UCLA | ECONOMICS 106T | FALL 2012

TA: SIWEI KWOK | PROFESSOR BOARD

STEVE WU
FRANK LEE
JEREMY REYNARD

Airbnb
For all the lone wanderers or people just searching for a home away from home,
Airbnb has created the perfect solution for renters and providers worldwide. Since its inception
in 2008, Airbnb started an innovative community marketplace for people to list, discover, and
book a wide variety of accommodations around the world. Airbnb has pioneered a new industry
of collaborative consumption and peer-to-peer accommodation rentals, which leaves room for
the companys potential growth and worldwide adoption.
Airbnb has experienced immense success with over 1 million hosts and travelers, over 10
million nights booked, and over 26,000 cities within 192 countries.1 Despite the substantial
growth and potential within this new industry, Airbnb faces several strategic issues moving
forward. Airbnb lacks a sustainable competitive advantage, faces a heavy influx of new
competitors, and also faces multiple legal and trust issues in the market. Airbnb must determine
its direction moving forward or risk losing its competitive position in this emerging industry.

Collaborative Consumption Movement

Collaborative consumption is a term used to describe the rapid explosion in traditional
methods of sharing, bartering, lending, trading, renting, and swapping.2 Also known as a peerto-peer online marketplace, this trend has seen immense growth in recent years. This
exponential growth is largely due to the increases in internet-accessibility, online social
networking, mobile technology, location-based services, and penny-pinching. There are several
online P2P services offered that defy traditional rental services, such as renting out your own
car, gadgets, parking spot, and even your own garden, among many other things. The ability to
rent out almost anything has been a huge advantage to the peer-to-peer economy, as individuals
can now capitalize on items that would otherwise not be in use.

The development of the peer-to-peer economy challenges existing traditional services in

which a transaction is conducted between a company and a customer. Rather than renting
through a car rental agency (Hertz, Enterprise) or hotel booking company (Hotels.com, Expedia),
consumers can now use a peer-to-peer marketplace where they can find more flexibility and
often a better price. With the advent of the peer-to-peer economy, the industry is seeing
increased competition in the renting marketplace in general, as there are competitors in both the
traditional renting marketplace (Marriott, Westin) and competitors who offer similar services
in the peer-to-peer online marketplace as well (Wimdu, Roomorama).3

History of Airbnb
Founded by Brian Chesky, Joe Gebbia, and Nathan Blecharczyk in August 2008 in San
Francisco, California, Airbnb broke ground as one of the first peer-to-peer services to specialize
in housing accommodations. Unable to pay for housing while traveling to a design conference in
2007, Chesky and Gebbia offered to rent part of their lofts as accommodations to subsidize to
cost of their trip.4 They soon realized the potential in growing this market and joined with
programmer Nathan Blecharczyk to start Airbnb and change the way people think about travel.
In January 2009, the company joined Y Combinators incubator program and expanded
its offerings from just shared spaces to apartments, whole houses, and other properties. The
expansion led to rapid growth throughout the year and in November 2010, it raised $7.2 million
in Series A funding from Greylock Partners and Sequoia Capital, announcing that out of 700,000
nights booked, 80% had occurred in the past six months. By February 2011, Airbnb reached one
million bookings and in July 2011, the company raised an additional $112 million, placing it at a
$1 billion valuation. Using these funds, Airbnb expanded internationally by purchasing Accoleo,
a German clone of the site.5

Airbnb: How it Works

Airbnb is a community marketplace where guests can book living accommodations from
a list of verified hosts. Membership to the site is completely free and there is no cost to post a
listing. Using a targeted user interface designed to narrow down traveling preferences, Airbnb
offers an attractive, cost-saving alternative to traditional hotel bookings and vacation home
rentals. Upon finding a desired listing, guests are prompted to sign up for membership, which
provides access to contact the host directly as well as provide payment information for a request.
Only once the host accepts the transaction and the guest checks in is the credit card charged,
along with a 6-12% transaction fee from Airbnb.6 The process is similarly simple for hosts, who
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receive a notification once a guest indicates interest in a particular listing and have the option to
approve or deny the transaction. Once the listing is booked, the host receives the payment and
Airbnb takes a 3% transaction fee.7
Business Model
By allowing free membership and free access to list properties, Airbnb quickly overcame
the initial mobilization hurdle and attracted a dedicated following of guests and hosts. Users
were free to browse as they pleased and were only prompted to pay a service charge when a
reservation occurred, allowing Airbnb to maximize the number of potential transactions. Airbnb
expanded on its first mover advantage by focusing on customer service and satisfaction. By
forming a reputation of personalization, reliability, and trust, Airbnb attracted users that truly
believed in the brand value the company created. To establish this ecosystem, Airbnb used the
revenue from transaction fees to implement systems such as improved customer verification,
million-dollar theft/damage insurance, authentic guest reviews, and social connections.8 All of
these factors helped Airbnb create a highly scalable business model that has led to promising
financial returns.

