed that all the surrounding hotels were fully booked. He typed up an email to Chesky, suggesting to sublet their apartment to the designers flocking into the city.

They then created a simple website called airbedandbreakfast.com, purchased a few air mattresses, and placed them as beds in their apartment.

Soon after, they had their first 3 bookings. Each of the guests paid $80 in exchange for breakfast and a place to stay. They even offered a free tour of the city.

That 4-day stay netted them over $1,000 – and made the duo realize how big that idea could potentially be. All they needed was some technical expertise in order to further develop the platform.

That expertise came in the form of Nathan Blecharczyk, Gebbia’s former roommate and a Harvard Computer Science graduate.

Interesting side note: Blecharczyk’s former Harvard roommate Aaron Greenspan would later say that Blecharczyk was one of the world’s top spammers. He would design software that sent out millions of spam emails a week, making him enough money to pay his way through college (until he was shut down by the Federal Trade Commission when he was a junior).

Over the course of the next few months, they relaunched the site various times, but nobody seemed to notice. One of the launches occurred at SXSW, but they only ended up getting 2 customers – co-founder Chesky being one of them.

The team was repeatedly rejected by investors. On top of that, they had amassed close to $40,000 in credit card debt. Fueled by their desire to restore their one weekend magic of the initial conference, they decided to keep going.

The moment that ultimately ended up being the turning point for Air Bed & Breakfast became the 2008 Democratic National Convention (DNC) in Denver, Colorado. The team saw an opportunity to take advantage of an event that, in all likeliness, was going to attract masses of people.

To get some press coverage, the team started to contact niche bloggers that would be willing to write about their startup. This snowballed into even greater exposure and the founders ended up being interviewed by national news networks such as NBC and CBS.

While the press mentions gave Air Bed & Breakfast a boost, its effects were only short-term. To continue taking advantage of the political climate, the team decided to do what any sane travel platform founder would do: sell cereal.

Chesky and Gebbia utilized their design expertise to create fictitious cereals named Obama O’s and Capn’n McCain’s. They convinced a student at UC Berkeley to print 500 units of these boxes and, again, sent them to bloggers willing to advertise the boxes.

Soon after, they began selling the cereal boxes for $40 apiece. Within a matter of weeks, the team was able to sell $30,000 worth of boxes. The Obama boxes sold out instantly, so they ended up handing out the McCain’s for free with each purchase.

A few weeks later, the team got the chance to pitch their startup in front of Paul Graham, the founder of Y Combinator. After a lackluster pitch, the founders were ready to leave the room when Gebbia pulled out one of his Obama O’s that he carried in his bag.

After rehashing the story of their cereal endeavor, Graham simply responded “Wow. You guys are like cockroaches. You just won’t die.”

He said that if the team was able to convince people to buy $40 cereal boxes, they’d probably be able to convince them to pay and sleep on someone else’s airbed. With $120,000 in cash from Y Combinator, the team was able to continue working on Air Bed & Breakfast.

But even at Y Combinator business performance remained stagnant at $200 per week. In the program, the team had regular mentoring sessions with Graham. During one afternoon, when looking through their New York listings, they noticed something: almost all the apartment pictures were taken with mobile phones and thus offered very low quality.

Graham suggested to fly to New York, rent a camera, spend some time with hosts, and take better pictures of their apartments. While this suggestion was non-scalable and thus seemed counterintuitive to what the founders had seen in Silicon Valley, they ended up taking the trip.

In New York, they not only took the pictures but actually engaged with some of their hosts and discovered additional flaws the platform had. As a result, Air Bed & Breakfast was able to double its revenue to now $400 per week, their first financial improvement in months.

The founders knew they were up to something. In March 2009, they rebranded the company to Airbnb and got rid of any confusing association with air mattresses. A month later, the founders were able to raise their seed round, picking up $600,000 from Sequoia Capital.

The founder’s obsession with their business is probably best exemplified by Chesky, who, in 2010, moved out of the apartment he shared with Gebbia and decided to live in Airbnb’s for the next year. Or as he put it:

“I am either a homeless entrepreneur, or a guy with 650 homes in San Francisco. Depends on your perspective.”

The constant moving certainly didn’t seem to affect the firm’s growth. By late 2010, Airbnb was able to raise a $7.2 million Series A. By then, the company was already present in over 8,000 cities across 166 countries. It furthermore recorded a total of 700,000 bookings, 80 percent of which came in the 6 months prior. Talkin’ about hockey stick growth.

By 2011, Airbnb officially became one of Silicon Valley’s darlings – and the inspiration of many copycats. Around the time, upcoming startups were calling themselves the ‘Airbnb of …’ in hopes of attracting more investor attention (such as DogVacay, “The Airbnb for Dogs”).

Furthermore, competition in other countries started to arise. For instance, Berlin-based and Rocket Internet funded startup Wimdu had raised $90 million within months of inception to become the Airbnb of Europe.

Then, in July 2011, Airbnb faced its first-ever moment of public scrutiny. One of the firm’s hosts had their apartment completely trashed while all belongings of value were carefully extracted.

