Airbnb has risen from its founders’ bedroom to becoming one of the largest players in the travel industry. In 2021 alone, the company generated close to $6 billion in revenue.
The reason for Airbnb’s impressive ascent is multifaceted, to say the least. However, part of it can be explained by the competitive advantages it has created throughout its existence.
In short, Airbnb benefits from three distinct competitive moats, namely network economies, strong branding, and the ability to attract and retain the world’s best talent.
We will be analyzing Airbnb’s competitive advantages through the lens of Hamilton Helmer’s 7 powers, which detail how companies are gaining an edge over their contemporaries.
World-renowned tech executives including Reed Hastings (founder and CEO of Netflix) as well as Patrick Collison (CEO and founder of Stripe) have leaned on Helmer’s framework to devise the strategy for their respective businesses.
The 7 powers include: scale economics, switching costs, cornered resource, counter positioning, branding, network effects, and process power.
However, I will only analyze the powers that are applicable to Airbnb’s business. Scale economies, for example, are normally how manufacturing companies producing physical components separate themselves from the pack.
So, without further ado, let’s take a closer look at each competitive advantage that Airbnb possesses.
1. Network Economies
Far and beyond the most important aspect of any online marketplace (and many tech businesses as a whole) are network economies.
The value of the service is enhanced with each new user that joins said network. As a result, the more users a platform onboards, the better the overall experience becomes.
Airbnb, which is a two-sided online marketplace connecting travelers and hosts, is no exception to that rule. In fact, the network effects it has amassed have been far and beyond the most important reason for its sustained dominance.
More precisely, Airbnb benefits from cross-border network effects. One additional rental unit makes the product more valuable for travelers all across the globe.
According to data provided by Airbnb, there are currently over 4 million hosts and 6 million active listings on the platform. Additionally, the platform is active in 100,000 cities and towns across 220+ countries.
In contrast, the competitors of Airbnb, which include platforms like Booking.com and Expedia or indirectly hotel chains, can only partially compete with its extensive supply (at least when it comes to accommodations owned by individual people; not necessarily hotels and vacation homes).
However, it has to be noted that many hosts do in fact list on multiple platforms to increase their own chance of having a place booked.
So, why is supply this vital in a marketplace setting? In essence, the more supply of high-quality accommodations is made available, the greater the chance of facilitating a sale.
This concept is commonly referred to as marketplace liquidity. If you can fulfill a customer’s demand, regardless of how obscure it may be, it increases the chance of said customer returning (granted the experience itself was enjoyable as well).
More satisfied customers, in turn, prompt more hosts to either join the platform or continue using it. And it also increases the defensibility of Airbnb’s business because hosts that regularly receive bookings are less incentivized to join competing platforms. The same applies to travelers who may be using Airbnb more frequently.
The average U.S.-based host on Airbnb earns close to $14,000 per year (~ $1166 / month), which indicates that many are not very active on the other platforms since the number likely excludes the fees (around 3 to 5 percent) that they have to pay to Airbnb.
Airbnb’s network effects also come into play when it comes to the site’s reviews. The more and better reviews a given property amasses, the likelier a traveler is to book it (again feeding into the liquidity aspect).
Over the course of its existence, Airbnb has increased the amount of data it collects from travelers to better understand the quality of a given listing, which it then uses to provide more relevant recommendations.
And some of those data points can be huge competitive differentiators. In August 2021, for instance, Airbnb began collecting the Wi-Fi speed of its listings as travelers started to use the platform to reside longer at a given place.
To my knowledge, no other accommodation platform has begun to display or even collect said information. As a result, Airbnb is likely the platform of choice for many remote employees and founders (like myself) who travel while working.
Another huge benefit of network effects that Airbnb has profited from is that they lead to substantially better unit economics.
Since the participants in the network are the ones attracting each other to the platform, Airbnb can effectively decrease its marketing spending, which otherwise would go towards enticing new customers and hosts to join.
Interestingly, this is exactly what happened. In March 2021, Airbnb announced that it had cut its performance marketing spend by $662 million. During Covid, Airbnb had reduced its advertising spending by more than half and still generated 95 percent of its usual traffic (part of that is also tied to its strong branding, which we’ll examine later).
On the other hand, Booking.com and Expedia spent an estimated $2.9 billion on Google ads in 2021 alone.
Lastly, network effects and high engagement also allow a platform to cross-sell into other products and services.
Experiences on Airbnb are such an example. The millions of users on Airbnb incentivize people on the supply side (experience providers, in this case) to join instead of going for competing platforms.
In the past, Airbnb contemplated utilizing its existing demand to cross-sell customers into other offerings such as flight bookings. It eventually put those ideas to rest to focus on its core business.
However, it wouldn’t be unfathomable to assume that similar plans remain in the idea backlog. Alternatively, Airbnb could also allow hosts to advertise on its platform, which is a common monetization tactic among marketplaces like Amazon or DoorDash.
The second power that has allowed Airbnb to differentiate itself from the competition is its strong branding.
According to Helmer, a company with branding power enjoys a greater perceived value, which thus allows it to charge higher prices compared to similar offerings.
A brand is able to charge higher prices due to two reasons:
- Affective valence: the brand elicits good feelings, distinct from the objective value it brings to the table
- Uncertainty reduction: customers can have peace of mind knowing that the money they pay will be well spent
Unfortunately, data on whether Airbnb is indeed charging higher prices than its competitors is not available. After all, pricing properties is inherently complex while data is opaque due to the variety of inputs (e.g., location, size of apartment, amenities, etc.) involved.
Nevertheless, there are some data points that support Airbnb’s strong brand presence. A study by MarketingWeek found that Airbnb has the strongest advocates of any brand, even scoring above the likes of Apple or Disney.