Financial Landscape
With nearly $120 million in venture funding to date, most of Airbnbs growth can be
attributed to its heavy investment in marketing and infrastructure. By devoting resources through
the Google Display Network, Airbnb attracted customers through compelling display ads that
introduced its services as an entirely new way to travel the world. This investment largely paid
off, driving a 120% increase in branded searches and increasing the number of nights booked
from 800,000 to 2 million.9 This form of enhanced advertising, as well as an improved website
infrastructure, allowed Airbnb to grow its revenue from $850,000 in 2009 to nearly $45 million
in 2012, translating to a 3 year compounded growth rate of 275%. Sales numbers rose similarly,
from merely 365 bookings in 2008 to 15.8 million in 2012. Even the number of employees
jumped from 4 in 2009 to over 500 in 2012.10 While future growth remains to be seen, Airbnb is
currently enjoying a financial stability that will allow it to invest heavily in expanding its current
market share of users.

Room-sharing P2P Market Forces

Airbnb is currently the market leader in the room-sharing peer-to-peer online
marketplace, but it faces competition from several companies, who are all seeing booms to their
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businesses as the peer-to-peer economy expands. Four of the top competitors Airbnb faces are
Wimdu, Roomorama, 9flats, and Couchsurfing.org.11 These companies have similar offerings in
the P2P property rental market. Because they are very similar in structure (low fees, easily
accessible), there is limited differentiation found among the companies core business models.
The differentiation that does exist is found in the number and diversity of listings, brand
recognition/reputation, and loyalty of user base.

Problems Facing Airbnb

Developing a Sustainable Competitive Advantage
As mentioned before, while Airbnb is a market leader and offers competitive advantages in its
brand recognition, ease of use, extensive listings, and network effects, the company faces
difficulty in maintaining a sustainable competitive advantage. The peer-to-peer rental
marketplace is a recent advent, and as such, is not a defined market and can be shaped with
relative ease. Due to relatively low barriers to enter this market, Airbnbs competitors can almost
perfectly replicate its business model, which makes long-term growth challenging.
Establishing Consumer Trust
A major barrier to the continued proliferation of Airbnb services is establishing consumer trust.
Since Airbnb connects individuals to each other versus the traditional model of connecting
individuals with an established company, continuing to defy this norm is a challenge that Airbnb
constantly faces, and must address while they continue to expand. While Airbnb has insurance
policies in place to address issues of vandalism, theft, or violence, the true cost of these incidents
lie with the potential damage to Airbnbs reputation. As Airbnb continues to expand, methods of
establishing consumer trust must be adapted over several countries and designed to respect
cultural norms.
Legality Issues
Airbnb faces legality issues in both domestic and international markets. There is legal ambiguity
with Airbnbs services and it is not quite clear whether its rental services violate any laws.12 This
may vary from state-to-state and country-to-country, so Airbnb must be cautious of its expansion
to minimize the risks of lawsuits and increased pressure from the hotel industry. Renting
accommodations for less than 30 days is technically illegal in certain states, so Airbnb must deal
with these issues or risk losing its business. Airbnb may need to fix these issues prior to
expanding aggressively or implementing new services.
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Strategic Options
With the arrival of new competition and problematic legal/consumer issues, Airbnb must
prioritize a series of strategic options. Although the company currently enjoys a considerable
first mover advantage, Airbnb must consider three main options to ensure optimal competitive
positioning within the market to secure future financial stability and growth.
Increase usage and establish Airbnb in domestic market
Since the peer-to-peer market is still relatively unknown to the general population,
aggressively advertising Airbnbs business could substantially increase untapped domestic
customers waiting to lend or rent new accommodations. The current 200,000 worldwide listings
statistic merely shows there are still millions of untapped living spaces. Next, resources can be
directed towards developing technology or strategies to differentiate Airbnb from its competitors.
When asked about what separates Airbnb from competitors, Brian Chesky merely listed
aggressive expansion and first mover advantage.13 Airbnb has no sustainable advantage so
developing any edge it can is essential. Airbnb can either focus on addressing its domestic legal
issues through lobbying or circumvent the problem by avoiding the states that outlaw P2P
accommodation rentals.
Integrate Airbnbs platforms with other outlets
The peer-to-peer accommodation rental market is similar to the hotel rental industry, so
Airbnb can adopt similar partnerships with outside companies to bundle goods. If partnerships
are formed, both the outside providers and Airbnb will benefit from increased usage, promoted
traffic, and growth in revenues. Partnerships with car rental services, review services, and airline
agencies are all viable options when browsing selections for accommodation providers. Moving
forward, the erupting collaborative consumption industry also represents potential
partnerships. Instead of only claiming a room, customers can now rent other goods from the
same lenders. For example, a user can have the opportunity of renting a room on Airbnb,
borrowing someones car from a service such as Getaround, and also rent a spare digital camera
through another service such as SnapGoods. The usage of services can be promoted through
integrating their processes together and collectively pushing the savings potential of the
collaborative consumption model.

