How Does AirBnB Make Money?

AirBnB is not the sharing economy. It is the retailing of your roof.

AirBnB helps people make money from the spare room they are already paying for. For something you have bought or rented wholesale.

Take a step back, and realize that housing is sold in larger units than most people can consume.

Think of your local Starbucks. They sell you cups of coffee. They mostly don’t buy them from the little farmer on a hill in Kenya. They buy them from a conglomerate you’ve never heard of.

That conglomerate is a wholesaler and Starbucks is buying that coffee, by the ton, wholesale.

They are selling it to you retail. In portions you can drink before it gets cold.

AirBnB host with pride

Image source: Quinn Dombrowski

The sharing economy

I heard a question at a recent start-up conference that asked a number of entrepreneurs “how can you claim to be part of the sharing economy if you charge?”

A fair point with a simple answer and a tangential insight.

Let’s start with the insight.

AirBnB has outgrown Couchsurfing because free cannot match paid, when it comes to high safety, service and security.

Even Linux is improved by paid for service providers like RedHat.

Building a platform costs money. Ensuring quality exceeds expectations costs money. And importantly, insuring people’s property, and making sure dangerous people are weeded out of the system early, costs money.

This is not to say a platform with 7m users is a fail. Couchsurfing is a huge success.

It is simply to say we should not be surprised that AirBnB, which was founded four years after Couchsurfing, and where you pay, has 50m users.

Even if you came at me saying “but AirBnB let’s people share houses!”, I’d feel obliged to reply that sharing is still a terrible name for it. Perhaps the utilization economy is more accurate?

Now, if I’m going to tell you how AirBnB makes money, I have to talk about price.

Pricing – the customer’s view

Pick a place, any place. AirBnB will give you a list of accommodation with a per night price for one person. Pick some dates, add that you’re going with your partner, and the list may change completely. That’s to be expected given availability.

Now go to book.

BAM, the price is double what you thought it was. What is going on?

To figure that out, we have to jump to the host’s seat.

Pricing from the host’s view

Smart-Pricing-Web-640x420

You have a Calendar with your bookings. It gives the host enormous flexibility around pricing.

Once you have filled out your listing, they ask you to set a room rate per night. This is typically the price you see when you do an open search for a location. After that though is where the host’s options get interesting. You can change:

  • Rates at the weekend
  • Rates for additional persons
  • Discounts for one week or one month periods
  • Minimum stay periods
  • Cleaning fee

You can even price each day individually if you’re feeling like a control freak.

End of last year, AirBnB added a smart pricing recommendation system. I’ve found it to be of limited use. They may be able to price your location, but they cannot price your quality. It does give hints on whether demand is high or low.

They is some discussion on the internet that AirBnB is purposefully trying to get hosts to under price for the benefit of guests. However, without access to their data, outsiders can only speculate on this.

You already know that you have to put in your dates to check availability, well guess what, you have to put your dates in to check your price too. And I mean you need to specify your exact dates and how many are coming along.

More surprisingly, the host you are hitting up has no idea what your total cost is either. The price can easily double after accounting for weekends, extra people and cleaning fees.

On top of that, is the 6-12% “service” fee they add. This isn’t service, this is “AirBnB“.

Not only is the 6-12% “service” fee not a service fee, it’s also not 6-12%.

If the booking headline is $100, the fee is $12 right?

No, typically its $14.

This is because of sales tax (or VAT) in the country the guest is COMING from. I have seen actual AirBnB charges vary from 10 to 14%.

They also charge hosts 3%. So AirBnB makes $17, or 15%, on every $114 charged to a customer. The 15% take rate is corroborated by the revenue data below.

The view from AirBnB’s seat

AirBnB’s take of 15% would be at the low end of the online travel agent (OTA) model.

If an OTA simply advertises a hotel’s inventory, they take 15%. That’s Priceline.

If the OTA buys the inventory to resell, they take 20%. That’s some of the stuff on Expedia.

How do you tell the difference?

If they ask you to pay now or pay at the hotel. If you pay now you’re buying it from Expedia, not the hotel.

Consumers find AirBnB fees more painful than Expedia fees, because Expedia fees are superficially paid by the hotel and is invisible to the consumer.

Last year AirBnB disclosed that in July to September of 2015, they rented out 23.8m room nights, for an average of $92 a room per night. Disclosed revenue of $340m suggests their cut on this was 15.4%.

AirBnB are number one in the renting out of spare bedrooms. However sharing is a terrible adjective for what AirBnB does. They are a peer-to-peer marketplace matching individuals’ largest asset with what is often travelers’ largest cost.

Investors place a large valuation on AirBnB because we are likely at a minuscule penetration rate of all the spare bedrooms out there. And AirBnB already has a heady lead, with its closest competitor HomeAway a third its size.

Already many quirky and boutique hotels will list on AirBnB. But nobody would imagine putting an air bed on Priceline. The segmentation is all in their favor.

But the killer is something I can only say anecdotally right now. I checked up the hotels in my area of London, and a plain but clean hotel room is 2-3x the price of nearby AirBnB listings. This has got to shrink, as I experienced on a trip to Geneva, where airBnB private shared rooms cost the same as hotels half an hour away near the airport.

Hotel prices will either go down or AirBnB listing prices will go up.

You want to make money out of AirBnB? Clear the junk out of your spare room and list it.

Thinking of renting a one bed apartment? Rent a two bed apartment and list the other room.

We are also seeing many dedicated AirBnB cleaning, keyholding and servicing companies. As AirBnB grows demand for these will grow in lockstep.

There are even professional investors who are renting houses on long leases and subsequently putting these out on AirBnB as short term lets.

The viability of these strategies depend strongly on the price levels, supply and demand in each individual market. But AirBnB are the guys helping to break down all these differentials and making money every step of the way.

This is most definitely not the sharing economy. This is taking your roof to Wal-Mart and getting the best price.

How AirBnB makes money

  1. Create a trust and transaction platform around unusual quantities of shelter.
  2. Connect hosts and guests, resolving the inevitable misunderstandings and problems along the way.
  3. Take a 3% cut from hosts and a >6-12% mark up from guests.

Want to know why Facebook are pushing ChatBots, the latest bit of technology after your job? Read more in my post on How Does WhatsApp Make Money.

Yuen Lo

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