Airbnb has been on a remarkable journey from scrappy startup to global giant, becoming a name everyone recognises. Now, we’re going deeper and asking the question: how does Airbnb actually make money from their platform?
To help answer this, we’re going to break Airbnb’s revenues down into its three main drivers:
- the number of nights booked
- the booking value/night
- the take rate
Now, that might sound slightly confusing. You might be wondering what on Earth a take rate is, but don’t worry, we’re going to simply go through each of these drivers and you’ll see how companies like Airbnb (and Uber) think about their revenues.
Okay so let’s start with an example... We’re going to use the classic pair, Ross and Rachel!
Ross is the Guest looking for a place to stay and Rachel’s the Host. This is obviously some parallel universe where Ross and Rachel didn’t end up together by the way... Let’s say Ross books a quick trip to Rachel’s place for four nights. Rachel charges him $100/night, so 4 nights x $100 = $400. Great, we have a booking!
But hold on, where’s Airbnb’s revenue from all of this? Well, Ross doesn’t just pay $400. He has to pay a service fee. For guests, the average service fee is ~14%. Which means Ross parts with the $400 (4 nights x $100) + $56 (14% x $400), so he pays $456 in total and Airbnb makes $56 (the service fee) from him.
Now, that’s probably not a surprise to a lot of readers. Those of us who’ve been guests before know Airbnb take a service fee. But what you may not realise, is that Airbnb also take a service fee from hosts… but it’s a lot less than 14%! So, does Rachel get all of that $400 from Ross? No! Airbnb takes ~3% from her, which means Rachel gets $400 (4 nights x $100) - $12 (3% x $400). So Rachel gets $388 and Airbnb makes $12 (the service fee) from her.
Airbnb made $68 total revenue from this Ross-Rachel booking. But now, I want to
break this $68 revenue down into its three drivers we saw earlier...
Number of nights booked = Four.
Gross booking value/night = $114. Ross’s $456 divided by four.
Take rate = 14.9%. Airbnb’s $68 revenue as a percentage of $456.
The key thing to take from this is that there are three ways Airbnb’s revenue increases. If Ross had booked for five nights instead of four, Airbnb would’ve made more revenue. If Rachel had increased her nightly rate from $100 to $150, Airbnb would’ve made more revenue. And if Airbnb decided to take a higher service fee % from Ross and/or Rachel, they would’ve made more revenue.
Now, let’s jump into each of these three drivers, starting with nights booked.
So, the number of nights booked on Airbnb, how does this go up? Well, there are two ways. The first is if people book longer trips. The average length of a trip on Airbnb is 4.1 nights and if this 4.1 figure goes up every year, that’s great for Airbnb, because more nights means more revenue.
Now, unfortunately for Airbnb, on average, the length of people’s holidays doesn’t tend to go up much year on year. In fact, the average rental stay on Airbnb has stayed pretty flat at ~4.1 nights for the past few years. However, with more employees being allowed to work remotely now, maybe we will see guests adding a night or two to their trips!
However, there is a second way nights booked can increase, and that’s if there’s more people booking trips on Airbnb. Ross’s trip was four nights, but let’s say Ross’s friend (Joey) also books a trip for four nights. That’s now eight nights booked! And this is exactly what’s happened at Airbnb. As more people around the world have become aware of Airbnb, the number of trips booked through the platform has grown strongly. Back in 2017, ~45 million trips were booked on the platform, but by 2022, this had grown to a whopping ~96 million!
Read the full article - and plenty more from The Business Of - on The Athlete's Voice by 4CAST.
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