Airbnb Business Model & Revenue Model to Consider For Startup

When should you consider the Airbnb business model for your own business? This will come in handy if your business idea is focused on creating a marketplace. Any marketplace is built around facilitating transactions. Thus, a transactional business model should be considered first. And the Airbnb business model is a great example of one. 

Airbnb with its transactional business model is one of the most trusted and popular platforms for finding housing and experiences. Airbnb started with three air mattresses placed in the living room and turned into a bed and breakfast. With time, the business has undergone a lot of transformations. It eventually revolutionized the way travelers approach their vacations. Consequently, it transformed the travel market as a whole. However, it all started with a simple idea and an MVP process. 

At a recent business event, where Airbnb’s cofounder Joe Gebbia spoke about Airbnb, the company was introduced as the one that operates in 220 countries while the UN officially recognizes 195. This would be a great way to describe the current state of affairs with how successful Airbnb is today. But also, Airbnb as of July 2024 has a market capitalization of $96.47 billion while Hilton has $54.6 billion. Certainly, this difference is striking considering Hilton invested heavily in property with high operational costs while Airbnb operates a digital space.

The path to the current Airbnb business model

Origination

It is rather comical how the idea of Airbnb appeared. Two of three cofounders – Joe Gebbia and Brian Chesky – moved to San Francisco and rented a place. One day, their landlord announced a 25% increase in rent and they had no money to pay for it. With the looming eviction on the horizon, they had to come up with the money quickly. Joe Gebbia still quotes the proverb describing that time in their lives: “Necessity is the mother of invention”.

Albeit, right timing should be considered too. This awkward situation also happened when San Francisco hosted a large IT conference and all hotels had been sold out. So, Brian and Joe literally sourced three air beds and put them up in their living room. In addition, they offered an airport pick-up, breakfast, and a subway pass to the conference. As a matter of fact, the demand was huge – people sent their resumes and LinkedIn profiles to be one of the lucky three to stay on an air bed. It is equally important to note that the demand was achieved through a trusted mediator. In fact, the information about air bed availability came from conference organizers.

Early days

Affordable and convenient housing from a trusted source struck a chord. Brian and Joe invited a third co-founder Nathan Blecharczyk as a Chief Technology Officer. Unfortunately but predictably for an early MVP stage, Airbnb revenues at the start looked modest, to say the least. For months in a row, their early platform made $200 per week. That was until the co-founders themselves conducted in-person interviews with the property owners. They learned the problems they had and worked on providing better images for rentals. When they fixed some of these problems, revenues started doubling. No MVP can move forward without customer feedback. 

Successfully passing an MVP stage

Interestingly, throughout that iterative growth – Airbnb did zero marketing. None at all. In order to hit product-market fit, MVP needs as little extra push from marketing as possible. It means relying mostly on word-of-mouth. Of course, it is often a balancing act between the speed of iteration too. So not all MVPs can afford to go without any marketing at all.

Airbnb faced a lot of other issues. They were rejections by investors, UX design issues, and marketing. With proper Startup Services, some growth pains and learning from experience can be prevented. The biggest lesson though, Joe Gebbia learned from MVP’s early stages and close communication with early adopters – it is best to overinvest in early adopters so that you make them love your company. It is useless to have a thousand of the same early adopters who just somewhat appreciate it. Achieving product-market fit lies through getting ‘love’ from early adopters. The business took off from there. 

Airbnb business model

The Airbnb business model is shown in the picture below. It lists all pillars of how Airbnb creates value for its two major customer segments: hosts and travelers. The model describes resources, activities, and partners involved in the value creation. Customer relationships and channels describe how value is delivered and maintained. Cost structure and revenue streams are two key factors forming the Airbnb pricing model.

Airbnb Revenue Model

Even though Airbnb does not operate actual properties, it still has a significant cost structure to maintain. Airbnb develops, upgrades, and maintains its platform. At this mature stage of business, Airbnb’s cost and revenue structure is quite complex. The excerpt from the financial statement for the year 2023 is shown below. All numbers are in millions. 

Table – Airbnb Consolidated Statements of Operations (in millions)

Revenue side

Revenues in the statement exclude taxes charged, refunds, and any incentive programs such as marketing promotions or referrals. So, revenues that are sourced from host and traveler fees are as follows: 

• year 2021 – almost 6 billion dollars, 
• 2022 brought 8.4 billion dollars, and
•  2023 generated almost 10 billion dollars. 

This rising trend is mainly due to recovery from COVID. However, pricing adjustments and new features around rendering total price in browsers also played a role. 

• The Hill newspaper conducted a study into Airbnb fees and included Airbnb’s spokesman comment. Even though fees can add up to 48% of the total price, the value compared to regular hotels is greater. For instance, a traveler can get an apartment with two bedrooms and two bathrooms for the price of a single room at a hotel in the same location. 
• The feature of displaying the total price in search engines and on the maps was released in December 2022. Guests found the total price display feature extremely useful. The total price breakdown was available before booking confirmation. 

