Airbnb, Sustainable Competitive Advantage — Business Strategy and The Key Success Factors
In 2008, three recent college graduates Chesky, Gebbia, and Blecharczyk, started a website called Airbed & Breakfast(which became Airbnb) to allow people to rent out part of their homes to travelers — An alternate for expensive hotels. The idea itself was not new, and the market already had similar websites — HomeAway.com, VRBO.com, Couchsurfing.com, BedandBreakfast.com, and Craiglist.
Though Airbnb was a late entrant, it began to climb up the ladder quickly. By 2016, within eight years, the valuation of Airbnb reached $30 billion whereas, HomeAway was at $4 billion. The new company had 140 million guest arrivals in that year. It was phenomenal growth.
What were the reasons behind Airbnb growth? How did the brand build its sustainable competitive advantage?
Note: The following content is largely from the book ‘The Airbnb Story’ by Leigh Gallagher.
1.0 BRAND POSITIONING — Niche, Positioning, Value Propositions,
The first step in building a sustainable business is to position your brand inside a consumer’s mind. The ways to enter their mind is
a) Becoming a leader in an existing product/service category(It would need massive investments in money, effort & time and not a practical option)
b) Becoming first in any new product/service category. In other words, you need to create a new listing.
If you plan to create a new category, then the conventional wisdom is to look for a niche market.
Finding a Niche Market — The general rule is to start small. Focus on a particular need, work on it, make your product distinctive, and dominate the niche market. Narrower the segment, it is easier for the entire company to focus and meet the customer needs, wants, and desires. Once you become a leader in the niche market, you could grow your market.
1.1 Airbnb’s Niche Market
The Exposition — During college days, Brian Chesky and Joe Gebbia had become friends by working together on several projects and social initiatives. Chesky was one year senior to Gebbia. As both of them found it comfortable working with each other, they strongly felt that if they start a business together, they could surely succeed.
After graduation, Gebbia moved to San Fransico as he got a graphic designer job in a company. At that time, Chesky was working at a design studio firm in Los Angeles. Though both worked at different places, they remained in touch and continued to brainstorm ideas for their venture.
The Rising Action — As months passed, Chesky began to find his work monotonous and dull. He felt that he had lost his motivation. So, he quit the job.
The Crisis — At the same time, Gebbia’s roommates suddenly moved out of the three-bedroom apartment after his landlord raised the rent. Chesky moved to San Fransisco and took one of the rooms. Yet, two of them could not cover rent for all the three bedrooms. To cover the cost for the extra empty room, Chesky and Gebbia began to brainstorm for ideas.
The Solution — After generating and reviewing several ideas, Chesky and Gebbia zeroed on one idea —Short term renting out a part of their homes.
The Business Idea — Story
The Exposition — Being designers, Chesky & Gebbia knew about several design happenings. That year, one of the prominent associations, Industrial Designers Society Of America(IDSA), was conducting a global event in late October in San Fransico. It would draw thousands of young designers/students to the city who would be looking for affordable room rents.
The Crisis — Chesky and Gebbia, being recent design graduates themselves, were well aware of those students’ needs. They knew that the limited hotel capacity in their city would push the rents too high, making it unaffordable for several students/young designers.
The Solution — Chesky and Gebbia pondered the idea of creating a bed-and-breakfast for the conference, from the available space in their home. Gebbia also happened to have three air mattresses in his closet. They thought that they could sell a cheap place to stay and even offer breakfast — and they could also advertise their offer on the known design blogs.
The Denouement — With the deadline to pay rent, they felt that they had nothing to lose from trying out the idea. Chesky and Gebbia made a rudimentary website and called it Airbed & Breakfast. They listed three airbeds in their apartment for eighty dollars apiece.
Design blogs saw it as a crazier idea and promoted it. Within a few days, they had booked three guests who were professional designers on a budget. Two of them were millennials like Chesky and Gebbia.
Thus the idea of Airbnb was born. The initial target customers(Niche) were millennials.
Chesky and Gebbia began to target other conferences — South by Southwest convention, the tech, music, and film festival — Democratic National Convention, Denver, and several other events.
Niche — The Millenials
Chesky and Gebbia continued to target millennials. They had their reasons —
- Chesky and Gebbia, being millennials themselves, had sound knowledge of the target customer’s needs, pains, and desires. A critical factor for succeeding in business is to have a thorough understanding of the proposed customer segment.
