The idea for Airbnb originated in 2007 when Brian Chesky and Joe Gebbia decided to rent out some air beds they had available in order to pay their rent. From those humble beginnings, the company has grown into a business that provides access to over 5 million unique places to stay and was valued at $31 billion in 2018. The company’s business model faces legal challenges, however, in large cities like New York, which seek to limit short-term private rentals where the host is not present. This legal action threatened the company’s ability to offer short-term rentals in some of its most lucrative urban markets and posed a dilemma for the founders who had to decide whether to defend or change their business model.
Company History
Initially, the founders decided to target conferences and festivals across America. The first major conference they targeted was the 2008 South by Southwest conference and they managed to attract about 40 listings. After observing the interactions between hosts and renters at that event, Airbnb tweaked the business model and began acting as an intermediary between the contracting
parties and charged a service fee for facilitating payments. At first the company required hosts to be present when guests rented the space which enhanced the quality of the lodging experience. As the company grew, this requirement was relaxed and a greater variety of listings was allowed. A turning point for the company came in 2009, when Airbnb became involved with Y Combinator— an investment fund and start-up advisory based in Silicon Valley. Y Combinator provided a network of outside investors and mentors and allowed Airbnb to focus on growing the business. After working with Airbnb for a few months, one of the Y Combinator mentors encouraged the founders
to pursue slower organic growth by engaging in activities that were difficult to scale. He further suggested that the company focus on New York City, which was the market with the highest growth and where most of its customers were located. As part of their growth strategy, the company invested in activities that were sometimes expensive and did not scale easily, such as hiring professional photographers to train thousands of hosts in design principles so they could present their rentals in the most attractive light. Property owners were also encouraged to throw host parties that included persons currently staying with them as well as stay in touch with past renters. Videos of customer experiences were then posted by Airbnb on its website and social media accounts. Gradually, the company began developing a social network of loyal renters and hosts who connected over their shared Airbnb experiences and also provided feedback to the company on how the rental experience could be enhanced. The rich insight derived from these forum discussions not only increased the odds of properties being rented but made it more difficult for competitors to copy the company’s business model.
Competition
As the vacation rental industry grew, Airbnb found itself facing competition from three sources. The first category of competitors included companies attempting to clone the Airbnb business model. These copycat websites had a similar design to Airbnb and some even posted Airbnb listings on their website. Many of the imitator websites based in Europe falsely claimed to be affiliated with Airbnb and offered similar services but from a European perspective. Airbnb also faced competition from hotel aggregator sites such as Hotels.com whose deep pockets gave them the opportunity to offer attractive prices. Unlike Airbnb, these companies mainly catered to persons seeking to book a hotel room
but also offered vacation packages that included airfare and rental cars. A third category of competitors consisted of well-funded sites such as Flipkey who targeted families and individuals looking for a more upscale vacation rental than typically offered by Airbnb. These companies had grown exponentially by deploying an aggressive marketing campaign that allowed them to get instant brand recognition.
In response to the intensifying competition Airbnb adopted several strategies to defend its market position. To counter the threat of copycat websites, Airbnb initiated a campaign in 2011 to encourage customers to notify the company if they received an unsolicited invitation from an imitation website. Helping to expose copycat sites not only built customer loyalty but also strengthened the sense of community among Airbnb’s customers. The company also improved its website to help prospective customers book rentals faster and invested heavily in enhancing the experience of its guests. In 2014 for instance, Airbnb partnered with a start-up called Vayable to offer renters guided tours of attractions in the neighborhood where they were staying. Local businesses near the company’s listings were also invited to join the Airbnb network and provide special deals to nearby renters. To address the concerns of hosts that their properties might be vandalized by unruly guests, the company began providing insurance to hosts up to $1 million, backed by Lloyds of London and introduced a 24/7 helpline manned by customer service agents. Efforts were also made to obtain continuous feedback from hosts and guests about what they liked or disliked about their Airbnb experience. This detailed insight was used to tweak the website and business model. The net effect of these initiatives was an increase in the number of in-dividuals willing to rent out their properties via Airbnb and greater confidence by renters in the quality of the experience they would have while staying at one of the company’s listings.
Legal Challenges
As Airbnb grew, the company began allowing second- home and vacation rentals when hosts were not present during the rentals. This aspect of the company’s business model brought it into conflict with regulations in New York City and other major markets which prohibited the short-term rental of residential rooms without the tenant being present. The hotel industry contended that Airbnb violated leases and evaded taxes which hotels and Bed & Breakfast were subjected to. They argued that this gave Airbnb an unfair competitive advantage and advocated that the company should be governed by the same set of regulations that applied to the hotel industry. Airbnb initially took a hardline stance in defending itself against these calls for regulation. Airbnb contended that it should not be subject to traditional hotel regulations and hotel taxes because it did not actually own the rented spaces and existed simply as an intermediary. The company also launched several campaigns to demonstrate how it was contributing to local communities and providing a much-needed source of income to cash strapped homeowners. Faced with pressure from local authorities and mounting negative publicity, in 2015 Airbnb changed its philosophy and agreed to collecting and remitting hotel taxes on behalf of their hosts and guests.
Questions.
1.What is Airbnb’s business model?
2.What actions did Airbnb take after its inception that contributed to its success?
3.What are the major threats to Airbnb’s future success and how should the company address its legal challenges