Cost side

• “Cost of revenue” includes all operational expenses involved in supporting each transaction. This includes transaction processing fees, payments for cloud storage for hosting listings, and costs of data transfer. Unfortunately, there is also a matter of fraudulent bank operations and other chargebacks. 
• “Operations and support” include primarily costs related to customer support. Customer support includes:
  • salaries of customer support personnel,
  • third-party service providers who contact customers via SMS, phone, or else,
  • credits issued to customers to maintain customer satisfaction, 
  • insurance costs for host property protection. 
• “Product development” accounts for paying internal developers as well as outsourcing. It also includes payments for IT facilities and technology. 
• “Sales and marketing” accumulates costs related to marketing and sales staff salaries, marketing budgets, incentive programs, and so on. 
• “General and administrative” contains salaries of managerial personnel, HR, and legal. 
• Restructuring expenses are one-off expenses that cover changes that need to be made when some other technology is acquired. For instance, in 2019, Airbnb acquired HotelTonight.It led to the integration of HotelTonight’s fast, fun, and simple booking experience for last-minute travelers into the boutique category on the Airbnb platform. 

Value Proposition of Airbnb business model

The value of the Airbnb business model is a place of trust to conduct transactions. Both hosts and travelers can likely find cheaper deals. Hosts can find a way to put up their listings and pay less commission. The same goes for travelers. Yet, it is the sense of trust that ensures the competitiveness and growth of Airbnb. The sense of trust is created through:

• security of transactions 
• the Host Protection Program, 
• 24/7 Customer Support, 
• account verifications, 
• efforts put into professional property photographs,
• reviews and ratings. 

By having this marketplace that is trustworthy, Airbnb can offer travelers a choice of secure stays. Similarly, it offers hosts a way to monetize their properties. 

Customer Segments

Broadly speaking, there are hosts and travelers. These are major segments. However, if to look into each category there would be layers of other customer profiles. For instance, an Airbnb host can be someone who owns a home or an apartment. Or, It can be a person who inherited a property. Alternatively, it can be someone who chooses to relocate for work but does not want to sell the place. Other homeowners can be social and creative people who just enjoy meeting people from around the world. Others are those who are entrepreneurs and purchased several properties specifically for short-term rentals. Others can be families where older children moved and decide to monetize the extra space. In addition, hosts can be owners of condos, summer homes, and other types of properties. 

In terms of customers, there are different profiles too. Young travelers and Millenials, families, solo vacationers, business travelers, you name it. Depending on the category, they can be those seeking affordability or placing a higher value on authentic experiences, and so on. 

Depending on the customer segment, Airbnb tailors its marketing efforts and promotions. Operating under a transactional business model, understanding customer segments ensures the efficiency of each transaction. There can be special efforts for pricing strategies. Overall, the transactional business model places a heavy focus on doing its best to ensure there is a next transaction coming. Therefore, personalization of offerings and ensuring customer satisfaction is vital.  And it relies heavily on understanding your customer segments. Yet, knowing your customers plays significant role in all major business model. You can check them our in the article Top 10 Business Models to consider for your startup.

Customer Relationships

As we’ve discussed in the Value Proposition part, building trust is a key aspect of the transactional business model. To ensure this, maintaining relationships with all its customer segments is vital for Airbnb. To achieve this, Airbnb maintains a community as well as targeted programs. For hosts – they have a Host Protection program, yet it is insurance-like strict. So there are some issues with what is reimbursable, in what amount, and whether there is proof of guest inflicting damage. There is also a community for hosts. For travelers, there is 24/7 support. 

Channels

The value is delivered through Airbnb apps:

• Web app,
• Android native app,
• iOs native app.

Key Partners

The big shift in Airbnb’s success started with the improvement of listings’ images. The co-founder himself spent weekends 6 weeks in a row going to New York and photographing the host’s properties. That was back in 2007-2008. Nowadays, Airbnb has a ‘request professional photography’ option for the hosts. This makes photographers one of the key partner groups. Other key partners include:

• Insurance companies;
• Payment processors;
• Investors;
• Other partners that help ensure compliance with local law including tax law and more.

Key Activities

In Airbnb’s early days, the first website took its owner a couple of days to put together. These days, platform development is a key activity. Airbnb’s internal development works to ensure a smooth, bug-free, secure environment. 

Other key activities include:

• Marketing to acquire new hosts and attract travelers;
• Third-party security providers as this issue is quite complex on the scale Airbnb operates now;
• Customer support with a focus on conflict resolution in cases where there is a dispute between a host and a traveler. 

Key Resources

Resources involved in value creation and distribution are mainly Airbnb’s platform, listings, and people helping to maintain all of it. In addition, there is an algorithm that helps travelers find the best properties.

Other Companies on Transactional Business Model

The transactional business model is popular with a lot of marketplace-like businesses. 

• Of course, one of them is Amazon. Amazon invites third-party sellers to post their listings for sale and charges a commission from each transaction. 
• Uber operates a platform for drivers and passengers. It charges drivers a percentage of each fare. 
• Booking.com is quite similar to Airbnb but focuses on hotels, hostels, and other traditional accommodations. It charges commissions from providers of accommodations, car rentals, and others. 
• Alibaba is a marketplace similar to Amazon but coming from China. It charges commissions from merchants for transactions. 
• Square is a payment processing tool that earns a percentage of each transaction processed through its platform. 
• DoorDash is a marketplace-like platform that connects local restaurants to people ordering food. It charges a commission for each processed order. 
• Instacart is a marketplace for connecting customers with personal shoppers. It charges customer service and delivery fees for each order.
• Fiverr is a marketplace to connect customers and freelancers. The commissions are charged to freelancers for each job fulfilled. 

Frequently Asked Questions About Airbnb’s Business and Revenue Models