Introduction to Airbnb

Airbnb also known as ‘Air – Bed and Breakfast’ is a leading organization in the hospitality industry that operates on an online marketplace (Zervas et. al., 2017). The business is aimed at providing people with leasing or renting properties for short durations. These properties include hostel beds, guest houses, residential apartments, cottages and hotel rooms. The most unique attribute of the business is that none of these properties are owned by Airbnb (Guttentag, 2015). Therefore the business just provides a platform for property owners and property renters.

Airbnb is a perfect example of a disruptive innovation. The uniqueness of the idea, the flawless execution, excellent consumer understanding and the increasing demand for the business has allowed Airbnb to enhance their consumer base and witness expansive growth throughout the world. The company was formally launched in February 2008 by founders Brian Chesky and Joe Gebbia. At present the brand operates in over 190 countries and processes millions of bookings annually. This report highlights upon the brand’s competitive advantage, the hospitality industry’s trends and the company’s target market.

For the success of any business, it is imperative to identify the target market of the brand during early stages of formation. Identifying the target market assists brands in understanding consumer needs.

There are various segments are targeted by the hospitality industry in EU and abroad. Players of the hospitality industry divide the customers of the brand on the basis of following segments. These segments include:

Geographical segmentation: Geographic segmentation of the customers refers to dividing the business’s customers on the basis of their geographical locations.

Length of stay: Customers can also be divided on the basis of their lengths of stay. Customers who stay longer generate better revenue for the hotels.

Psychographic segmentation: Customers are also divided on the basis of lifestyles within the hotel industry. Customers belonging to a higher income group tend to avail value added services offered at the restaurant.

Airbnb business model aims to bridge the gap between property owners and travelers or lodgers who need accommodation facilities for short durations. Airbnb runs on an online platform where property owners can register their properties (lodging homes, rooms, bunk beds, hotel rooms) with Airbnb (Ert et. al., 2016). Renters or travelers who are seeking short duration accommodation facilities can register with the business and book rooms for the desired duration.

The property owners can decide the price that they wish to charge for their facilities and Airbnb would list the same after adding their fees. Airbnb also allows people to host experiences. These experiences may include a local city tour, cooking, weaving, cycling or painting. This allows customers to experience different things with experts of various fields.

Target Market of Airbnb

Therefore Airbnb is a two sided online platform. On one hand, the business enables owners to earn rent money and on the other hand, it enables tourists to rent out places for short durations. Tourists can choose the place that they wish to rent and similarly hosts can also choose who to rent out their space to. Airbnb receives commission from two sources upon every booking. The brand charges guests 6-12% of the booking fee and charges hosts 3% of every successful transaction (Oskam & Boswijk, 2016).

Target market of a business include the set of customers whose needs the business aims to fulfil. The target market of Airbnb includes the following:

Travelers: Airbnb target’s tourists and travelers who enjoy travelling but prefer being economical. The specific kind of people targeted by Airbnb are those who would rather spend more money of travelling to tourist places rather than on the place of accommodation.

Hosts: Hosts of Airbnb include those owners who are willing to rent out their place in order to make some money or to meet interesting people from across the globe.

Within the hospitality industry, Airbnb specifically targets the following customer segments:

Geographic segmentation: Airbnb target customers from over 190 countries which includes hosts as well as guests.

Psychographic segmentation: This segmentation refers to the process of segmenting customers on the basis of their lifestyles (Wedel & Kamakura, 2012). Airbnb target travelers who travel frequently and for short duration. The brand also target people who plan their holiday economically and do not necessarily need a luxurious accommodation.

Demographic segmentation: Airbnb targets customers who fall in the lower income group. The brand targets customers across all age groups. However, it is the youth which provides maximum business to Airbnb as compared to families with children.

Porter’s five forces helps brands in understanding the industry within which they operate (Dobbs, 2014). For the hospitality industry and specifically for a disruptive innovation like Airbnb, the Porter’s five forces applicable are as below:

The bargaining power of buyer’s is relatively less since the brand is targeting a huge customer base. Moreover, there is no room for negotiation for any property’s price that is being shown on the mobile application or website. The bargaining power of buyers is therefore limited as the prices are determined by the hosts and Airbnb has little role to play in manipulating these prices. Moreover, Airbnb has a large number of hosts and hence the guests already have sundry options before booking their stay.

Bargaining power of suppliers

Porter’s Five Forces Analysis for Airbnb

The suppliers in this case are various hosts who list their properties with Airbnb. The bargaining power of suppliers at the moment is moderate. Airbnb’s entire business model is largely dependent on the availability of properties with these hosts. However, the monopoly, uniqueness and strong brand of Airbnb ensures that the bargaining power of these suppliers remains under control. If the competition in the industry increases, then the bargaining power of these suppliers would increases drastically.

