How Airbnb Works

What Is Airbnb?

Airbnb (ABNB) is an online marketplace that connects people who want to rent out their homes with people who are looking for accommodations in specific locales.

The company has come a long way since 2007, when its co-founders first came up with the idea to invite paying guests to sleep on an air mattress in their living room. According to Airbnb's latest data, it has in excess of six million listings, covering more than 100,000 cities and towns and 220-plus countries worldwide.

In this article, we break down how Airbnb works, how it makes money, and the pros and cons of using its online marketplace.

Key Takeaways

Airbnb is an online marketplace that connects people who want to rent out their property with people who are looking for accommodations in specific locales.
Airbnb offers people an easy, relatively stress-free way to earn some income from their property.
Guests often find that Airbnb rentals are cheaper, have more character, and are homier than hotels.
Airbnb makes the bulk of its revenue by charging a service fee for each booking.
Cons of using Airbnb include not getting what you expected, and, for hosts, renting your place to someone you haven’t had the chance to meet first.

How Airbnb Works

Airbnb has revolutionized the hospitality industry. Prior to 2008, travelers would have booked a hotel or hostel for their trip to another town. Nowadays, many of these same people are opting for Airbnb.

The idea behind Airbnb is simple: Find a way for local people to make some extra money renting out their spare home or room to people visiting the area. Hosts using this platform get to advertise their rentals to millions of people worldwide, with the reassurance that a big company will handle payments and offer support when needed. And for guests, Airbnb can offer a homey place to stay that has more character, perhaps even with a kitchen to avoid dining out, often at a lower price than what hotels charge.

Airbnb stands for "Airbed and Breakfast," a name that reflects the company’s origins when its co-founders invited paying guests to sleep on an air mattress in their living room to help cover the rent.

History

In 2008, Brian Chesky (the current CEO), Nathan Blecharczyk, and Joe Gebbia, established the company now known as Airbnb. The idea blossomed after two of the founders started renting air mattresses in their San Francisco home in 2007 to conference visitors. Hence, the original name of Airbed & Breakfast. The company website booked 80 stays in 2008 ahead of the Democratic National Convention.

In 2009, the name Airbnb was introduced and the type of property rentals started growing beyond air mattresses to include spare rooms, apartments, entire homes, and more. The areas in which it operated grew, as well. By 2011, Airbnb had opened an office in Germany and in 2013, it established a European headquarters in Dublin, Ireland. Its primary corporate location remains San Francisco, California.

In addition to the U.S. and Europe, the company has established a presence in Australia, Asia, Cuba, as well as other nations (over 220 countries and regions in total). And, beyond its familiar earlier offerings, guests can opt for alternative lodgings that stand out in a particular destination and Experiences.

In 2015, Airbnb became the official provider of alternative accommodations for the 2016 Rio Games. In 2020, it launched a program called Frontline Stays to lodge first responders during the COVID pandemic.

Also in 2020, the company went public. Its common stock trades on the Nasdaq.

Airbnb for Guests

On Airbnb's website, you can click on any listing to view all kinds of details about the property, including a description (including amenities), photos, check-in and check-out times, price and fees, house rules, availability, host info, and more. You can also read reviews from previous guests.

To use Airbnb, you generally need to take the following steps:

Visit the Airbnb website.
Create an account, if you haven’t already done so. Signing up can take a bit of time. Among other things, you’ll need to verify your phone number and upload some form of identification.
Specify the location and date(s) you’re after and then begin reviewing listings for a place that’s available. Use the site's various filters to customize your search.
When you’ve found the ideal accommodation, make a booking or reserve it. Unless it's an instant booking, sometimes the host needs to fully validate/accept a reservation.
Pay for the accommodation and receive notification of your booking, including the address where you'll be staying. For longer-term stays, it’s possible to arrange a payment plan by which you’ll pay an initial deposit and the rest in installments.

Reading reviews is a key part of finding the right place to stay. However, they can't always be 100% relied on. Reviews sometimes tend to be overly generous, perhaps because guests are worried a bad review will lead the host to fire one back.

Airbnb for Hosts

Airbnb hosts can be an individual or a company. As an Airbnb host, you can rent out extra space in your home, such as a bedroom. Or you can offer your entire home for rent. You can even host special experiences like classes, tours, concerts, and more in your area.

Hosts have control over certain aspects of their rental, such as amenities and special features. For example, you might offer to pick up and drop off guests at the airport. Hosts set prices, security deposits, refunds, check-in/check-out times, and other listing particulars.

