Airbnbs Business Model, Business Strategy, Challenges, and Opportunities - Case Study Example

A Critical Evaluation of Airbnb’s Business Model, Business Strategy, Challenges, and Opportunities Introduction Airbnb, a company based in San Francisco, operates a website that assists customers in renting out accommodation services such as apartment, house, or room to other people. Below is the advertisement from the website (Tate, 2015, p. 161): Airbnb is a trusted community marketplace for people to list, discover, and book unique accommodations around the world—online or from a mobile phone. Whether an apartment for a night, a castle for a week, or a villa for a month, Airbnb connects people to unique travel experiences, at any price point, in more than 26,000 cities and 192 countries. The company’s business model is focused on assisting people turn their lodgings into something profitable. It is an uncomplicated, appealing idea: earn profit in a secure, innovative manner while paying for negligible costs. Airbnb is not asking other people to buy the property itself. To take part in Airbnb one does not have to sell his/her house. Access or service is the only thing for sale. Airbnb assists its customers in selling accommodation services to other people. Sellers have to register their property or asset on the company’s website and provide descriptions of it (location, quality, history, and so on), the different components or aspects that contribute to the service, and ultimately the price (Edelman et al., 2014). It is an unfussy business facilitated by the capabilities of social networking and the World Wide Web. Apparently, the concept of getting the most out of one’s property or assets is incredibly appealing. This essay critically explains and analyses the business model, strategy, opportunities, and challenges of Airbnb. Airbnb’s Business Model and Strategy Similar to numerous other start-up businesses, Airbnb lacked a business model at first. Nathan Blecharczyk, Joe Gebbia, and Brian Chesky were the founders who tried not to make payments a negative feature of the business. Hence, at the outset, they offered Airbnb free of cost. The website links those with room in their houses to those seeking vacation rentals (Lane, 2014). The company has persistently enlarged the kinds of spaces available, from private houses to private isles. By linking people to people, it attempts to offer a satisfying private experience in a foreign land—quite distinct from an unknown hotel space. In 2008, soon after introducing the business, the three founders made a decision to buy their own product and use their own service (Fisk, 2014). The experience of sleeping and staying in the living room of another person was amazing. Yet, when it is time to leave, a quite uncomfortable moment comes—getting the money and paying for the accommodation services. The founders observed that this act in some way damaged the welcoming and pleasant rapport they had developed with their host. Such experience was a turning point for Airbnb. By incorporating fees and other charges into the company’s website, they were able to get rid of the discomfort of the act of paying (Qin, 2010). By offering online payments, they in fact made the website more appealing as a service. The Chief Product Office (CPO), Gebbia, explains: “Facilitating easy, web-based payments is one of the most important aspects of the whole Airbnb experience, which is about a community sharing unique and exciting spaces” (Schlie et al., 2011, p. 2). The online payment scheme also enabled Airbnb to put charges on the transaction. This is the current business model of Airbnb. The website of Airbnb offers a search engine, which connects guests to properties, addresses possible issues, and determines prices. The company carries out several significant processes which facilitate the development of trust between the involved parties, like rigorous verification of identity (Semmelhack, 2013). To take advantage of the company’s online services, site guests look for listings in places they want to visit. After picking an accommodation, they can communicate with the host to ask about anything related to the rental service. Afterwards they pay the rental fee in full via PayPal or credit card. The company keeps the payment until the visitors check in, making sure that they are not scammed and that the visitors are accommodated well (Tate, 2015). Hosts register their assets or properties on the company’s website. The company urges hosts to disclose important details about the property and themselves and recommends an expert photojournalist for their property. Hosts with detailed information and high ratings get a larger number of customers. Through the website, hosts and guests can authenticate each other’s phone number, passport or driver’s license (Wheeler, 2014). The guest and the host discuss about the most agreeable way of accessing the property. Then, the hosts and guests provide feedback on the website; hence there is a high motivation to provide a satisfying experience because negative feedback implies less capacity to take part in the market for both guests and hosts. The company also routinely offers insurance to majority of its hosts and seldom receives claims (Rifkin, 