Airbnb’s Growth Strategy: How to Make $3.4B in ARR & IPO During A Pandemic

I’m writing a post about Airbnb, from an Airbnb.

Ironic yes, but not unlikely.

In 2019, Airbnb hosted 272 million bookings globally. And, in 2020, despite a global pandemic restricting travel, Airbnb suffered relatively minimal losses of only 22%.

2020 was also the year Airbnb decided to go IPO, despite the global pandemic, a significant drop in revenue, and global travel restrictions.

How did they manage it? A growth strategy like no other, that’s how.

This Process Street blog post takes a deep dive into Airbnb’s growth strategy, how they got where they are today, and where they could be going. To skip to a specific section of the post click the appropriate link below:

• The history of Airbnb: From Obama O’s to turning over $3.4B in revenue
• Airbnb’s growth startegy: Product breakdown
• Airbnb’s growth strategy: Overcoming “stranger equals danger”
• Airbnb’s growth strategy: The sharing economy
• Airbnb’s growth strategy: Promise & deliver on value for everyone
• The future of Airbnb

Let’s start with where it all began, with 3 air beds.

The history of Airbnb: From Obama O’s to turning over $3.4B in revenue

In 2007, at the beginning of the financial crisis, Airbnb started as a simple solution to a pressing problem; co-founders Joe Gebbia and Brian Chesky couldn’t afford rent, so they opened up their San Francisco apartment for guests to stay in. They soon realized they may be onto something bigger than just a way to avoid eviction. So, along with their old roommate, Nathan Blecharczyk, the trio started to build their idea into a hosting business. That was 13 years ago.

Airbnb has evolved substantially since then, though it has not been a straightforward path to success. They launched and relaunched a number of times (six to be exact). They found themselves up to their ears in debt, rejected by multiple investors, and were close to flatlining on more than one occasion.

The Airbnb story is one of perseverance and steadfastness. Opportunities and ideas were found and grasped through innovation to drive massive growth. One of the wackier ideas being their “Obama O’s” and “Cap’n Mcain’s” cereal.

The Obama O’s & Cap’n Mccain’s Story

To summarize the video. Obama O’s cereal sold out in record time, making the founders around $30,000. Substantially more than they had ever made renting airbeds.

(Cap’n McCains didn’t sell out.)

Post Obama O’s

Perhaps the founders’ design background played a role in finding such innovative ideas, or perhaps it was just sheer luck. Either way, their ability to adapt, adjust, and persevere eventually began to work in their favor. By 2019, Joe, Brian, and Nathan had turned a once floundering idea into a global business that operates in more than 34,000 cities in 91 countries. And, in December of 2020, they decided to go IPO, despite the global pandemic, a 22% drop in revenue, and global travel restrictions.

Typically startups prefer to go public during a phase of sustained economic growth and overall stability to have the advantage of confidence within the market. Choosing to go IPO during economic recessions, or in the midst of chaos: like World War II, natural disasters (think: Australia bushfires of 2019), or during a… pandemic isn’t just abnormal, it’s unheard of.

Airbnb’s decision to go public was radical.

Astonishingly, Airbnb’s radical move worked in their favor. Airbnb shares were originally valued at $68. This doubled overnight to $146 and the current value per share (at the time of writing) is $209. Sure, they experienced some fluctuations, but let’s not dwell on that.

Today, Airbnb is more than air beds and breakfasts, Airbnb is used by millions of hosts and guests globally not just for accommodation, but also for experiences. The following section will take a closer look at Airbnb’s product and service offerings.

Airbnb’s growth startegy: Product breakdown

I’ve chosen to keep this section brief, as it’d take a whole post to fully cover the ins and out of Airbnb’s product. For a full low-down check out Pooja Srinivasan’s post: The Tech Stack Behind Airbnb

In essence, Airbnb operates an online marketplace for lodging, primarily homestays for vacation rentals, and tourism activities, aptly named: Airbnb Experiences. Unlike the average home, Airbnb does not own any of the properties listed on its app or website. Instead, it profits by receiving a commission for every booking made via its platform.