To rent out your property, you generally need to take the following steps:

Start by researching whether the area where your property is located imposes fees or restrictions on rentals.
Become familiar with Airbnb's requirements for hosts.
Create a free Airbnb account. Then, click on “Airbnb your home” in the upper right corner of the page.
Next, click Airbnb Setup. Create an attractive, attention-grabbing listing for your property. Great photos that give potential guests a complete picture of the space can help.
If you need ideas or help creating your listing, contact a Superhost Ambassador in your area.
Set your pricing. Airbnb provides a tool in its Help Center to assist you with this. Once everything's complete, publish your listing.
You'll be able to add or update certain items, such as your general settings and house rules, after you publish your listing. Check with Airbnb's Help Center for more details.

Pricing

The amount that you'll pay for a room or other space on Airbnb includes the host's price and Airbnb's guest service fee (a maximum of 14.2%). Hosts are charged an Airbnb fee of approximately 3%.

The host's property price before fees will depend on various things, such as the property location and quality, the amenities it has, and how in demand it is. Inflation can also play a role in price levels. It's safe to assume that properties in areas of the world that are popular destination points will cost more than others.

Safety and Security

Airbnb has certain regulations that are designed to protect both guests and hosts. For example, threats, violence, and abuse toward others (sexual and otherwise) are not tolerated. Neither are dangerous animals, undisclosed weapons, or explosive devices.

Legally-owned, permitted weapons of various types are allowed but they must be secured and disclosed to hosts prior to arrival. In addition, Airbnb asserts that guests may defend themselves against attack with appropriate measures until help arrives or the danger ceases.

Hosts can refuse or cancel reservations if a guest makes them feel uncomfortable/unsafe. In addition, Airbnb offers AirCover for Hosts, a program that provides "top to bottom protection," including guest identity verification, reservation screening, liability insurance, damage insurance, and 24-hour safety phone access.

How Does Airbnb Make Money?

Airbnb’s business model is quite profitable. The company, like Uber, Lyft, and others, has capitalized on the sharing economy, essentially making money renting out property that it doesn’t own.

Every time a reservation is made, Airbnb takes a cut. When you click on a property, you'll find to the right of the page a breakdown of the fees you'll be charged if you go ahead and book. One of these fees is a service fee, which covers the cost of running the platform and providing support. This fee makes up the bulk of Airbnb's revenue.

According to the company’s website, most guest service fees are under 14.2% of the booking subtotal. Hosts, meanwhile, are charged 3% or more of the total amount earned for each booking.

Airbnb also operates an alternative payment structure that you might see from time to time. It's mandatory for hotels and some specific types of hosts (including software-connected ones) located in certain regions of the world to cover the service fee in full rather than split it with guests. When this is the case, the person offering accommodation will usually be charged about 14% to 16% of the booking subtotal. Exceptions include mainland China, where the host-only fee is fixed at 10%.

Competitors

Airbnb's competition includes Agoda, Booking.com, Expedia, HomeToGo, Google, Hopper, Tripadvisor, Trivago, and VRBO. Some, such as VRBO, offer solutions that are similar to Airbnb's. Others are effectively online travel agencies that help travelers find hotels and other private accommodation in the area they are visiting.

Advantages and Disadvantages of Using Airbnb

For hosts, participating in Airbnb is a way to earn some income from their property, but with the risk that the guest might do damage to it. For guests, the advantage can be relatively inexpensive accommodations, but with the risk that the property won’t be as appealing as the listing made it seem.

Here's a more in-depth look at some of the pros and cons:

Pros

Wide Selection: Airbnb hosts list many different kinds of properties, from single rooms, apartments, and houses to houseboats, caravans, and even castles.
Free Listings: Hosts don’t have to pay to list their properties. Listings can include written descriptions, photos with captions, and a user profile in which potential guests can get to know a bit about the hosts.
Hosts Can Set Their Own Price: It’s up to each host to decide how much to charge per night, per week, or per month.
Customizable Searches: Guests can search the Airbnb database—not only by date and location, but by price, type of property, amenities, and the language of the host—and add keywords (such as “close to the Louvre”) to help narrow their search.
Additional Services: Airbnb offerings include experiences and restaurants. People searching by location will see a list of experiences, such as classes and sightseeing, offered by local Airbnb hosts. Restaurant listings also include reviews from Airbnb hosts.
Protections for Guests and Hosts: Airbnb holds each guest's payment for 24 hours after check-in before releasing the funds to the host. For hosts, Airbnb provides up to $1,000,000 to cover unreasonable damage inflicted on the property. This protection comes at no extra cost but doesn't cover everything.