2014). The history of Airbnb demonstrates that it usually takes innovation, testing, and time to choose the appropriate business model and bring it into line with the entire value proposition (Tate, 2015). In truth, the entire activity of acquiring the needed resources and enhancing the service was deeply challenging and demanding, with numerous hindrances in the process. The launching of Airbnb was financially supported by profits earned from selling recycled cereal cartons with a Barack Obama drawing at the Denver Democratic Convention (Ken, 2014). Airbnb is a good illustration of a website that has involved stakeholders and has developed a sustainable and socially responsible business model. The history of e-commerce has been a very challenging pursuit which has produced numerous success stories but also numerous failures. Entrepreneurs have sought means to generate profit on their website, as a unified, trouble-free component of the whole online experience (Botha et al., 2008; Qin et al., 2014). Airbnb belongs to a larger movement, known as the ‘sharing economy’. Across the globe, people are selling temporary access to their private dwellings, their garage, their car, etc. Those who have assets, resources, or properties take advantage of digital clearing houses to make the most out of the vacant and idle capacities or spaces they already have, and customers pay rental fees to their peers instead of paying or using the service of a company (Schor et al., 2015). From an unconventional movement, the sharing economy has expanded globally and currently earns billions of dollars in profits. Airbnb defies the traditional business model of the hospitality industry. Airbnb is a “peer-to-peer accommodation rental” (Baker, 2014, p. 65) business, a case in point of an open market business model, connecting asset owners to tourists looking for a transient accommodation. Basically, Airbnb works as an in-between, facilitating the transaction between asset owners and tourists. The company maintains the website which enables communication between parties, provides customer service, processes payments, offers protection for the hosts, and enhances security through rigid verification procedures (Wilkinson, 2015). Airbnb does not have any assets or properties, but depends on property-owners wanting to gain profit from their unused resources, like private dwellings. Different from conventional hotels, the company grows not by efficiently handling inventory but by expanding the community of tourists and hosts and connecting them to one another (Rifkin, 2014). The company started from 100,000 guests in 2009 to 750,000 in 2010 and more than a million guests booked in 2011. By 2013, Airbnb was already operating in 33,000 cities in 192 countries across the globe (Galliani, 2014, para 3-5). On a daily basis, the company assists roughly 150,000 guests in renting private homes, rooms, and other types of accommodation—a sizeable number in comparison with the 600,000 rooms of Hilton scattered across the globe (Galliani, 2014, para 5-6). The business model is inspired by brokerage and is commission-based. Airbnb gets a 3% commission from the host and 6% to 12% from the guest, depending on the property’s quality and price (John, 2012). Hosts and guests can give feedback or rating to each other, hence bolstering the quality of and confidence in the service. Fundamentally, Airbnb shows that a business model does not have to be complex. The pitch deck of the company contained a simple slide that provides a thorough explanation of Airbnb’s business model. As stated there, “We take a 10% commission on each transaction” (Schlie et al., 2011, p. 2). Afterwards, the slide specified that, according to its sales history, the Airbnb obtained approximately $20 for every transaction. This revealed an interesting fact to the company’s venture capitalists (Reuter, 2011), for they could instantly realise that a million transactions would guarantee that the business becomes a remarkable feat. Opportunities and Challenges for Airbnb to Stay Competitive in the Market In order to appropriately identify and examine the opportunities and challenges for Airbnb, SWOT analysis and Porter’s Five Forces Model are used. A SWOT analysis is a straightforward but extensively applied tool that aids in identifying the strengths, weaknesses, opportunities, and threats surrounding an enterprise or business operation (Warner, 2010). Likewise, Porter’s Five Forces Model is a simple tool for identifying and analysing the competitive position and strength of a company (Williamson et al., 2013). SWOT Analysis Airbnb’s business strategy has several internal strengths. First is the number of its available channels. The company reaches its target customers through word-of-mouth, PR, and online advertising. Airbnb has greatly focused on word-of-mouth and has been largely successful. The founders realised that if they provide good customer experience there would be a considerable likelihood that their customers would spread the word (Baker, 2014). The company has also given customers access to social sharing mediums to boost word-of-mouth. Airbnb is also highly competent in PR, particularly during its initial operations. The founders are impressive narrators