Airbnb: Unlock Your Own Backyard
By: Alysaa Co & Dorothy Lin
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Airbnb’s Growth Aspirations
Airbnb is a marketplace that connects property owners with consumers looking to book accommodations across the world. The 11-year-old company operates both online and mobile platforms and has a pre-IPO valuation of $38 billion. Airbnb has contributed to the proliferation of the sharing economy alongside Uber, TaskRabbit, and more. As a result of rising competition, Airbnb’s net losses doubled during Q1 of 2019, compared to the same quarter in the previous year. The biggest contributor to this loss was Sales and Marketing costs, which increased by 58 per cent from the previous year. It is evident that the company is investing heavily in customer acquisition and retention, but further growth is coming at a much higher cost.
Turbulence Ahead
In recent years, Airbnb has faced decelerating growth in its core product, Stays, as measured by the number of rental sessions. Morgan Stanley estimates that Airbnb’s bookings grew 29 per cent in 2016 but slowed to 14 per cent in 2018. Airbnb’s historical growth has been driven by consumers shifting to online home rentals, but as this market saturates, it is evident that customer acquisition is slowing down dramatically. Airbnb will face challenges in increasing profits if it fails to increase customer retention or differentiate itself from other online booking competitors.
The Invincible Online Travel Agent
A cause of Airbnb’s plateauing growth is competitive pressures, specifically due to the continued success of online travel agents (OTAs) like Expedia, Booking Holdings, and Trip.com. These platforms have invested in offering similar products in the vacation home rental and apartment segments, competing directly with Airbnb. As a result, the average customer can now visit two to three booking sites before making their decision, without facing any switching costs. As OTAs continue growing, Airbnb’s value proposition of offering unique and authentic Stays diminishes, and the race to develop a comprehensive end-to-end tourism platform becomes much more competitive.
The popularity and growth of Airbnb over the last decade has caught the eye of many entrepreneurs, who are now entering the tourism space. Startups such as Sonder and WeLive have become popular and provide similar value propositions aimed at capturing the millennial market. These companies are backed by various venture capital firms and have attained the necessary funding to compete against Airbnb in select geographies. Airbnb was once a unique company that offered novel customer experiences, but it now exists among many substitutes.
To differentiate from competitive pressures, Airbnb has looked at product expansion opportunities to replicate its core success and increase their share of users’ wallets. The company introduced Experiences in 2016 and has expanded to other categories such as Airbnb Concerts, Social Dining, Restaurant Booking, Trips, Adventures, and Social Impact Experiences. These auxiliary offerings aim to provide unique experiences, but without consistent user engagement and frequent bookings, these services will not be effective in helping Airbnb keep its competitive foothold.
Experience Home
Airbnb must find innovative ways to maintain and grow market share amidst rising competition that threaten the company’s current areas of differentiation. On traditional travel platforms, user purchases are sparse and high ticketed, making it difficult for Airbnb to consistently generate revenue from its customer base. As the number of bookings available in foreign destinations continue to increase, an opportunity is neglected in the local market. Airbnb has a unique opportunity to leverage its two-sided marketplace and authentic experiences to capture users embarking on explorations in their home city.
In order to encourage customer retention, Airbnb should focus efforts on increasing frequency of customer interaction. This can be achieved by leveraging existing auxiliary products such as Experiences to drive regular engagement, as they are smaller purchase items than Stays. Shifting consumer perception of the Airbnb brand to encompass lower ticketed items will encourage greater interaction and increase customers’ willingness to stay loyal. Specifically, the company should launch Airbnb Local, a subscription program targeted at customers in their local neighbourhoods.
The Airbnb Local subscription provides several benefits for the company as they tackle the increasing competitive pressures and stagnating growth. A key driver to increasing customer lifetime value is improving user frequency. The average user frequency of Stays has stayed constant at approximately 3.3 times per year from 2015 to 2017, which indicates the company’s investments into additional products have not been positioned well to provoke increased usage of the platform.
As a part of the subscription program, users will receive discounts on Stays, to help drive demand for Airbnb’s core business. Additionally, by increasing regular platform usage and driving consumer loyalty, users are more likely to select Stays for travel bookings over competitor options. Research has shown that trust and familiarity hesitations are barriers of adoption when considering Airbnb for bookings. Specifically, the idea of staying in another person’s home raises safety concerns for users. This subscription program aims to dissolve the consumer mistrust through repetitive touchpoints with the user, building credibility.
By launching Airbnb Local, the company shifts the direction of its platform from being centered around tourism, to a more holistic experiences platform. Consumers benefit from more frequent and engaging use of the platform, and suppliers of experiences and restaurants can use the Airbnb platform to gain publicity and expand their customer base. Ultimately, the Airbnb platform will become a more rich, diverse, and captivating platform for all users.
The Finer Details
Airbnb Local should be a curation subscription which offers customers novel experiences, aligning with millennial attitudes of spontaneity. The subscription program will be built on two of Airbnb’s main auxiliary products: Experiences and Restaurants. Subscribers will be charged a monthly fee to receive three tailored Experiences and Restaurants to try out each month, based on an initial survey they’ll fill out. The subscription fee will go towards subsidizing the Experiences and Restaurants as well as covering the discounts that consumers will receive on Stays. The subscription package will use Airbnb’s customized recommendation system to answer a growing need in the millennial customer base for personalized activities and encourage price-sensitive customers to book Stays through the platform. Capturing the millennial market will favourably position the firm when this demographic becomes the core customer base of the travel industry over the next decade.
The purpose of having Experiences in this subscription is twofold. Firstly, Experiences is one of the only products on the Airbnb platform that is highly differentiated from OTAs and hotel offerings. Highlighting this unique supply is critical in differentiating Airbnb in its consumer brand perception. Secondly, Experiences can be enjoyed both in foreign destinations and locally, due to its lower ticket prices compared to Airbnb’s other offerings. Leveraging Airbnb’s customer base in their local markets will increase platform engagement, potentially leading to incremental rental bookings.
The Restaurant offering will consist of partner restaurants in each major city that will curate exclusive prix fixe menus, only accessible by Airbnb Local subscribers. This menu will contain popular dishes packaged into a multi-course dining experience priced at a discount to à la carte ordering, similar to the structure of wildly successful events such as Summerlicious and Restaurant Week. The Restaurant offering will be critical in the local subscription package, as dining indulgences are among the most active experiences engaged by a consumer in both foreign and home cities.
To incentivize restaurants to take part in the subscription program, Airbnb should leverage their partnership with Resy, and subsidize the cost of offering these curated menus through the reservation platform. Additionally, restaurants can be promoted to the Airbnb Local customer base through features such as “Restaurant of the Month”. Restaurants benefit from publicity on the Airbnb platform, without having to spend large amounts on marketing through traditional mediums.
Carving Success
To determine the feasibility of the program, Airbnb Local should be piloted in major cities around the world, with a full rollout conditional on the success of the pilot. Airbnb Local will incur marketing costs necessary to attract subscribers and participating restaurants, but should become less capital intensive over time, due to network effects and increasing customer buy-in. The monthly subscription should be priced close to economic break-even, to ensure that the price point is attractive to most members. Airbnb Local should be used to keep customers on the Airbnb platform, and stimulate sales of higher ticket items. The company will also have to invest in acquiring more Experience vendors catered for the local demographic.
In the long-run, smaller ticketed services on the Airbnb platform will be used more frequently by consumers, leading to a stickier platform that is front-of-mind when consumers decide to make bigger travel purchases. Airbnb Local will increase brand recognition in consumers’ minds and re-establish Airbnb’s unique value proposition that originally brought consumers to the platform.