What makes Airbnb

Airbnb is a cloud-based application, which allows it to quickly scale and handle heavy workloads. This is what the nifty app relies upon:

1. Programming languages: Ruby and Javascript.
2. Framework: Ruby on Rails. The RoR framework is well known for its awesome capabilities that speed up development and, as a result, reduce costs and TTM (time to market).
3. JavaScript framework: React. A JavaScript UI library, React, is a flexible and efficient solution for building sleek user interfaces.
4. Web server: Nginx. A powerful HTTP and proxy server that speeds up content delivery, while ensuring Airbnb is secure and scalable.
5. Key-value storage: Redis. Redis provides a scalable cache infrastructure and a key/value database.
6. Cloud storage: Amazon S3, EBS. To store user data including user pictures, Airbnb uses Amazon services.
7. Cloud hosting: Amazon EC2. An efficient tool for distributing incoming traffic. It ensures that Airbnb’s system doesn’t go down during sudden traffic spikes or unexpected traffic fluctuations.
8. Cloud database: Amazon RDS. Airbnb keeps its data in Amazon’s cloud relational database.
9. Big data tools: Presto, Druid, Airpal. Airbnb has a ton of user data and therefore rely on various instruments to store, process, analyze, and manage that data.

Airbnb Plus

Airbnb Plus is an invite-only program that recognizes top hosts and places to stay on Airbnb. Many Superhosts are in the Airbnb Plus program and Plus hosts are expected to maintain Superhost-level standards of hospitality.

For those unfamiliar with the app, Superhosts are experienced hosts who provide an example to other hosts, and extraordinary experiences for their guests. Once a host reaches Superhost status, a badge will automatically appear on their listing and profile to help them be identified.

Airbnb.org

Airbnb.org is a new non-profit that connects people to places to stay in times of crisis. It provides emergency response to help provide shelter and homes to evacuees, relief workers, refugees, asylum seekers, and more recently, frontline workers fighting the spread of COVID-19.

Across the globe, more than 100,000 hosts have offered to open up their homes and have provided accommodation to over 75,000 people in need. This is a great example of Airbnb taking a strong social responsibility stance.

Airbnb Experiences

There are online and offline Airbnb experiences. The online experiences can be hosted from anywhere through video, whereas in-person experiences are hosted in a specific location. The experiences range from those relating to culture, art, music, nature, dining, and exploration activities. Airbnb experiences, much like Airbnb stays, are hosted by people who have something they wish to share; but, rather than sharing their home, they share an experience.

The Airbnb we all know

Hosts can use the site to rent out extra space in their house or apartment to travelers. Guests can use Airbnb to find a place to stay, and/or experience something unique and special. Airbnb claims to be:

“A trusted community marketplace for people to list, discover and book unique accommodations around the world.” – Anne Sraders, How Does Airbnb Work for Hosts and Travelers?

Disclaimer: For any of you reading this and thinking: “what about the downside of these short-term rentals, such as the gentrification of local neighborhoods, etc.?” – I’ll cover that later in the post.

Airbnb’s growth strategy: Overcoming “stranger equals danger”

The idea of staying in a stranger’s home may have blown your mind a few years ago, but today it’s not only a standard practice, it’s actually the preferred accommodation for tens of millions of travelers across the world. And there’s one company to thank for that: Airbnb.

The question is, how did they manage it?

How did they convince both hosts to open up their homes to complete strangers, and also persuade guests to stay with complete strangers? Especially given the current crisis of trust we’re experiencing. Thanks to the prevalence of fake news, a general lack of faith in the system, fear of globalization, and the consistent erosion of social values we’re more unlikely to trust now than ever before.

In order to overcome this “crisis of trust” Airbnb has designed a whole system that encourages its users to trust in the, and their product. This system is called the “hierarchy of needs”:

Airbnb’s hierarchy of needs

(Source)

In order for both hosts and guests to trust in Airbnb, they believe they must accomplish three things: Safety, connection, and support. Let’s take a closer look at each of these.

• Safety
  They use technology and machine learning to assess the risk of each and every reservation before anything is confirmed. Globally, they conduct watchlist checks, and in the US they run background checks on every host and guest. They also lead home safety workshops, give out free smoke and carbon monoxide detectors, and provide online safety cards with important emergency information. In terms of data protection, they safeguard all accounts using multi-factor authentication, requiring additional verification whenever a user logs in from a new device. Plus, they don’t release payment to a host until the guest is checked in safely.
• Connection
  Each and every person on Airbnb has a detailed profile page with helpful information about themselves and their home. Hosts can also require that guests provide a government ID, such as a passport or driver’s license, before booking their listing, and then the host, in turn, must do so as well. Airbnb’s secure messaging tool allows hosts and guests to get to know one another before requesting or approving a reservation. Also, guests and hosts can publicly review each other after each stay, so future hosts and guests can see those reviews and take them into consideration before making any decisions.
• Support
  Airbnb’s customer service, trust, and safety teams are on call 24/7 and are available in 11 different languages. Plus they offer rebooking assistance, refunds, reimbursements, a Million Dollar Host Guarantee, and insurance programs, all to help make things right.

