AirBnB Business Model and How does AirBnB make Money

AirBnB Business Model & How does AirBnB make Money – Unicornomy

AirBnB Business Model
AirBnB Business Model

About AirBnB, Funders, Founders and Facts

AirBnB is one of those Decacorns ($10 Billion+ Valuation Companies) that is there to stay, unlike our other favorites like Theranos.

Started out as Air Bed and BreakFast (Air – B and B), primarily hinting towards cheaper modes of stay while travelling out of home.  It is a peer-to-peer online marketplace and homestay network which enables people to list or rent short-term stay in residential properties.  It is that type of the sharing economy business model examples which has done pretty well despite the numerous revenue leakages that this model is prone to and they have done fantastically well to limit the leakage by eliminating the leakage catalyst i.e. charging both the parties equally high (more on this, down).

AirBnB Founders :  Brian Chesky, Joe Gebbia & Nathan Blecharczyk from Good old Silicon Valley.

AirBnB Funding : As of 2016, the company has raised US$2.1 billion in VC funding from Y Combinator, Greylock Partners, Sequoia Capital, Andreessen Horowitz, DST Global, General Catalyst Partners, TPG Capital, General Atlantic, Hillhouse Capital Group, Tiger Global Management, Kleiner Perkins Caufield & Byers, GGV Capital, China Broadband Capital, Horizon Ventures. Google Capital and Technology Crossover Ventures.

AirBnB Valuation : Last know valuation of AirBnB is $30 Billion.

AirBnB Business Model

AirBnB Business Model is pretty straight-forward as it sounds, but as interwined as it can be with the local government.  Primarily the local governments can create lot of hurdles for the home owners to let out their property to any one else.  This recently happened at major locations across the US and other courntries due to murders happening at the host locations and a myriad of other reasons.

Before understanding what the business model of AirBnB is let’s look at it as to how does AirBnB work.

Read one more Sharing Economy Business Model : How does Uber Make Money

How does AirBnB Work

How does AirBnB Work
How does AirBnB Work

Consider this example:

  1. Home owner A has a property in location X
  2. A person B wants to travel to location X but is short on cash so decides on booking an BnB and comes across this portal called AirBnB and books through it
  3. Person B pays upfront fees to the portal + booking charges
  4. Person B confirms travel dates and so does person A (host)
  5. Person B checks into the BnB
  6. Person B Checks out of the BnB
  7. Person A gets their payments from AirBnB after deduction of required fees.

AirBnB Business Model via Traveller Bookings

AirBnB Business Model is primarily dependent on bookings being routed through its platform.  How does AirBnB make Money is actually pretty surprising given the tendency of consumers to bypass the middle man (in this case AirBnB) and do a deal directly with the seller of the services / products.

Assume Traveller does a booking of 100$ per night for 4 nights i.e. 400$ total bill for the stay + AirBnB charges 50$ cleaning fees to the traveller for keeping the apartment check in ready.

AirBnB will charge the customer any thing between 6-12% of the total booking amount (450$ in the above example) depending on the size of the booking to pass on more savings to the customer.   The longer the stay the lesser is the booking fee billed to the travellers.

This is primary AirBnB Business Model.

AirBnB Business Model via Host Charges

AirBnB Business Model by charging the host is pretty similar to that of any OTA except the difference that is dirt cheap.

Remember I talked about how they plugged the revenue leakage from the system by removing the catalyst that causes this damage i.e. charging the host and the traveller equally.  AirBnB does not charge the host basic card related expenses!

Seriously.

AirBnB Business Model works only because a meager 3% of the total booking amount is charged to the host after the customer checks out.  Thus in the above example 3% would be billed to the host on 450$.

This ensures that the host atleast does not try to break the chain by directly dealing with the customer because a meager 3% is what he will also pay to the pos vendor for swiping of credit cards.

How does AirBnB make Money via Different Revenue Lines

How does AirBnB make Money
How does AirBnB make Money

AirBnB has following Revenue Lines:

  1. Charging the Traveller anything between 6-12%
  2. Charging the Host flat 3%
  3. Corporate / Business Travel
  4. Property / Key Management solutions for home owners (via Brokers – No concrete proof of this I could find)
  5. Photography and other services to the host as a one time fee to list the apartment on their website (I could not find proof of this either – but all of this makes sense and they started with the premise of charging the home owner in India but it did not work out)
  6. Checking account Arbitrage on Traveller money

How does AirBnB make Money via Corporate Travel

How does AirBnB make Money via Businesses / Enterprise customers is exactly similar to an OTA business model where the OTA approaches corporates to sign up for their employee travel program and the payments are directly done to the OTA (Online Travel Agent).

Here the fees that is being charged to the user of the property is being passed on via a corporate account to the enterprise to which the employee belongs.

The booking fees here are as low as 2-5% depending on the number of employees and length of stay.  AirBnB does not make money on this for sure, because this does not even cover basic cost of capital since the enterprise customer hold payments for upto 90 days for their vendors.

How does AirBnB make Money via Checking Account Arbitrage

The entire AirBnB business model is based on the premise that most of the travel plans are pre-booked to the tune of 4-6 months we can safely assume that this entire money is lying some where post the payment has been received from the traveller.

It is actually lying with AirBnB.  They hold the entire payment of the host untill the guest checks out or 24 hours post check in (which ever is earlier).

This is how AirBnB makes money from investments because this money is invested in debt market securities like money market instruments which have zero risk and flexible maturity.

Disclaimer : All views on AirBnB Business Model & How does AirBnB make Money are of the authors.  User discretion is advised.

1 Comment

  1. great post – 1 surprise info i didn’t know or wouldn’t have guessed, airbnb making money from investments via debt markets securities as they hold the payment of hosts til guests check out, but make sense & brilliant optimisation.

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