- Millennials wanted a greater sense of adventure at an affordable cost. Most of them were comfortable with venturing into the home of someone they’d connected with online. It’s not the same for other segments.
- An Airbnb report says that most millennials would prioritize travel over buying a home or paying off debt.
- Millennials are also called as Digital Natives as they grew up interacting with the virtual world. They would be the ideal segment for a web platform like Airbnb.
Airbnb also focused on another niche — They targeted hosts from cities instead of vacation destinations in resort areas. The company was so focused on its niche, unlike its competitors.
In the beginning, the brand was predominantly an urban phenomenon — 70 percent of Airbnb’s full-home listings were studios, one-bedroom, and two-bedroom units.
Thus Airbnb’s niche was millennials and urban destinations.
1.2 CREATING A CATEGORY & VALUE PROPOSITIONS
When we start a business or a new brand, it is essential to aim for a long-term payoff for all our efforts and investments — A sustainable ROI. One of the ways to achieve that is to strive for getting maximum value from each customer(higher Customer Lifetime Value(CLTV)) — It means the brand should look for developing loyal customers.
The first step in building loyalty is to find a way to enter a customer’s mind, which is called Brand Positioning. It is a consumer’s perception of a brand with respect to competing brands. And, the research shows that the easiest way to enter their mind is being first under a new category.
Being №1 in a consumer’s mind will help a business to grab a larger market share and have a sustainable business.
Coke is the first cooldrink to enter the consumer’s mind under the Cola category. Seven-up is the first cooldrink under the Un-cola category. Redbull is the first cooldrink under the ‘energy drink’ category. Xerox is the first brand under the ‘photocopying’ category.
So, how can a business enter a consumer’s mind by being first? — It could be done only after creating a new category in their minds.
Creating A Category — A category is defined based on the brand’s value propositions. So, what value propositions did Airbnb offer in the beginning? How were they different from other brands?
VALUE PROPOSITIONS — To identify value propositions, we need to think from a customer’s shoes — What do they need? What do they desire?
- Affordability — Airbnb’s target customer segment were millennials. The one critical thing they needed most is the affordability of the stay—Airbnb’s sharing economy has given them several options on a budget to escape the pricey hotel rooms.
- Experience — Another thing that attracted millennials were the adventurous experience — Rather than staying in traditional tourist zones, a person, could stay in people’s home in neighborhoods. They could gain a localized, authentic experience at an affordable cost. The Millenials loved it.
So, Airbnb’s initial value proposition was Authentic Local Experience for much less than the cost of a hotel. That has become their category of differentiation.
ACTIVITIES AND THE STRATEGIC FIT
Now, the next crucial part — To deliver the proposed value proposition to a customer through a product/service, a brand/company has to perform specific actions.
Example — To deliver the value proposition of Authentic Coffee, Starbucks performs the following activities — Sourcing of quality coffee beans, Roasting, Customer Education, Baristas training, Consumer Research, R&D, Hiring, Procurement, Testing, Real Estate, Packaging, and Branding. All the above activities complement, enhance, and reinforce each other, forming an interlinked chain.
Let’s see some of Airbnb’s activities that helped the brand in building a sustainable competitive advantage?
Before moving ahead, let’s briefly understand how a brand chooses an activity and what is meant by strategic fit.
How a company/brand chooses an activity?
A company will only choose activities that would contribute directly to the value proposition. It would skip the activities that won’t enhance or add value to the value proposition. The company would also eliminate activities that affect the core value proposition.
STRATEGIC FIT — For a business to establish a sustainable competitive advantage, the chosen activities should interact, complement, enhance, and reinforce one another. It is called ‘Strategic Fit’ among activities. The ‘fit’ determines the brand’s success.
2.0 SELL EXPERIENCES, NOT PRODUCTS
Why Sell Experiences? — Every brand aims to build a long-term business. One of the ways to accomplish that goal is to try to maximize the benefits of an investment. It implies that a brand has to develop loyal customers who would purchase the product/service again & again without the brand prompting them to buy. In this way, the brand would gain maximum value without any additional investments of money, time, and effort on expensive marketing.