Although Airbnb can’t eliminate all risks for both hosts and guests, they clearly strive to ensure that every host and guest have the best, and safest experience possible. But, needless to say, sometimes things do go wrong. I wrote about some of the hurdles experienced by Airbnb in this post: The Minimum Virtuous Product: Is the Move Fast & Break Things Era Behind Us?

In terms of a percentage, the amount of stays that go bad is very few:

“Of our more than 30 million stays in 2016, significant property damage (claims reimbursed under our Host Guarantee program for over $1,000) was reported in only 0.009% of stays. At that rate, you could host a new reservation every single day for over 27 years without expecting to file a significant property damage claim under our Host Guarantee.” – Nick Shapiro, Global Head of Trust & Risk Management at Airbnb

Airbnb’s growth strategy: The sharing economy

Co-founder of Airbnb Joe Gebbia defines the sharing economy as “commerce with the promise of human connection”.

The sharing economy disrupts old notions concerning consumption and ownership. You don’t have to go to work to earn a living, and your “home” can become a source of income. As can your car, your professional equipment … your pet.

In 2013, when Airbnb was scaling rapidly and very much in vogue, Forbes wrote an article featuring Frederic Larson, a famous 63-year-old photographer. At the time, Larson had two kids in college and was looking to fill the family’s piggy bank by any means possible. For twelve days a month, he’d rent out his Marin County home on Airbnb for $100 a night, of which he’d get $97. He also turned his Prius into a part-time taxi via the ride-sharing service Lyft, and pocketed another $100 a night in the process.

Larson leveraged his assets, took advantage of the sharing economy, and generated an average of $3000 a month in revenue.

Airbnb is often described as the best-known example of the sharing economy, which to expand on Joe Gebbia’s definition, consists of: Asset owners who use digital means (such as Airbnb) to capitalize on the material assets they already own. While the consumers rent from their peers rather than making a purchase themselves, in the case of Airbnb the “purchase” would be a home.

What’s interesting here, however, is not that Airbnb found a way to provide people like Larson with an income through the sharing economy. But, rather that they created an entirely new market.

Airbnb created a whole new class of supply that had never before been experienced by guests and hosts but also hadn’t been experienced by the market. This meant that Airbnb could make the rules as they went along, with little to no regulator involvement, particularly in the early years.

“Airbnb was able to enact much more platform-favorable payment terms versus the hotel industry. Unlike Booking.com and the OTAs, guests pay Airbnb at the time of booking, and Airbnb keeps that cash (including fees) until after check-in — which could occur weeks or even months later.” – Acquired, The Complete History and Strategy of Airbnb

The creation of this new market created an immensely beneficial cash-flow dynamic for Airbnb that allowed them to grow while using much less cash than would otherwise have been required. The company created a unique experience, not just for the guests and hosts, but also for the travel industry as a whole. In this sense, Airbnb can be seen as Disruptive technology that shook up the travel and tourism industry.

Airbnb’s growth strategy: Promise & deliver on value for everyone

Airbnb relies on user-generated listings, content from its hosts, and most importantly, upon reviews from both guests and hosts in order to build trust. User engagement is at the root of Airbnb’s success and that is why they do what they can to keep their users happy. How do they do that? They deliver on what they promise.

Let’s take a closer look at how Airbnb strives to deliver on value for both hosts and guests.

Hosts

• Income generation: Hosts keep 97% of the income generated with each booking.
• Convenient transactions: Payment collection, verification, and delivery.
• Insurance: Airbnb offers solutions and promises to mitigate and issues that may arise, such as damage to a host’s property. This includes insurance with the protection of up to $1,000,000 USD; the ability to set house rules that guests need to confirm adherence to prior to booking (e.g. no parties, no smoking, pets, etc), and various other measures.
• Risk minimization: Verified ID forces members to link a Facebook/Google+ account to their Airbnb profile and add personal information.
• Reviews: Online reviews and ratings help hosts judge the reliability of their counterparts.
• Ease of joining the platform: Detailed guidance through the process, resources, case studies, clarity around hosting requirements as well as support (live chat, email, phone).
• Management tools for hosts: Basically a mini reservation management system with various features, such as: listing details, price settings, availability calendar, and more.
• Controlled messaging: Communication between the host and the guest is tightly moderated (no contact information exchange), and reporting features.