Cons

What You See May Not Be What You Get: Individual hosts create their own listings, and some may be more honest than others. One way to avoid disappointment is to read comments from previous guests.
Potential Damage: Although most stays go without incident, property damage is probably the biggest risk for hosts. Airbnb’s Host Damage Protection (part of AirCover for Hosts) provides some assurance. But it may not cover everything, such as cash, rare artwork, jewelry, and pets. Hosts whose homes are damaged may also experience considerable inconvenience.
Added Fees: Like hotels, Airbnb imposes a number of additional fees. For each booking, both guests and hosts pay a service fee to Airbnb, which can be steep. Banks or credit card issuers may also add fees, if applicable.
Taxes: Hosts and guests in several countries may be subject to a value-added tax (VAT). And depending on their location, hosts may be subject to rental income taxes. To assist with U.S. tax compliance, Airbnb collects taxpayer information from hosts so they can provide an account of their earnings each year via Form 1099 and Form 1042.
It Isn’t Legal Everywhere: Before listing a property on Airbnb, a would-be host needs to check local zoning ordinances to make sure it’s legal to rent out their property. Hosts may also be required to obtain special permits or licenses.

Airbnb's Impact

On Travel

Airbnb has made travel more feasible for many people by providing the opportunity to find destination accommodations that cost less than traditional hotels and other lodging. It has provided property owners in destination cities with new opportunities to earn income by renting out available space to these travelers. Overall, the travel industry benefits from the access that Airbnb has enabled.

Airbnb's success has spawned competitors such as Vrbo and FlipKey. It has also created a demand for greater regulation of its rental activities due to customer behaviors and/or the fear of the financial threat to local travel-related businesses. This may end up prohibiting or restricting travel and tourism within certain locales.

On the Hotel Industry

While Airbnb plays a positive role in supporting more and better travel experiences for many people, it has been shown to cause a reduction in bookings at hotels. This, in turn, results in less income for those hotels. In major destination cities such as London, Paris, and Manhattan, Airbnb has intercepted up to 12% of travel demand because of the advantages it offers.

However, as a result of this incursion into their sphere of business by Airbnb and its like, hotels have responded by offering more amenities and lower rates to make themselves equally as attractive. In addition, hotels have begun listing their spaces on Airbnb. The company has a very engaged customer base with repeat users and hotels aim to take advantage of that.

On Local Markets

The financial advantages that Airbnb has offered travelers also benefit local neighborhoods in areas that might not have received infusions of income from tourism (or business travel) before Airbnb. Property owners and businesses in locales with few accommodation options have seen new and added revenue, courtesy of Airbnb rentals.

Nonetheless, some municipalities have taken action to limit or ban Airbnb to prevent the shrinking availability of housing and spiraling rental prices.

Yet, the jury's still out. A study published in the journal Marketing Science found that local short-term rentals such as those supported by Airbnb tended to result in greater residential investment in housing units, and especially those dedicated to short-term occupancy.

Is an Airbnb Cheaper Than a Hotel?

In many cases, yes. This is in part because the owners of these rentals don’t have the same overhead costs as hotels. Moreover, Airbnb hosts typically don't have to pay for lodging or hospitality licenses or permits, which can be expensive.

How Do Airbnb Hosts Get Paid?

Hosts are paid after Airbnb deducts its service fees. Usually, that's 24 hours after the reservation begins, even for long-term stays which also include a monthly payout. Payout methods include direct bank transfers or ACH, international transfers, PayPal, Payoneer Prepaid Debit Cards, Western Union, and AliPay (for Mainland China hosts only). Remember, banks do not process payments over the weekend of holidays, so Airbnb processing will resume the next business day.

Can You Stay in an Airbnb Long Term?

Yes, some hosts provide that option and may even throw in a discount for these types of reservations. Bear in mind, though, that stays longer than 28 days require paying each month upfront and are subject to Airbnb’s long-term cancellation policy, which states that guests must give 30 days notice before check-in to receive a full refund. If you miss this deadline or wish to cancel during your stay, you will be billed for 30 days or the total cost of the reservation if it is for less than a month

What Is Airbnb’s Refund Policy?

Airbnb hosts select their cancellation policy, from very strict to free cancellations. Once a reservation is made, you may be able to get a full or partial refund if you decide to cancel. Generally, the refund amount depends on the host’s policy and how much time is left before checking in. If you click to cancel your reservation, you’ll be presented with a complete breakdown of how much you‘ll get back if you proceed. It’s also possible to get a partial refund after you’ve checked in, provided you file a request within 24 hours.

What Are the Rules for Having an Airbnb?

The allowability of hosting an Airbnb will differ by location. In many cities, property owners must obtain licenses and permits before legally taking in paying guests. Certain restrictions may apply, too. Also, Airbnb reports all earnings to the designated tax authorities, including the Internal Revenue Service (IRS).

The Bottom Line

Airbnb started in 2007 with an air mattress in an extra room and today has a market capitalization of over $66 billion. Its online marketplace connecting people seeking accommodations with hosts in cities all over the world has proven its worth with travelers, the travel industry, and local markets that benefit financially from tourism. Hotels, which saw bookings drop with the advent of Airbnb, have improved their offerings to compete more effectively and have attracted new customers. A classic industry disruptor, Airbnb saw a need and quickly moved to address it, with enormous success.