Developing Loyal Customers — One of the best methods to make a customer loyal to a brand is to entice him/her to spend more time with your product or service. He or she will allocate more time only if the product/service offers pleasant experiences.
Research reveals that a person’s subconscious emotional mind was responsible for a large number of purchasing decisions. And, the product/service experience directly appeals to the emotional mind. So, the product experience matters.
Experiences are also relatable and shareable. A customer may not talk about product features or benefits to his/her friends but would happily share his/her feelings about the product — the experiences while using the product/service. Stories are always appealing than listening to a list of features.
What experiences should a business provide? How to find out?
Think from a Customer’s Perspective —When Chesky and Gebbia developed the website for the first time, they thought from the customer’s shoes — Why are they coming to the design conference? What would they need to achieve their objectives? How could we help them to realize their trip goals? The questions helped Chesky and Gebbia to provide a pleasant experience to the customers.
When guests arrived, Chesky and Gebbia presented them with a welcome package that contained a BART pass, city maps, and spare change to pass out to homeless people. They served their guests breakfasts of untoasted Pop-Tarts and Orange juice. Chesky and Gebbia also showed their guests around the city — they took them to their favorite Taco place, Ferry building, and Stanford’s design school.
The guests loved their stay. They realized that they would’ve missed this experience if they’d opted to stay in a hotel. They were thankful to Chesky and Gebbia and became close friends with them. It shows how selling experience would convert a customer into a loyal one.
Overdeliver — One of the ways to determine what experience a company should sell is to go beyond the present customer needs at each touchpoint.
(From Reid Hoffman’s Blog) — Chesky says, “We basically took one part of our product and extrapolated — what would a 5 star experience be at that point? You knock on the door, the host opens the door and lets you in. You didn’t face any problems. That’s great. Would that be enough?”
Chesky, continues ‘What would a 6-star experience be?’
He imagined, “How about the host showing the guest around and welcome him/her with a gift that is to their liking. How about water in the fridge for them, toiletries in their bathroom?”
Would that be enough?
But, Chesky continued to ask himself, “What’s a 7-star experience be?”
“How about a host allowing the whole kitchen for the guest to use? How about organizing things a guest would like — For example, a cycle or a surfboard for surfing or special lessons or a car to move around or booking in a local restaurant. That could be way beyond.”
It is one of the ways Chesky and Gebbia brainstormed for new exciting experiences for their customers. Always overdeliver at each touchpoint.
2.1 DELIVER HUMAN EXPERIENCE
One of the exceptional advantages of Airbnb was the human experience — the intimate interaction a guest has with the host that could not be copied by hotels. Usually, when people travel, they would feel alone. In Airbnb, the host becomes a part of that travel, helping the guest to immerse himself/herself in the local culture. It is similar to how Chesky and Gebbia became friends with their first set of guests.
Airbnb focuses on providing a human experience with personalized touches.
2.2 DELIVER CULTURAL EXPERIENCE
The critical experience Airbnb offers for a traveler is to experience new places as the locals do. It helps a customer to have a personalized experience.
It was the underlying message behind Airbnb’s marketing campaign — Don’t Go There. Live There. It is an opportunity to immerse yourself in the local culture.
“The Live There campaign is about tackling the tension that so many people feel when they travel,” said Jonathan Mildenhall, Airbnb’s CMO. “We know travelers want more. People around the world have told us they want to live like a local. They want a deeper connection to the community, to genuinely feel part of the places they visit. At the heart of this campaign is our antidote to commoditized travel — the unique, human connections that happen when you truly Live There.”
Along with the guests, the hosts also gain cultural experience. They get opportunities to connect with people of different cultures across the world. They learn about their guest’s life and travel experiences.
2.3 SEAMLESS EXPERIENCE AT CUSTOMER’S VIRTUAL TOUCHPOINTS
Before Airbnb, the home rental market had similar websites — HomeAway.com, VRBO.com, Couchsurfing.com, BedandBreakfast.com, and Craiglist. So, Chesky and Gebbia’s idea wasn’t an original one. Yet, they cornered a niche, differentiated the brand from competitors, and grew. And, from the beginning, one component played a critical role in its initial success — It was Airbnb’s website.
Delivering a successful wholesome experience to a customer depends on identifying all the touchpoints where he/she would be interacting with the product/service. It’s not just physical but also virtual touchpoints.