who have taken part in numerous press events and conferences. Most importantly, the company is also quite focused on its online marketing and its advertisements can be seen via a broad system of affiliate sites and leading search engines (Ken, 2014). Second is Airbnb’s relationship with its customers. The company strives to deepen its relationship with property-owners and renters both offline and online. Customers have numerous options for platforms where they can avail rental services in either apartments and homes or hotels. Hence the company goes to great lengths to ensure their customers had a satisfying experience. Airbnb believes that maintaining a community of loyal customers would generate profits for numerous years to come. Third strength is its revenue streams. The company earns the bulk of its profits from commission from property owners and renters (Cohen & Kietzmann, 2014). It tries to sustain the competitiveness of its commission to prevent customers from shifting to offline transactions. Fourth, Airbnb is recognised for having the finest team in the technology industry. On the product development arena, the company is continuously enhancing its platform by means of advanced methods. Moreover, the company has country managers for its bigger markets who perform continuous offline and online activities to produce a sense of engagement and community from asset owners (Ken, 2014). By doing this, Airbnb boosts the loyalty of their customers to the company. Other known competitive features of Airbnb are high reputation; attractive branding; availability of truthful feedback from previous renters; established sales and distribution network; existing niche; affordable transaction fee; wide-ranging customer market because of shorter rental time duration choices and housing choices; and, global presence (Dixon & Walsman, 2014). Airbnb also exhibits internal weaknesses. First is the difficulty of managing and sustaining the company’s massive number of customers, host networking, and technology; second is high level of competition (e.g. HomeAway, Wimdu, 9flats, Expedia) and availability of other competitively priced services in the industry (Martinez-Lopez, 2013). Other noticeable internal weaknesses of Airbnb are the effects of unfavourable feedback on the company’s reputation and integrity; few upgrades or enhancements to website since the launching; risk to investors because of potential damages to properties; and, extremely broad portfolio (Mullins, 2014). On the other hand, the opportunities available to Airbnb are social media promotion and marketing which is more cost-effective, convenient, and easily manageable option; wider online endeavours and mobile alternatives; physical/actual offices; expansion in new foreign cities or countries; tie-up with other businesses in the same or different industry (e.g. transportation, tourism); expansion of processes and options for short-term rental; and expansion of market for business travellers and/or discount tourists (McKean, 2014). But then, Airbnb is also confronted with external threats. Some of the most observable are the demand to aggressively push the company’s high credibility and reputation, whether by means of innovation or advertising; technology restraints, such as problems with servers, issues with service providers, and so on; time demands because of a negligible overhead and huge volume of hosts and guests; increasing competition and continuous innovation and growth of others like Hotwire and Expedia; and some countries prohibit Airbnb services without authorisation, which, consequently, restricts the company’s pursuit of expansion (Lane, 2014). Based on this SWOT analysis, it becomes apparent that Airbnb has to modify its business strategy and refocus it on acquiring larger market share. The rapidly growing competition should push the company towards greater innovation, product development, and community management. Moreover, Airbnb should expand its market base by developing a more precise portfolio of accommodation services, enhancing accessibility through different mobile devices, and continuously improving the website. Porter’s Five Forces Model Porter’s Five Forces is used to determine the opportunities and strengths of a business organisation. Strategic analysts usually apply this model to determine the potential profitability of new products/services. Airbnb is the most current sign of the growing discontinuity in the industry of travel accommodation. Airbnb and other online in-betweens are capable of offering diverse options, real-time communication mediums for sellers, and fast and easy access to important information (Tate, 2015). In contrast, the traditional travel intermediary provides negligible added value. Due to this, businesses in the travel industry have almost singly spent resources on Information Communication Technology (ICT). The threat of new entrants is somewhat modest for Airbnb. To the outsider it appears that there are very few entry barriers and that anyone who wants to set up a similar business can do it anytime, anywhere. However, Airbnb is extensively financed and doing business in 192 countries. New entrants will have to obtain sources of massive capital and rival the corporate reputation/brand