The threat of new entrants currently is low. The cost involved in establishing a new brand, garnering the large number of guests and hosts as well as building trust among customers is very high. It will take a long time for a new entrant to pose threat to Airbnb. Moreover, at present, Airbnb is charging 6-12% from guests and 3% from hosts. This is great deal for customers on both ends and this has been possible because Airbnb is running on economies of scale. For a new business, it will be difficult to sustain in the market with such margins (Nurlansa, 2016).

The threat of substitution refers to the threat posed by substitutes of the product or service that exist in the market (Rothaermel, 2015). There are no practical substitutes for accommodation facilities for travelers. Therefore the threat of substitutes for Airbnb is negligible.

The competition within the hospitality industry is extreme and hence it is imperative that Airbnb continues to differentiate its services from other players of the industry. The uniqueness of Airbnb’s business model will soon be imitated by other players or new entrants in the industry and convert this blue ocean into a red one. Competition may cause price wars which may even adversely impact Airbnb’s bottom line. This is why it is essential that Airbnb continues to target new customers and put efforts in ensuring customer loyalty and repeat purchases.

Competitive advantage for any business throws light upon all those aspect that make the business different from its competitors (Gobble, 2012). Airbnb is a disruptive innovation that has changed the face of hospitality industry. The major competitive advantage of Airbnb is its wide reach, strong brand name, trust among consumers and uniqueness of the business model. The value added by these competitive advantages of Airbnb are as below:

Unity in diversity: Unlike other hotels, Airbnb does not provide accommodation, Airbnb provides experience to customers. People from different parts of the world open up their homes for different people. People coming from sundry backgrounds live together, share their experiences and learn about each other’s cultures and lives. This creates a positive atmosphere and also enhances brand loyalty. Since people who can afford luxury hotels may also book Airbnb rooms to experience this.

Competitive Advantages of Airbnb

Sharing experiences: A unique feature of Airbnb allows guests and hosts to share experiences (Lehr, 2015). Apart from offering accommodation, hosts registered on Airbnb can also invite guests to share experiences including weaving, cycling, swimming, pottery or any other unique experience that people can enjoy together.

The sources of these competitive advantages are as below:

No real estate: The major source of the competitive advantage of Airbnb is that even after organizing of the largest hospitality business, the brand does not own a single property under its name. This largely reduces business costs. It is important to note here that hospitality industry is highly expensive and a new entrant in the market would require a heavy investment to begin. Airbnb has massively reduced its costs through its unique business model.

Massive reach: Another source of competitive advantage of Airbnb is the brand’s massive reach. Airbnb operates in over 190 countries and has hosts listed from remotest parts of the world. The reach captured by Airbnb is truly unfathomable and consistently growing. A large hotel at any given point of time will only be able to service a couple thousands of customers. On the other hand, Airbnb can serve millions of customers on a regular basis.

Strong brand name: In a span of a few years, Airbnb has earned a solid brand name for itself. This brand name has allowed Airbnb to grow and reach out to millions of customers on a regular basis and earn various advantages for the brand as compared to its competitor (Lee & Kim, 2018). The brand name of Airbnb instils trust and assurance of impeccable service and a user friendly experience.

Unique Promotion strategies: Airbnb’s unique promotion strategies have also allowed the brand to garner the popularity and trust that it has received. Airbnb has resorted to unique digital marketing and social media marketing strategies which has helped the brand in reaching out to wide customer segment.

Value added services offered by businesses play a significant role in enhancing customer loyalty and reach. Hotels are currently starting to offer numerous value added services to customers. These value added services include in built gyms, spas, swimming pools and entertainment centers. The increasing amount of value added services offered by these hotels would adversely impact Airbnb’s business. This is because Airbnb can only offer what hosts are willing to offer. Therefore, even if the brand wants to offer value added services, it needs cooperation from several hosts which is difficult.

Sources of Competitive Advantages

Global tourism industry is one of the largest industries in the world with total economic contribution of over 7.6 trillion in 2016 (Statista, 2017). This growth of travel industry is expected to sustain. Increasing number of travelers would benefit the competitive advantage of Airbnb as the brand has a large number of properties and hosts listed. Leading hostels of the industry have a limited number of properties and hence at a certain point of time, they can only cater to that many customers. On the other hand, Airbnb does not own any property but bridges the gap between guests and hosts. Therefore, with the increase in the number of travelers across the globe, it would be easier for Airbnb to expand its reach and cater to a much larger number of customers.

Another trend that is already being witnessed in the hospitality industry is that of package tourism. Customers are not booking hotels, they are booking holidays. This means that it is the responsibility of the hotel to ensure that their guests travel around the city, cover important destinations and enjoy the local experiences. This reduces the stress of planning the tour for the guests and shifts it to the hotels instead. Airbnb cannot adopt this strategy as it ties up with different hosts from across the globe. Various travel agencies are also allowing travelers to do the same. This is sure to negatively impact Airbnb’s competitive advantage.

