Impact of Airbnb on Hotels

By:Shreya Baijal 2016-11-15

Airbnb itself was founded in August 2008 and defines itself as "a social website that connects people who have space to share with those who are looking for a place to stay", and exemplifies a community marketplace. Airbnb hosts list their spare rooms or apartments, establish their own nightly, weekly or monthly price, and offer accommodation to Airbnb guests.

Airbnb derives revenue from both guests and hosts for this service. They charge guests a 9 − 12% service fee every time a reservation is booked, depending on the length of the reservation, and they charge hosts a 3% service fee to cover the cost of processing payments. Airbnb's business model currently operates with minimal regulatory controls in most locations, and as a result, hosts and guests both have incentives to use signaling mechanisms to build trust and maximize the likelihood of a successful booking. To reinforce this behavior, Airbnb has built an online reputation system that enables and encourages each guest and host to leave a review upon completion of a stay. Guests use star ratings to rate features of their stay, e.g., cleanliness, location, and communication, while both guests and hosts may provide other information about aspects of the stay, including personal comments. Since its launch in 2008, the Airbnb online marketplace has experienced very rapid growth, with more than seven to eight million guests and over three million nights of cumulative bookings worldwide at the end of 2015. The site is now being used by over 50,000 renters per night and had a market cap of $2.5 billion after its most recent funding round.

AirBnb has quickly become a threat to hotels as travelers choose to book with independent hosts on the website rather than with traditional hotels. 

Loss on Hotels

HVS estimated that hotels lose approximately $450 million in direct revenues per year to AirBnb. Between September 2014 and August 2015, 480,000 hotel room nights were reserved while over 2.8 million room nights were booked on Airbnb.

Airbnbs are less labor intensive than hotels because they do not require the same level of service. Over 2,800 jobs are directly lost to Airbnb, a loss of over $200 million in income for hotel employees.

With lesser demand for hotel rooms comes an additional negative effect for hotels and their employees. When guests choose not to stay in a hotel, the money they would have spent on food and beverages at the hotel's restaurant and bar is likely spent elsewhere. Therefore, the hotel loses out on the revenue they otherwise would have received from that guest. In total, over $108 million of food and beverage revenues ($88 million on food and $20 million for beverages) are lost because travelers choose to book with Airbnb.

Each additional 10% increase in the size of the Airbnb market resulted in a 2-3 % decrease in hotel revenue.

Conclusion:

First, the Airbnb platform has near zero marginal cost, in that a new room can be incrementally added to (or removed from) the platform with negligible overhead. Because of this, Airbnb can scale supply in a near frictionless manner to meet demand, even on short timescales. By contrast, increasing hotel room supply involves buildout, causing significant marginal costs for hotel chains. Second, Airbnb offers a much wider range of products and services than hotels: Airbnb users can rent anything from an apartment to a yurt. More importantly, because Airbnb leverages existing housing inventory, it can potentially expand supply wherever houses and apartment buildings already exist. This is in contrast to hotels, which must be built at locations in accordance with local zoning requirements. Therefore, competition by Airbnb is potentially harder for incumbents to adapt to, compared to competition by other hotel firms.

 

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