How Does Airbnb Make Money? Business Model Explained!

Airbnb (ABNB) is a platform that connects people who want to rent out their homes with people who are looking for lodging in specific areas.

Since 2007, when its co-founders first proposed inviting paying guests to sleep on an air mattress in their living room, the company has come a long way. According to the most recent data, Airbnb has over six million listings in over 100,000 cities and towns across 220 countries.

Airbnb Business Model

Airbnb’s business model is based on a marketplace platform where hosts and guests exchange housing for monetary compensation. Hosts and guests can find reviews and social media connections during the application process to help build trust among marketplace users.

While useful, Airbnb’s strategy is not novel. Users can now control their experiences and influence future consumer choices thanks to the advancement of digital technology. While not all hotel websites directly offer board review systems, third-party platforms such as Yelp or Expedia do.

While Airbnb facilitates peer-to-peer exchanges, it has no direct impact on host lodging prices. Airbnb hosts follow the same rules as hotels when renting out their homes.

Guests looking for less than seven nights of lodging are likely to pay more than those looking for longer-term stays. Hosts can charge for individual nights, weekly stays, cleaning fees, weekend rates, and additional guests when listing their home on Airbnb.

On weekends, holidays, and when the number of beds is exceeded, rooms, like hotels, can command a premium. Hotel visits, on the other hand, are free of charge because most hotels have in-house cleaning services. Furthermore, in high-demand areas such as major cities or tourist attractions, hotel rooms and Airbnb accommodations are more expensive.

So far, Airbnb has avoided many rental and hotel tax laws. Regulations and property laws can be a major source of worry for hosts. Many states have squatter laws, and visitors who stay in space for more than 30 days are legally granted tenant rights to the rented space.

Furthermore, subletting a residential space such as a home, apartment, or room for less than 30 days is illegal in some states unless the resident is present at the same time as the guest.

How Airbnb Makes Money

There are more than seven million listings on Airbnb in more than 200 countries. It has more than 150 million users, with six people booking a room every second.

Service fees

The majority of Airbnb’s revenue comes from service fees charged to both guests and hosts during bookings. Depending on the listing type, guests must pay a non-refundable service fee of 14.2% or less. Guests can save on service fees by making a larger reservation, allowing them to use the savings on other expenses.

Every completed booking includes a 3% service fee to cover the processing of guest payments. This fee may be higher or lower depending on the listing. Unless the host cancels or retracts the reservation, guests pay the service fee when they book it. If the reservation is changed, Airbnb adjusts the fee accordingly.

Taxes

Customers in the European Union (EU), Switzerland, Norway, Iceland, and South Africa are subject to value-added taxes in addition to Airbnb fees (VATs). Guests in the EU are also subject to taxes based on their home country’s rate. The hosts’ earnings from booking reservations are subject to VAT.

Exchange Rates

Airbnb charges exchange rates if guests pay for a booking in a currency that’s different from the currency of the place they are visiting. Airbnb determines the exchange rates. This allows Airbnb to make a profit from the difference.

Airbnb IPO

Airbnb filed a prospectus to go public on November 16, 2020, and it debuted on the Nasdaq under the ticker ABNB on December 10, 2020. Airbnb’s IPO was priced at $68 per share, rather than the $44 to $50 per share that had been planned, for a valuation of $47.3 billion on a fully diluted basis. Airbnb raised $3.5 billion in its initial public offering, which was more than the expected $2.5 billion.

Airbnb’s bookings and revenue plummeted during the global travel embargo caused by the Coronavirus pandemic. Reservations were 70% lower than the previous year, prompting the company to lay off a quarter of its workforce in May.

Bookings on Airbnb were only 30% lower in June compared to the same month last year during the summer. The surge in demand was driven by tourists looking for nearby vacation rentals to escape cities and take advantage of work-from-home policies.

Airbnb vs. Hotels

The presence of short-term rental taxes and regulations distinguishes the hotel industry from Airbnb. The term “hotel” in New York refers to hotels, motels, inns, bed and breakfasts, apartment hotels, and condos. This category of rentals necessitates the collection of an additional sales tax based on the room charge. In addition, hotels in New York City must charge a $1.50 per day hotel unit fee, in addition to additional occupancy taxes.

As a major source of contention, Airbnb has not always been subject to occupancy tax laws and has occasionally avoided paying sales tax to the local government.

Airbnb, like hotels, includes a value-added tax in its service fees. In the European Union, a value-added tax (VAT) is a tax levied on the final sale of goods and services, most commonly associated with lodging. Due to different tax laws, Airbnb and hotels do not charge VAT to every guest.

Airbnb Competitors

As trusted and well-known as Airbnb is, there are similar property rental websites. Some Airbnb alternatives offer extra benefits, while others have specialized in catering to a particular type of visitor.

Vrbo

After Airbnb, Vrbo (originally known as “Vacation Rentals”) is the world’s second-largest short-term rental company. It is a member of the HomeAway network. Vrbo has 2 million listings worldwide, ranging from apartments to villas, and caters primarily to families.

Because Vrbo is owned by HomeAway, a subsidiary of Expedia, listing your property on Vrbo will automatically cross-list it on Expedia. This saves you from having to make a separate list.

Regardless, Vrbo has fewer listings than Airbnb, which has over 6 million. Vrbo also does not permit the listing of shared spaces, whereas Airbnb does.

Booking.com

The Priceline Group’s Booking.com is one of the world’s largest and most well-known online travel agencies, with listings in 227 countries and support in over 40 languages. Its headquarters are in Amsterdam, but it operates on a global scale.

Unlike Airbnb, Booking.com prioritizes traditional hotel rooms over living spaces hosted by locals. It is, however, a good place to get your property noticed.

Expedia

Expedia, the parent company of large sites like Hotels.com and Trivago, is one of the largest online travel agencies, with millions of bookings each year. As a result, listing a property on Expedia’s website provides great exposure.

Expedia also offers hotels, car rentals, and flights, which allows it to reach a much larger audience than other Airbnb alternatives that only offer short-term rentals.

With 510,000 available listings, Expedia has fewer than Airbnb. Expedia also charges a much higher commission rate of 16.5%.

Challenges to Airbnb

There has been concern that long-term rental units are being converted into de facto hotels, driving prices in the rental market and increasing competition for hotels. $5.6 million of the $1.1 trillion hotel industry’s budget is dedicated to lobbying. 

Airbnb effectively declared war on the American Hotel and Lodging Association in 2016, according to the New York Times, with a national campaign on local, state, and federal levels.

Final Words

Thanks to more accessible travel and lodging, the sharing economy continues to expand rapidly. Airbnb has taken advantage of technological innovations to create platforms that connect individuals for everyday exchanges. 

Although it doesn’t directly provide goods or services, its platform connects individuals who want to transact business. Because of the high number of bookings, Airbnb’s revenue continues to grow while only charging a nominal fee.

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