As a result of greater connectivity, the sharing economy has evolved to allow buyers and sellers to more easily transact business. The sharing economy is a peer-to-peer economy that allows individuals to share human and physical resources. This includes the collaborative consumption of goods and services of shared ownership and value. Popular companies such as eBay and Craigslist have taken advantage of a peer to peer business model for over a decade, but more recently, companies such as Uber, Airbnb and Lyft have modeled their companies to meet a variety of consumer demands.

Uber and Airbnb in particular are headline-grabbing successes that have company valuations of $69 and $31 billion respectively (See also: The Story of Uber). Companies in the sharing economy don't provide individuals directly with goods and services, but make their money by connecting buyers and sellers. This model has potential for continued revenue growth.

Airbnb Explained

Founded in 2008, Airbnb is a platform for individuals to rent out their primary residences as lodgings for travelers. Renters who use the website typically seek accommodations with a homey feel that hotels cannot provide, and most hosts are individuals who want to rent out their homes to supplement their income. However, lawmakers, and especially the hotel industry, have been concerned that long-term rental units are being converted into de facto hotels — thus driving prices in the rental market and increasing competition for hotels. The $1.1 trillion hotel industry's has an annual budget of $5.6 million dedicated to lobbying. In 2016 the American Hotel and Lodging Association presented a “multipronged, national campaign approach at the local, state and federal level,” according to the New York Times, and effectively declared war on Airbnb.

Regardless, as a conduit between hosts and travelers, Airbnb provides an established marketplace platform where both hosts and travelers can safely exchange goods and services.

In a peer to peer model such as Airbnb, an in-depth review system adds value to prospective hosts and guests looking to accommodate their lodging needs. In online marketplaces, participants trust reviews, allowing individuals to safely choose quality products rather than purchasing lemons.

See also, Investors: 5 Best and Worst Cities for Airbnb Renting

How Airbnb Makes Money

With listings in over 65,000 cities spread out in more than 190 countries, Airbnb’s reputation and revenues have rapidly grown. The primary source of Airbnb’s revenue comes from service fees from bookings. Depending on the size of the reservation, guests are required to pay a 6-12% non-refundable service fee. A more expensive reservation will result in lower service fees for guests. Airbnb reasons that families or groups with larger reservations can save money for other travel expenses. With every completed booking, hosts are also charged a 3% fee to cover processing of guests payments. When a reservation is booked, guests pay the service fee unless the host cancels or retracts the listing. If the reservation is altered, Airbnb adjusts service fees to accommodate users.

Depending on local or international tax laws, users are also subject to a value-added tax (VAT). A value added tax is a tax assessed on the final sale of goods and services. For guests seeking accommodations in the European Union, Switzerland, Norway, Iceland and South Africa, Airbnb charges a VAT in addition to its service fees. Due to different tax laws, Airbnb does not charge a VAT to every guest across the board. In particular, guests with reservations in the EU are subject to taxes based on the rate found in the guest’s home country. Furthermore, guests paying for bookings in a currency different than the one the host has chosen are subject to varying exchange rates determined by Airbnb. Likewise, hosts are also subject to a value added tax which is deducted from income earned from booking reservations.

The Bottom Line

With transportation and lodging more accessible than ever thanks to mobile computing, the sharing economy continues to expand rapidly. Companies such as Airbnb and Uber have taken advantage of technological innovations to create platforms that connect individuals to exchange everyday needs. In particular, Airbnb has been valued at $31 billion, and has alluded to a potential IPO next year, without directly offering goods or services to the individual. Instead, its platform connects individuals who want to transact business with each other. Due to the large amount of bookings, Airbnb’s revenue continues to grow while only charging a minimal service fee.

See also, How Airbnb Is Trying to Get the Rich & Famous (AIRB, EXPE)

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