As discussed before the threat of new entrants which is moderate at the moment may increase in the future. This is because the cost of establishment is relatively lesser for business’s that imitate Airbnb’s model of revenue. The reason why this threat is moderate currently is owing the large reach and the immense amount of trust that Airbnb has garnered from across the globe. Therefore, any new entrant would take time to reach the despicable lengths that Airbnb has. However, over a period time, with increased innovation and differentiated services, it is likely for new entrants in the market to impact Airbnb’s monopoly in their current business model.

The coming years will also witness the growth of big data analytics which will allow hotels to enhance their relationship with customers by analyzing data at the minutest level and offering customized services (Xiang et. al., 2015). In the years to come, hotels will be able to track down and identify various details about their customers and work towards ensuring customer satisfaction by offering highly customized services to all their guests. Data is one of the most precious asset that every modern brand has. Owing to increased dependency of Airbnb on its hosts, the brand may not be able to reach a significantly high level of service customization.

Disruptive innovation is not a trend that is limited to hospitality industry but it is a trend that impacts all industries alike. Over the recent years, we have witnessed that every industry faces a new innovation that disrupts the status quo and adversely hampers the existing players of the industry (King & Baatartogtokh, 2015). There no certainty of knowing if and when will this disruption occur, but it is safe to say that Airbnb must ensure that must continue to work upon its sustainability through innovation and differentiation in order to be prepared when such a disruption occurs.

Airbnb has created a massive disruption in the hospitality industry owing to the uniqueness of its business model. The strategies that must be adopted by an EU hotel’s chain in order to respond to Airbnb are as below:

The hotel can offer package tourism rather than simply offering a source of accommodation to its guests. Hotel chains have a clear advantage of being physically present and hence they can participate in planning the entire holiday for customers rather than simply offering them a place to stay. This would include their food, lodging, travel and tourism experiences would be planned and executed by the hotel chain. This would relieve the tourists from the stress of conducting extensive research and planning a holiday in an unknown destination.

Niche targeting refers to the process of targeting a small set of customers which is unique to the hotel chain (Hill et. al., 2015). The chain must creatively define a unique target market for itself and ensure that fulfills every demand of that particular customer segment.

Promotion of a business is crucial to the success of the business. Therefore in order to attract customers from different parts of the world, the hotel chain must adopt extensively unique marketing strategies. These strategies must include Digital marketing, social media marketing, billboards and television ads. These ads must be creatively curated to ensure significant attention from customers.

Conclusion

Airbnb is a leading name in the hospitality industry. The brand has created waves in the industry through its unique business formula and extensive reach. Airbnb does not own any real estate property but provides accommodation facility to millions of customers on a regular basis. The brand has various competitive advantages which differentiate it from other players of the industry. The strong brand name, unique business model, wide reach and extensive advertisement has allowed Airbnb to rule the hospitality segment and reach the pinnacle of success. The brand must continue to strive heard, innovate more and ensure efficiency of service in order to sustain the market and competition in the industry.

References

Dobbs, M., 2014. Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), pp.32-45.

Ert, E., Fleischer, A. and Magen, N., 2016. Trust and reputation in the sharing economy: The role of personal photos in Airbnb. Tourism Management, 55, pp.62-73.

Gobble, M.M., 2012. Innovation and strategy. Research-Technology Management, 55(3), pp.63-67.

Guttentag, D., 2015. Airbnb: disruptive innovation and the rise of an informal tourism accommodation sector. Current issues in Tourism, 18(12), pp.1192-1217.

King, A.A. and Baatartogtokh, B., 2015. How useful is the theory of disruptive innovation?. MIT Sloan Management Review, 57(1), p.77.

Lee, S. and Kim, D.Y., 2018. Brand personality of Airbnb: Application of user involvement and gender differences. Journal of Travel & Tourism Marketing, 35(1), pp.32-45.

Lehr, D.D., 2015. An analysis of the changing competitive landscape in the hotel industry regarding Airbnb. Dominican.

Nurlansa, O., 2016. Analysis Porter’s Five forces Model on Airbnb. Elinvo (Electronics, Informatics, and Vocational Education), 1(2), pp.84-96.

Oskam, J. and Boswijk, A., 2016. Airbnb: the future of networked hospitality businesses. Journal of Tourism Futures, 2(1), pp.22-42.

Rothaermel, F.T., 2015. Strategic management. McGraw-Hill Education. United States.

Statista, 2017, ‘Global Tourism Industry’, Available at https://www.statista.com/topics/962/global-tourism/, retrieved on 30 April, 2018.

Wedel, M. and Kamakura, W.A., 2012. Market segmentation: Conceptual and methodological foundations (Vol. 8). Springer Science & Business Media.

Xiang, Z., Schwartz, Z., Gerdes Jr, J.H. and Uysal, M., 2015. What can big data and text analytics tell us about hotel guest experience and satisfaction?. International Journal of Hospitality Management, 44, pp.120-130.

Zervas, G., Proserpio, D. and Byers, J.W., 2017. The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry. Journal of Marketing Research, 54(5), pp.687-705.