The Business Of

Sharing | Airbnb | How Do They Make Money?

Morning All!

So yesterday, we started our new series on The Business Of Sharing. And we looked at Airbnb’s remarkable journey from scrappy startup to global giant. Today, we’re going deeper and asking the question - how does Airbnb actually make money from their platform?

And to help answer this, we’re going to break Airbnb’s revenues down into its 3 main drivers;

1. the number of nights booked,

2. the booking value/night, and,

3. 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 by the end of today, you’ll see how companies like Airbnb (and Uber) think about their revenues. Right, let’s crack on!

Ross and Rachel… as just Friends!

Okay so let’s start with an example. And for our 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 4 nights. And 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. And for guests, the average service fee is ~14%. Which means Ross parts with the $400 (4 nights x $100) + $56 (14% x $400). So Ross 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.

Okay, so hopefully that’s clear. Airbnb made $68 total revenue from this Ross-Rachel booking. But now, I want to break this $68 revenue down into its 3 drivers we saw earlier.

• Number of nights booked = 4.

• Gross booking value/night = $114. Ross’s $456 divided by 4.

• Take rate = 14.9%. Airbnb’s $68 revenue as a percentage of $456.

And the key thing to take from this is that there are 3 ways Airbnb’s revenue increases. If Ross had booked for 5 nights instead of 4, 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 3 drivers… starting with nights booked!

Revenue Driver #1 - Number of Nights Booked

So, the number of nights booked on Airbnb. How does this go up? Well, there’s 2 ways. And the first way, 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 vs pre-COVID, maybe we will see guests adding a night or two to their trips!

Working from home beach

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 4 nights. But let’s say Ross’s friend (Joey) also books a trip for 4 nights. That’s now 8 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. And by 2022, this had grown to a whopping ~96 million!

Okay so, 96m trips booked. The average trip length is 4.1 nights. That means that there were ~394 million (96 x 4.1) nights booked in 2022 right? And yes, that’s right! The chart below shows us how nights booked has more than doubled from 186m in 2017 to 394m in 2022. A handsome growth rate of 16% CAGR!

Alrighty, so that’s one driver down. Let’s move onto revenue driver #2!

Revenue Driver #2 - Booking Value/Night

Okay so back to Ross. We saw he paid $114 per night for his trip. But what was the actual average booking value/night on Airbnb in 2022? Well, it was a little higher at $160!

And the chart below shows us that this nightly rate has increased a whopping ~40% from $113 in 2017! So, what’s going on here? Why are prices getting so much more expensive? And although this may increase their revenue - is this actually a good thing for Airbnb?

Well, to start with - unfortunately for Airbnb - they don’t have much control over prices! Whilst Airbnb does suggest recommended nightly rates to homeowners. It’s the homeowner who ultimately decides what price they want to set their property’s nightly rate at. And this actually is a bit of a problem for Airbnb…

… because pricing was one of the main reasons why the company became so successful! Instead of booking expensive hotel rooms, travellers had the option of booking much cheaper places through Airbnb. But now, prices are on the up. And people are starting to notice the price difference between Airbnbs and hotels is starting to narrow!

So, why are nightly rates rising so much? Well, it’s a combination of rising demand and rising inflation. As we know from A-Level Economics, as demand for something (here, Airbnb properties) increases. Suppliers (here, hosts) will feel like they can put their prices up. And as inflation took hold globally, hosts had additional reason to raise nightly rates to make up for their higher expenses (e.g. electricity bills).

Alrighty so let’s get back to our maths. We saw earlier that in 2022, Airbnb had 394 million nights booked. And we’ve just seen that the average booking value per night was $160. Multiplying these numbers gives us ~$63 billion - the total value that was paid for nights on the Airbnb platform in 2022. However as we know, this isn’t Airbnb’s revenue! Because most of this $63bn goes to the hosts of course! So, what is Airbnb’s take of this $63bn? Well, let’s find out…

Revenue Driver #3 - Take Rate

Okay, so $63bn is the total value paid on the Airbnb platform. This $63bn is also known as GBV (gross booking value). Remember in our Ross-Rachel example, our GBV was $456 (4 nights x $114/night). And Airbnb took $68 of this, which equated to a take rate of 14.9%.

But question - what’s the actual take rate for Airbnb? Well, in 2022 the take rate was 13.3%. And the chart below shows us that this rate has stayed on a fairly smooth upward trajectory - aside from the COVID year of 2020.

Now, unlike the booking value/night, Airbnb have complete control of this. They decide how much they want to take of each booking. And next week, when we look at The Business Of Uber, we’ll dive more into whether 13.3% is high or low. But for now, let’s just chat about Airbnb’s favouritism towards hosts. Because as we saw earlier, Airbnb charges Ross 14% but only charges Rachel 3%. Poor Ross!

But you may be wondering - why is this? Why do guests get charged so much more than hosts? Well, it’s because Airbnb prioritises hosts (the supply side)! They know that if there wasn’t a supply of homes on the platform, Airbnb wouldn’t exist! And so since day one, the company has done lots to incentivise homeowners to list their properties on the Airbnb platform. We’ll see some examples of this tomorrow!

But this tactic - to prioritise the supply side - is a hugely common tactic for many platform businesses. We’ll see it next week with Uber, but for now, this brilliant article from ‘Lenny’s Newsletter’ gives you more examples of where this happens!

27% Growth = Great For Nvidia… Not So Great For Airbnb

Alrighty, let’s wrap up and now put it all together! So in 2022, Airbnb had 394m nights booked. The average booking value was $160/night. And Airbnb’s take rate was 13.3%. Multiplying these 3 figures together gives you a figure of $8.4bn. And voila - that’s Airbnb’s 2022 revenue!

The chart below shows us how the company’s revenues have grown at a pretty healthy 27% CAGR from $2.6bn in 2017. And this has mostly been driven by growth in the first revenue driver - number of nights booked.

Now, I said 27% is ‘pretty healthy’. Which may seem odd. Because when we looked at Nvidia and Netflix, I was gushing over a ~25% growth rate. But the difference with Airbnb is that the company is still relatively young! This was a company growing at well above 50% very recently. And so despite that ‘pretty healthy’ growth rate, many commentators have been slightly disappointed with only 27%!

So, will Airbnb’s revenue growth continue to slow? And how large could Airbnb’s revenue grow to? Well, we’ll dive into this a bit more on Friday. But you now know it’ll be a function of nights booked. The average booking value/night. And the take rate. Good luck forecasting!

26th Sep 2023

Nigel Jacob CFA