Airbnb responded by helping her to find a new place to stay. Furthermore, the company introduced a blanked $50,000 guarantee against damages to hosts (which would later be raised to $1 million) as well as a 24-hour support line.  

Unfortunately, apartment-destroying guests weren’t the only problems that Airbnb encountered along its path. Its increasing worldwide expansion led to pushback from cities themselves. Its most prominent (and still ongoing) battle has been fought with the city of New York.

In 2013, New York State Attorney General Eric Schneiderman issued a subpoena to Airbnb, demanding the firm to hand out information on over 15,000 residents that had put their apartments up for booking.

The legal fight was based on a state law that had passed in 2010. Under the new regulation, residents were limited to rent out their apartment for a maximum of 30 days if he or she wasn’t actually living in the place.

The aim was twofold: to weed out users that run illegal hotel operations and be able to collect the hotel tax they are due. To that extent, Airbnb started to automatically collect hotel tax with every booking made. Portland, in 2014, became the first city. San Francisco, the company’s hometown, followed weeks later (effectively collecting the 14 percent hotel tax on behalf of hosts).

That same year, Airbnb’s marketplace finally hit the scale that would allow entrepreneurs to build businesses on top of the platform. Startups like Guesty or Properly were able to raise millions of funding dollars themselves, providing services such as cleaning, photography, or listing optimization.

Airbnb underwent a major rebranding initiative to make its platform more welcoming to users of all sorts. Amongst others, the intention was to highlight the possible lifestyle users might experience as opposed to the individual homes they would book.

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Alongside the rebrand, Airbnb unveiled a new logo, changing it from the light blue letter writing to a pink design representing a symbiosis between a heart and a home.

Unfortunately, not everybody was seeing the same. Various media outlets picked on the new logo, named The Bélo, stating it would resemble female genitalia as opposed to a warm and welcoming home.

But even the media blunder would not be in the way of the hypergrowth train that Airbnb became. By 2015, the company started to diversify away from home listings towards other offerings such as corporate travels and experiences.

The team was able to raise billions of dollars by that time and amass a valuation of close to $30 billion. To eventually grow into that valuation, Airbnb had to find other verticals in which it could expand.

They were able to attract over 500 corporate clients, including tech companies such as Google, Salesforce, or SoundCloud, within the first 24 hours of launch.

Furthermore, Airbnb started to corporate more and more with cities around the globe. In 2015, it began collecting tourist tax in some of the world’s biggest tourist cities, including Barcelona, Paris, and London. The taxation contributed millions in additional income, on top of other, secondary effects.

While never scientifically proven, Airbnb (and its advocates) oftentimes argue that the travelers attracted through the platform can pump even more money into local economies due to the savings they generate when opting against hotel stays.

To that extent, Airbnb has supported the creation of so-called clubs, which are customer advocate groups that lobby on the company’s behalf. They would engage with local politicians and help convince them to not regulate the platform in any sort of way.

Airbnb even hired various former city mayors, such as Michael Nutter (Philadelphia), Annise Parker (Houston), or Stephen Yarwood (Adelaide, Australia), to push the firm’s presence in a few selected markets.

On the other side, Airbnb has received its fair share of criticism, which is mainly driven and financed by the hotel industry. Critics would argue that a selected number of hosts would run quasi hotel operations and oftentimes avoid the necessary taxation that came with it.

Furthermore, its listings would supposedly have a negative effect on housing stock and prices. By renting out to tourists instead of locals, dozens of apartments would effectively be taken off the market. And since renting via Airbnb was (and still is) financially more lucrative, prices in highly frequented areas would oftentimes increase exponentially.

It has to be noted though that many of the studies and politicians highlighting these adverse effects were heavily funded and lobbied by the hotel industry. So far, no conclusive findings were presented proving these accusations.

Nevertheless, that didn’t stop many cities to begin cracking down on hosts breaking local laws. Cities like Barcelona would fine both the platforms and hosts for violating local laws, urging them to pay millions in fines sometimes. Other cities, such as Amsterdam, simply decided to impose limits on how often hosts can rent out their apartments in a year.

By 2016, Airbnb’s platform also started to get politized. Chesky and many other executives were condemning Trump and other political leaders for the bans imposed on Muslims. The company even offered free housing to anyone affected by the bans via its disaster relief program (which was initially set up to rescue and accommodate people affected by hurricanes and other natural disasters).

The company furthermore fined a host $5,000 for racially discriminating against a guest of color. It even set up new rules on its platform that would immediately ban anyone that engaged in discriminatory behavior.

While Airbnb continued to face public backlash, its leadership was often met with a lot of positive reception for their outspokenness and social awareness. Compared to other Silicon Valley tech firms, which were busy manipulating elections or had employees being fired for sexually harassing their colleagues, Airbnb frequently showed empathy towards hosts, local communities, as well as guests. 

They used that clout to snap up several other startups along the way to continually expand their business. Its largest M&A deal became the acquisition of HotelTonight, which Airbnb acquired for about $400 million. The firm has made 21 more acquisitions in the travel industry to this date.

