When Brian Chesky and Joe Gebbia rented part of their San Francisco apartment in 2008 to make ends meet, they had no notion that it would inspire a profitable business trend. By the end of 2015, Airbnb, the company they eventually founded, was on track to earn $900 million.
Despite such impressive growth, Airbnb has faced numerous challenges along the way. In 2014 the company considered going after new customer segments beyond the urban, budget-conscious traveler that was its bread and butter. Given the criticism that Airbnb was drawing from the hotel lobby and regulators alike, some questioned whether stepping on their toes even further was the best way forward.
The Rise of the Sharing Economy
Airbnb represents more than a rags-to-riches story. Its success ushered in a whole new era in economic thinking: the sharing economy. Collaborative consumption, whereby consumers access goods without the need to own them, has been gaining ground over the past several years. One of the most important drivers behind the peer-to-peer marketplace has been technology, which facilitates payment as well as the aggregation and tracking of guest and host information.
Airbnb was successful for several reasons. First, it enjoyed first mover advantage. But more than that, the company knew how to foster the one key ingredient that allows a peer-to-peer online business to thrive: trust. The company's platform guarantees the authenticity of its review system and makes sure that all payments are secure and timely.
Airbnb's fast growth was enviable and the momentum looked set to continue. "Marriott wants to add 30,000 rooms this year. We will add that in the next two weeks," Chesky stated in 2014.
Considering the business from his vantage point as General Manager for North, East & South of Europe and Russia, Jeroen Merchiers pondered how to expand the supply of properties in the Mediterranean region. One possibility was to look beyond the traditional city-break traveler to reach tourists seeking rural getaways. He wondered if the Pyrenees region was worth looking into -- but he would be entering a competitive landscape where several other providers, such as the travel service giant Booking.com, already had a strong foothold.
There was also the idea of addressing more high-end segments beyond the usual budget-conscious travelers. As Chesky noted at the time, "We're starting to see people who aren't on a budget."
But rapid growth into unfamiliar territory brings its own set of issues. Without the right mechanisms in place to continue fostering trust, such rapid expansion could compromise quality and service levels. If these strategies backfired, instead of helping the company stride ahead, these new segments could become its Achilles' heel.
Answering the Opposition
Businesses in the sharing economy still hover in a regulatory gray zone. An apartment can be a home or idle inventory that can be monetized as lodging. Because Airbnb properties are not officially tourist accommodations, governments cannot collect taxes nor guarantee consumer health and safety. For its part, the hotel lobby sees Airbnb encroaching on its territory. Yet contrary to the industry's fears, occupancy and room rates do not appear to have suffered from the competition. In Barcelona, for example, between 2011 and 2013, occupancy rates increased by 4 percent, while average daily room rates rose to 116 euros from 110 euros per night.
Airbnb argues that the success of its model is that it allows a segment of consumers with less disposable income to stay in the heart of very expensive cities at much more affordable rates. And what these consumers save on accommodation they spend on other kinds of consumption. According to Airbnb, over the course of a five-night Airbnb stay in Barcelona, guests spent an average of 842 euros compared with 374 euros for a typical two-night hotel stay. Airbnb reports similar levels of economic activity for other cities.
Meanwhile, other questions were being raised among different peer-to-peer players operating in the ride-sharing sector related to the unionization of drivers. Should we consider the people who provide the asset as independent contractors or as quasi-employees? These sorts of questions were being closely watched by other businesses in the sharing economy to see how they might be affected.
Merchiers and Airbnb senior management had a lot to think about and no easy answers. How should the company grow in new geographic and demographic segments without compromising the trust between property owners and guests that has been at the heart of its success? How should they engage with city officials to answer the regulatory issues? Finally, what should they do to integrate hosts into the business model and decision-making process, in order to strengthen their sense of community and avoid bad press?