equity of Airbnb in order to become a threat (Galliani, 2014). Most likely, a potential new entrant does not have the positive feedback loop link to the network impact achieved by Airbnb. The company is being challenged by competitors that impose lower premiums for registering or making listings on their website, yet such measure would probably lower the quality of the product and/or service, unless they can find or create other sources of revenue (Galliani, 2014). Threat of substitutes is fairly high, due to the absence of switching costs. Customers have substantial leeway or freedom to shift to traditional travel accommodations or even to another alternative similar to Airbnb. For instance, Couchsurfing.org has already reached remarkable scale, but not the level of profitability attributed to Airbnb. The business model of Couchsurfing.org is distinct from Airbnb, but they cater to the same market (Galliani, 2014; Edelman et al., 2014). There is also the likelihood that the leading businesses in consumer-to-consumer (C2C) industry, such as Craigslist, eBay, or Amazon, exploit their competitive advantage to penetrate the market. Yet, such operation would necessitate a change in their business model to address an issue that is more rigorous, in social and legal terms, than the usual online marketplace (Cohen & Kietzmann, 2014). Porter’s model also includes the bargaining power of customers and bargaining power of suppliers. Customers of Airbnb are restricted by the existence of very few competitors for space. Customers could possibly determine the accommodation services they want to use on the company’s website and afterwards communicate directly with the home owner/seller, sidestepping the company’s premium; yet, as a result, the home owner/seller also avoids the Airbnb procedure of collecting payment and insurance policy (Fisk, 2014; Schlie et al., 2014). The suppliers of Airbnb also hold limited bargaining power, for their vacant spaces then would remain disused and unprofitable. Lastly, with regard to competitive rivalry, Airbnb seems to be competitively positioned against other online travel accommodation services, such as Kayak and Orbitz, and against traditional hospitality businesses like Ritz or Hilton (Galliani, 2014). In relation to online travel accommodation services, Kayak and Orbitz are not designed to provide the form of listings that Airbnb offers; for customers who want to rent a room in an actual house or private home, Airbnb is the major option. Hence, other online travel agencies provide an inclusive travel-planning bundle, a single package that offers all the needed information about hotels, rental cars, and flights (Rifkin, 2014). Discussion and Conclusions The business model of Airbnb is unique, not because of how it cuts down transaction costs by means of online technologies or ICT, but instead because of how it has introduced and bolstered the C2C framework to a marketplace that has conventionally been entirely B2C (business-to-consumer). Airbnb is widely classified as a ‘cybermediary’, a company that profits from technological economies of scale, global scope, and slimmer cost structure, the outcome of huge volumes at negligible costs of transaction (Galliani, 2014; Schor et al., 2015; Qin et al., 2014). One of the top assets Airbnb holds is its strongly connected founders who successfully convinced the top investors in Silicon Valley to finance the venture. This has enabled them to generate a sizeable amount of resources and hence conduct business very securely without worrying about the possibility of losing money or going bankrupt. This also allowed the company to obtain some of the top design and technical experts in the valley (Lane, 2014). In addition, Airbnb has a number of unique advantages over its traditional hotel rivals. Not like these traditional hotels, Airbnb is unhampered by escalating variable costs. The company can provide a tremendously vast listing of for-rent private spaces in countries across the globe, for very minimal transaction costs (Tate, 2015). The business model of Airbnb is hence a case in point of ICT that can reduce search difficulties and costs by offering a wide array of information and the ways to handle, apply, and assess it. This analysis of Airbnb’s business model and strategy furnishes the company the opportunity to develop innovative, resourceful recommendations about its customers’ prospective travel activities in ways that traditional hotels cannot. Airbnb, as a provider of service and information, with processes established to gather data about its customers, is highly competitive to deal with all threats and challenges. Since Airbnb is fundamentally a market-oriented business model, the usual mechanism of this kind of model is that they become increasingly appreciated over time with a single leading entity seizing the bulk of the market share. This explains the attractiveness of Airbnb to investors and its remarkable success in the e-commerce industry. References Baker, M (2014) Peer-to-Peer Leadership: Why The Network is the Leader? UK: Berrett-Koehler Publishers. Botha, J et al (2008) Managing E-Commerce in Business. Cape Town, South Africa: Juta and Company Ltd. 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