That same year, in 2019, Airbnb managed to check in its 500 millionth guest. Sadly, not all of them made it out alive. An Airbnb host in Melbourne, Australia, admitted to strangling his guest to death after he wasn’t able to pay for his room.

An even more tragic event occurred when 5 people were killed (and several more wounded) during a Halloween party hosted in an Oakland-based Airbnb. The company responded swiftly by banning ‘party houses’ through a set of measures, including more extensive screening protocols and immediate actions against users that violate guest policies.

At the beginning of 2020, Airbnb, just like every other company in the travel industry, was severely hit by the impacts of the coronavirus pandemic. In May 2020, Airbnb announced it would have to lay off a quarter of its staff, effectively terminating 1,900 of its 7,500 staff members.

But even in these trying times, the firm showed it has a consciousness. Airbnb immediately set up a $250 million relief fund to help its hosts absorb some of the losses they faced.

Despite the adverse effects that Airbnb has experienced during the majority of 2020, they finally decided to become a public company. In November 2020, Airbnb confidentially filed with the SEC to go public by the end of 2020.

Today, more than 5.6 million apartments are listed on Airbnb. The firm operates in 220+ countries and over 100,000 cities across the globe. Its hosts have earned a combined $110 billion across Airbnb’s lifespan and earn an average of $7,900 per year.

How Does Airbnb Make Money?

Airbnb makes money by charging a service fee to both its hosts and guests. The percentage that Airbnb applies is dependent upon who pays (hosts vs. guests), the location, length of stay, as well as the type of the service.

Airbnb has 2 different service fee structures. The first one, split-fees, entail both host and guest payments. The second one, host-only fees, simply require the host to pay.

For instance, hosts pay anywhere between 3 to 5 percent when renting out their apartment. Meanwhile, guests are charged an additional 10 to 14 percent on top of the booking price.

In a host-only payment scenario, which typically falls under hotel bookings, the owner would pay a service fee between 14 to 16 percent. Experiences, in the meantime, could cost hosts as much as 20 percent.  

While the fee structure may or may not seem steep, it actually falls in line with the prices that other platforms charge. Booking.com, for instance, requires hosts to pay anywhere between 15 to 20 percent in fees.

On top of that, other fees, such as payment processing, are applied. What furthermore differentiates Airbnb is its $1 million protection against property damage, which many other online platforms do not offer.

The comparatively lower fees and insurance are part of Airbnb’s marketplace business model. As an online marketplace, it needs to build up what most refer to as liquidity on both the supply and demand side.

On the consumer side, the company tries to evoke trust through its branding, carefully curated content (for instance, via highlighting a few of their unique stays), social proof (via user reviews), and by removing any friction from the booking process (bookings can be completed in as low as 10 clicks).

Once a marketplace reaches the necessary level of liquidity, it can begin to cross-sell into other industry verticals. Airbnb has done that successfully, for instance by introducing new products such as business travel or (offline and online) experiences.

In the past, it has been rumored that Airbnb might expand into additional verticals, including flight bookings (where it would compete against the likes of KAYAK and trivago) as well as running their own chain of hotels in selected areas.

Airbnb Funding, Valuation & Revenue

According to Crunchbase, Airbnb has raised a total of $6.4 billion across 19 rounds of venture capital funding. Some of the company’s investors include Sequoia Capital, Andreessen Horowitz, Greylock, Founder Fund, BlackRock, and many more.

At its private market peak in 2017, Airbnb was valued at $31 billion. Airbnb is currently valued at $18 billion as per the firm’s latest funding round (announced in April 2020).

The company is set to go public at a range of $30 to $40 billion. The final valuation will be announced once Airbnb prices its shares and is dependent on how the company’s revenues continue to evolve over the course of the next few months.

Talking about revenue: many investors were surprised by the income Airbnb reported in its S-1 filing. For the fiscal year 2019, Airbnb reported revenues of $4.81 billion (versus $3.65 billion in 2018).

For the first 9 months of 2020, revenue was $2.52 billion, down 32 percent from the $3.7 billion it reported in the first 9 months of 2019. Investors initially expected a greater decrease in revenues.

What became even more surprising was that the company, in Q3 of 2020, was able to generate a profit of $219 million. This showed a) how robust, even in a pandemic, Airbnb’s brand is and b) how easily the company can scale down its cost – a luxury many other travel businesses such as hotel chains and airlines don’t have.

Who Owns Airbnb?  

Another interesting nugget from Airbnb’s S-1 is the ownership structure. Its founding team, despite the large number of funding rounds, was able to retain a combined stake of 43.8 percent.

CEO Chesky takes the lead with 15.4 percent while Gebbia and Blecharczyk each come in at 14.2 percent.

Airbnb’s largest institutional shareholder is Sequoia Capital with a 16.6 percent stake. Sequoia was one of the first investors of Airbnb, leading a $600,000 Series A round back in 2009. The second largest is Founders Fund with a combined stake of 5.4 percent.

It has to be noted that Airbnb’s ownership structure will change to some degree once the company goes public. Some of the company’s investors and employees will want to cash in on their shares after years of work and commitment.

Viktor

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..