Airbnb is a platform for individuals to rent out their primary residences as lodgings for travelers. Renters typically seek accommodations with a homey feel that hotels cannot provide, while most hosts want to rent out their homes to supplement their income. The majority of its revenue comes from service fees from bookings charged to both guests and hosts.
Airbnb raised $3.5 billion in its initial public offering on Dec. 10 at a fully diluted valuation of around $47.3 billion, debuting on the Nasdaq under the ticker ABNB and pricing its IPO at $68 a share. The company reported revenues of $1.34 billion last quarter, down nearly 19% from the same period a year ago. Nonetheless, it disclosed $219 million in net income despite primarily turning net losses in the past.
The Sharing Economy
The sharing economy is a commercial or economic model often referred to as a peer-to-peer economy. This model allows buyers and sellers to conduct their business more easily by sharing human and physical resources. This includes the collaborative consumption of goods and services of shared ownership and value.
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 the potential for continued revenue growth. Both eBay and Craigslist have taken advantage of the peer-to-peer business model for more than a decade. Newer companies like Uber, Lyft, and Airbnb have modeled their companies to meet a variety of consumer demands.
Read on to learn more about how Airbnb has exploited this business model to become the behemoth it is, and about how the company makes money.
- The sharing economy is a commercial or economic model often referred to as a peer-to-peer economy.
- Airbnb connects travelers seeking affordable lodgings with hosts who offer their properties as short-term rentals.
- Renters are charged a nonrefundable service fee of under 14.2% based on the listing.
- Hosts are also charged a fee of no more than 3% for every completed booking.
Airbnb: A Brief History
The idea for Airbnb evolved after its founders, Brian Chesky and Joe Gebbia, put an air mattress in the living room of their San Francisco apartment, turning it into a makeshift bed and breakfast. The pair rented the space out to travelers as a way to offset the high cost of rent. In 2008, the two, along with Nathan Blecharczyk, developed a website for short-term rentals that would eventually become Airbnb.
The company went through a few major leadership changes in 2018. Airbnb announced the hiring of Dave Stephenson as its chief financial officer (CFO) after Laurence Tosi left the company in 2018. Airbnb also appointed its first chief operating officer (COO), Belinda Johnson.
The company began to raise capital in 2009. Several years later, it expanded into the international market, opening offices in the United Kingdom, Germany, France, Spain, Russia, and Brazil. The company also offers other services including:
- Airbnb Experiences: Renters can take part in activities like cooking classes, tours, and adventures.
- Airbnb Collections: Renters can use this section to find properties that can be used for special trips or other occasions. These listings include full homes, private rooms with either private or ensuite bathrooms.
- Airbnb Plus: This section features homes that are highly rated and come with standard amenities.
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.
How Airbnb Makes Money
Airbnb has more than seven million listings in more than 200 countries. The site has more than 150 million users, with an average of six renters checking into an Airbnb-listed property every second.
The primary source of Airbnb’s revenue comes from service fees from bookings charged to both guests and hosts. Depending on the size of the reservation, guests are required to pay a nonrefundable service fee based on the type of listing—usually under 14.2%. A more expensive reservation results in lower service fees for guests because families or groups with larger reservations can save money for other travel expenses.
Hosts are also charged a 3% fee with every completed booking to cover the processing of guest payments. This fee may be higher for Airbnb Plus listings. 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.
Users are also subject to a value-added tax (VAT)—a tax assessed on the final sale of goods and services—in the European Union (EU), Switzerland, Norway, Iceland, and South Africa in addition to Airbnb's service fees. Guests in the EU are also subject to taxes based on the rate found in the guest’s home country.
Guests are also subject to exchange rates if they pay for bookings in a different currency. Rates are determined by Airbnb. Hosts are also subject to a value-added tax which is deducted from income earned from booking reservations.
Airbnb has filed its prospectus to go public, on Nov. 16, 2020 and debuted on the Nasdaq under the ticker ABNB on Dec. 10 that same year. The company priced its initial public offering at $68 a share, up from its original plan of $44 to $50 per share, giving it a valuation of $47.3 billion on a fully diluted basis. Airbnb raised #3.5 in its IPO, up from the $2.5 billion expected.
Airbnb saw its bookings plummet and revenue tumble in 2020 as the coronavirus pandemic shut down global travel. In May, the company cut a quarter of its staff as reservations were down 70% from the prior year. However, Airbnb bounced back over the summer and reported that bookings were down only 30% in June compared with the same month in 2019. The surge in demand was driven largely by travelers seeking nearby vacation rentals to escape cities and take advantage of work-from-home policies.
- Airbnb debuted on the Nasdaq on Dec. 10.
- Airbnb priced its IPO at $68 per share, giving it a valuation of $47.3 billion on a fully diluted basis.
Challenges to Airbnb
Lawmakers and 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 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.
The Bottom Line
The sharing economy continues to experience rapid expansion, thanks to more accessible transportation and lodging. Companies like Airbnb have taken advantage of technological innovations to create platforms that connect individuals to exchange everyday needs. Even though it doesn't directly offer goods or services to individuals, its platform connects individuals who want to transact business with each other. Due to a large number of bookings, Airbnb’s revenue continues to grow while only charging a minimal service fee.