Guests

• Large amount of choice & variety: Airbnb has everything from treehouses to castles, and from hammocks to beachside penthouses. There are options on Airbnb that you are unlikely to find elsewhere.
• Often cheaper: You often get more for your money with Airbnb, even with the added 6 to 12% reservation fee. Airbnb stays often tend to be cheaper or provide more value through their included amenities (e.g. kitchen, coffee machine, washing machine, etc).
• Authentic stays & experiences: One of the earliest and still present propositions is to experience the location more authentically.
• Controlled messaging: Communication between the host and the guest is tightly moderated (no contact information exchange), and reporting features.
• Reviews: Online reviews and ratings help hosts judge the reliability of their counterparts.

The future of Airbnb

(Source)

“People will want options that are closer to home, safer, and more affordable. But people will also yearn for something that feels like it’s been taken away from them — human connection. When we started Airbnb, it was about belonging and connection. This crisis has sharpened our focus to get back to our roots, back to the basics, back to what is truly special about Airbnb — everyday people who host their homes and offer experiences.” – Brian Chesky, A Message from Co-Founder and CEO Brian Chesky

Remember the definition given by Joe Gebbia of the sharing economy? “Commerce with the promise of human connection”. As an outcome to the pandemic, the idea of human connection has been turned upside down. What was once considered a positive, unifying, and fundamental part of being human has now been reduced to face-masks and social distancing. The latter of which does not bode well for Airbnb who relies entirely upon human connection, be it through the sharing of one’s own space, or the sharing of an experience.

Specifically, Airbnb’s desire to go back to basics means they intend to return to focus on what they did when they first started in 2007: Provide a platform where everyday people can earn an income through hosting guests in their homes, or by hosting experiences.

This also seems troublesome to me for one key reason: More often than not, it is not everyday people renting out their homes on Airbnb; but rather commercial Airbnb operators, professionals such as brokers, real estate agencies, and multiple advertisers renting multiple apartments.

A 2019 research paper reveals that the more professional an Airbnb listing is, the higher average monthly revenue it stands to make. By professional I’m referring to attributes that reflect the host’s savvy when it comes to selling short-term rentals. Professional hosts ensure they get “Superhost” status, enable instant booking, know the value of professional photographs of their “homes”, and average a higher number of reviews per listing. All of which result in increased monthly revenue.

Other players that do well from Airbnb are those who rent out entire homes. As you’d expect, renting an entire home is more revenue than renting a Granny annex in your backyard. But, where is the human connection in renting an entire home?

So, in summary, I see two key issues with Airbnb’s future plans:

How can they “go back to basics” when both the sharing economy and the travel industry have completely changed over the last 13 years?

Basic no longer exists, and, at the moment, nor does travel.

It is becoming increasingly clear that sometimes it is actually the “everyday people” who are suffering at the hands of the platform.

Professional hosts who treat their listings as de facto hotels rather than opportunities for part-time ‘home sharing’ along with those that can afford to rent out their entire homes are considerably more successful in the Airbnb marketplace. These practices cause long-term rentals to be removed from the housing market and also drive up housing prices within popular neighborhoods. Resulting in gentrification, and erosion of socio-cultural norms.

As such, when looking towards the future of Airbnb, if returning back to basics is the plan, the basic arena would benefit from regulations. Policymakers and Airbnb itself should be concerned about the comparable success of professional hosts, especially as the platform tries to position itself as helping “everyday people”.

Conclusion

From Obama O’s to unicorn status, Airbnb’s road to success had been nothing short of unique every step of the way.

Born out of the 2008 financial crisis, they fundamentally changed the nature of the travel market and provide guests with more quality for less money. The platform has also facilitated and assisted hosts to earn a substantial income.

That being said, the coronavirus outbreak will undoubtedly create a new world for the travel industry and Airbnb will need to evolve to accommodate this. In their evolution, proper consideration of the social ramifications of their product should be prioritized to mitigate further gentrification and income inequality at the hands of the platform.

I’ll sign off with a quote from co-founder Joe Gebbia:

“We didn’t invent anything new. Hospitality has been around forever. There’s been many other websites like ours. So, why did ours eventually take off? Luck and timing aside, I’ve learned that you can take the components of trust, and you can design for that. Design can overcome our most deeply rooted stranger-danger bias. And that’s amazing to me. It blows my mind. I think about this every time I see a red Miata go by.” – Co-founder Joe Gebbia, How Airbnb Design For Trust

Further resources on growth

If you found this content interesting check out this post of hypergrowth featuring Airbnb and Uber:

• Hyper Growth: The Strategies You Need to Reach Unicorn Status

Or, for a look at how the likes of Slack, and Hubspot approach growth, have a read of this:

• Build a Product That Sells Itself With Product-Led Growth

We’d love to know your thoughts on Airbnb’s growth strategy. Let us know in the comments below. Don’t forget to subscribe to the Process Street blog to get notified about our future posts.

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