International Expansion
Airbnbs increasing international user base has heavily accounted for the start up
companys growth over the past five years. However, competitors have risen in the international
markets such as 9flats.com (Europe) and Airizu.com (China) and have quickly gained traction.
Aggressive international expansion could be the optimal priority for Airbnb as the peer-to-peer
accommodations marketplace exponentially expands. New offices need to be created in major
cities such as London, Paris, Shanghai, and others. Local teams can better understand the
geography and culture of the country, leading to better marketing, customer service, and dealings
with legal issues. Next, 24-hour customer service will need expansion into other languages in
order to educate new users and retain previous customers.14 Without adequate support, potential
customers will move towards other accommodation services that provide a better-localized
service. Finally, advertising efforts are required to further educate the general population about
the usefulness of a collaborative consumption modeled business. Since the concept is still so
new and widely unused, increasing expenditures on educating the international market could lead
to the most potential for maximizing worldwide profitability.

Conclusion
As the pioneer for the collaborative consumption industry, Airbnb will be forced to
quickly adapt to changes in the market and attempt to secure the most customers during the
industrys expansion period. By effectively prioritizing the strategic issues, Airbnb can ensure
market dominance in the domestic or worldwide market. The future of the collaborative
consumption market is very uncertain, but Airbnb is poised for continued dominance of the peerto-peer accommodations marketplace contingent on its upcoming decisions.

Exhibit 1
Airbnb Key Statistics

Source: "Airbnb." Fact Sheet. Airbnb.

<http://assets.airbnb.com/press/press-releases/Airbnb Fact Sheet_en.pdf>

Exhibit 2
Airbnb Key Products

Source: "Airbnb." Fact Sheet. Airbnb.

<http://assets.airbnb.com/press/press-releases/Airbnb Fact Sheet_en.pdf>

Exhibit 3
Airbnb Revenue, Employee, and Booking Rate Growth (2008-2012)

Source: "Overview & Corporate Organization." PrivCo.

<http://www.privco.com/private-company/airbnb>

Exhibit 4
Airbnb Revenue Growth (2008-2012)

Source: "Overview & Corporate Organization." PrivCo.

<http://www.privco.com/private-company/airbnb>

10

Exhibit 4
Airbnb Booking Rates Growth (2008-2012)

Source: "Overview & Corporate Organization." PrivCo.

<http://www.privco.com/private-company/airbnb>

Exhibit 5
11

Airbnb Employee Growth (2008-2012)

Source: "Overview & Corporate Organization." PrivCo.

<http://www.privco.com/private-company/airbnb>

12

"Airbnb Fact Sheet." Airbnb.com.

<http://assets.airbnb.com/press/press-releases/Airbnb Fact Sheet_en.pdf>
2

Collaborative Consumption Hub. <http://www.collaborativeconsumption.com/the-movement/>

"Overview & Corporate Organization." PrivCo. <http://www.privco.com/privatecompany/airbnb>

4

"Airbnb Story." Airbnb.com. <https://www.airbnb.com/home/story>

"Overview & Corporate Organization." PrivCo. <http://www.privco.com/privatecompany/airbnb>

6

Airbnb Service Fees." FAQ. Airbnb. Web. <https://www.airbnb.com/help/question/104>

Ibid

"Responsible Hosting." Airbnb. <https://www.airbnb.com/responsible-hosting>

"Airbnb and The Google Display Network." Google. Airbnb.
<http://www.google.com/adwords/watchthisspace/case-studies/airbnb/>
9

10

"Overview & Corporate Organization." PrivCo. <http://www.privco.com/privatecompany/airbnb>

11

"Overview & Corporate Organization." PrivCo. <http://www.privco.com/privatecompany/airbnb>

12

Sankin, Aaron. "Airbnb Legality." Huffington Post.

<http://www.huffingtonpost.com/2012/10/03/airbnb_n_1936523.html>
13

Tsotsis, Alexia. "Airbnb's Brian Chesky on Expansion Efforts." TechCrunch.

<http://techcrunch.com/2011/11/10/airbnbs-brian-chesky-on-expansion-efforts-we-use-ourcommunity-to-figure-out-whats-next/>
14

Lawler, Ryan. "Airbnb Plans Aggressive International Expansion." GigaOM.

<http://gigaom.com/2012/01/26/airbnb-international-expansion/>

13