Additionally, Clever Real Estate surveyed 1,000 people and discovered that 60 percent of leisure travelers prefer the platform over hotels.
And Airbnb itself, in August 2022, questioned its own hosts. Globally, 45 percent of them stated that the additional income from the platform allowed them to stay in their homes during 2021.
But how did Airbnb achieve such brand admiration? It all started in 2014 when the company unveiled a completely new brand identity.
The premise behind the rebrand was to foster a greater sense of belonging. While other platforms were marketing themselves simply as a cheap and convenient option, Airbnb began to tap into the aspirational nature of human beings.
Promoted by the ‘Belong Anywhere’ slogan, Airbnb started to highlight the lives of its customers who used the platform as a vehicle to immerse themselves in the places they traveled to.
Meanwhile, it would do the same with the hosts on its platform. Airbnb’s YouTube channel, for example, features multiple videos during which the company shows how hosts are benefitting from using it.
The product itself, to this date, continues to tap into that very same aspirational need. While sites like Expedia are plastered with a variety of different products, Airbnb keeps it simple.
Users landing on its homepage are immediately presented with a wide selection of unique stays that you likely cannot find on other platforms.
Almost similar to a shopping site, this invites users to simply browse the website and get lost in dreaming about staying at some of those places.
And there’s some data that backs up that level of engagement. According to Similarweb, the average Airbnb user visits almost 19 pages while it’s between 7 to 9 pages for sites like Booking.com or Expedia.
Additionally, Airbnb tries to do its best to ensure that the overall product experience is enjoyable as well. Hosts, for example, receive regular training sessions.
Simultaneously, both the guest and host are protected by Airbnb through a set of insurance policies. The host’s liability insurance, which is a part of Airbnb’s AirCover for Hosts offering, provides them with up to $1 million in coverage.
This directly ties into the above-mentioned uncertainty reduction aspects, giving both guests and hosts piece of mind and providing them with a clear incentive to remain with Airbnb.
Lastly, Airbnb is also world-class at reacting to crises that is either internal or external to the company.
For example, in 2016, it came out that hosts on Airbnb were discriminating against people of color, effectively refusing to rent out their apartments to certain guests.
Airbnb put on a PR masterclass by not only banning said hosts from its platform but adopting different policies, such as a team dedicated to fighting any form of bias, to curb discrimination on its platform.
Additionally, it launched a very vocal campaign dubbed We Accept, highlighting its commitment to inclusion and community over maximizing profits.
Airbnb has also been quick to react to crises that are external to its business. In 2021, the company set up homes for 20,000 Afghan refugees after the U.S. pulled its military presence from the country. A few months later, it did the same for 100,000 Ukrainians fleeing the war.
And yet again, there is some data that points towards the increase in brand equity as a result of those initiatives. A study carried out by YouGov, which polled close to 14,000 consumers, found that Airbnb’s social initiatives improved the opinion customers have of the company.
All of the above-highlighted initiatives have allowed Airbnb to not only become one of the most beloved travel brands but one of the most popular companies in tech as a whole.
3. Cornered Resources
The last of Helmer’s 7 powers that apply to Airbnb is cornered resources, which means that a business has preferential access to a coveted resource.
In tech, skilled employees, namely designers, software engineers, and product managers, are the name of the game.
According to Comparably, Airbnb has the second-highest employee retention among its competitors and ranks higher than the likes of Booking.com, Tripadvisor, Expedia Group, KAYAK, and so forth.
Among its big tech contemporaries, Airbnb employees are some of the most loyal and stay on with the firm for 2.6 years on average (data from 2018, though). That same year, Airbnb received 180,000 applications for just 900 open positions.
Back in 2015, Airbnb dethroned Google as Glassdoor’s best place to work. While the firm’s rating on Glassdoor has since decreased slightly, 85 percent of employees would still recommend working at Airbnb to a friend. For reference, it’s ‘only’ 76 percent for Booking.com and a mere 58 percent for VRBO.
But how is Airbnb able to attract and retain world-class talent? It all starts with its leadership, more specifically CEO and founder Brian Chesky.
A designer by training, Chesky has been instrumental in championing the focus on brand, design, and usability.
Alex Schleifer, Airbnb’s Chief Design Officer, said the following in a company-internal interview when asked about the role Chesky played in Airbnb’s success:
“Brian is a designer, founder, and CEO but more than that, he is the biggest champion of our mission and culture. He understands that we need to transform the customer journey and has been closely involved in creating the structure and mechanisms that can drive that. Brian and I have partnered closely throughout my career at Airbnb, and I don’t see that changing much. We’ll just be fixing a new set of problems.”
Research has shown time and time again that founder-led companies outperform those that bring on external leadership. All of Airbnb’s founders remain deeply involved in the firm’s day-to-day operations to this date.
Additionally, having a direct line to the leadership team also leads to greater loyalty and satisfaction among employees.
The leadership team also repeatedly listens to the needs of its employees. In April 2022, for example, Airbnb announced that it would become a fully-remote workplace while granting its employees up to 90 days of international work & travel in a year.
Its relentless focus on doing right by its staff was also evident during the company’s biggest crisis: the Covid pandemic.
Airbnb was forced to lay off 1,900 of the company’s 7,200 employees, equal to 25 percent of its entire workforce.
CEO Chesky not only announced the unfortunate move in a personal statement but made sure each departing worker would have a one-on-one, personal conversation with a senior leader at the firm alongside generous leave packages.
And while some would inevitably be discontent with those layoffs, they ultimately showed how to treat your (former) employees the right way – one of the reasons for Airbnb’s sustained dominance.