For Airbnb, being a digital platform, virtual touchpoints are as critical as the physical ones because several activities happen over the website — Seeing ads, opening the webpage, searching a destination, booking it, paying, contacting the host, reaching customer care, and various other activities. The website is a critical part of the product experience. At each touchpoint, the founders wanted to make sure that the customer’s experience not only has to meet his/her needs but should go beyond his/her expectations.
Don’t ask -What specific experience would we offer at each touchpoint? Ask — What would delight the customers?.
The Airbnb website’s success could be attributed partly to Chesky and Gebbia’s design background. From the beginning, they were determined to provide a seamless experience to a customer through the online platform. Their goal was to make it as easy as possible to book a room in someone’s house. Their field of knowledge became their biggest strength.
Chesky often told that when Steve Jobs conceived the iPod, he wanted never to be more than three clicks away from a song. He followed the same rule while designing the Airbnb website. It should not be more than three clicks away from booking a room. Save the user’s time as much as possible.
Airbnb’s digital experience played a significant role in its initial growth. It differentiated them from other brands.
3.0 UNDERSTANDING YOUR CUSTOMERS
“One of the reasons behind Walmart’s success was Sam Walton’s knowledge of customer’s needs, desires, wants, and pains. He lived among his customers as one of them.”
The foremost factor for a successful business is an in-depth understanding of its customers.
It is critical to understand the needs, desires, fears, wants, and limitations of your customers. To know them, we need to observe them. The more we discover them, the sooner we begin to think from their shoes. As we began to think from their perspective, we would sooner become one of them. We are them & they are us.
If you become them, you would be making business decisions from your consumer’s perspective or user’s perspective & your business would grow fast.
Airbnb Founders & Their Knowledge of Customers —A year after the first launch, Airbnb was struggling and was on the verge of collapse. Fortunately, at the right time, the company got selected for the Y Combinator Startup program. The scheme provided limited funding and also, mentorship. That turned out to be a blessing.
One day, Y Combinator’s Paul Graham asked Chesky about the number of users Airbnb had. Chesky replied that only a hundred users were on board.
Graham continued, “Where were they exactly?”
Chesky answered, “They were mainly in New York City.”
Graham paused, then repeated back to them, “So, you are in Mountain View and your users are in New York? What are you doing still here? -Go to New York! Go to your users.”
That was the bell that changed Airbnb’s fortunes.
For the next three months, Gebbia and Chesky flew to New York every weekend — They went door to door, met every potential user, and importantly, they observed them from close quarters.
Leigh Gallagher writes in his book on Airbnb, “Chesky and Gebbia learned a lot from talking to their customers, but they learned more by simply parking themselves in their living rooms and observing them as they used their product online.”
Chesky and Gebbia observed potential customers in a natural context. A naturalistic observation would reveal valuable insights about user’s needs, pains, or desires better than other research methods. It would be expensive and time-consuming, but it would help in generating innovative ideas. A naturalistic observation also lets us see what happens over a longer time.
Reid Hoffman, one of Airbnb’s early investors, says, “As co-founder and CEO of Airbnb, Brian’s early work was more akin to a traveling salesman. He went door-to-door, meeting Airbnb hosts in person, taking photographs of their space, and learning what they did and didn’t like about his product. Now, this may sound inefficient if you’re an entrepreneur with global ambitions. But I’d argue that painstaking, handcrafted labor is actually the foundation of Airbnb’s success.”
The observational research had helped Chesky and Gebbia to refine their website and several other customer touchpoints.
Let’s see a few examples of how the research had helped them.
From their research, Chesky and Gebbia identified two critical pain points — People had trouble pricing their properties and in taking/uploading photos.
- The Visual Experience — The founders observed that homes that appeared lively in-person looked ugly or uninviting on the website. People were taking photos through their mobile phones & it didn’t turn out well. So, Chesky decided to offer to send professional photographers to every host’s home. They also simplified the uploading process. Once better photographs were uploaded, the founders were surprised to see that the signup rate went up by leaps and bounds.
- Chesky and Gebbia also developed a program to help a guest in choosing the listing’s price by comparing neighborhood listings and market prices.
- In the beginning, Airbnb had a rule that hosts had to rent out air mattresses, even if they had an actual bed to spare. The founders also observed that the compulsory breakfast rule was not feasible in many places. Airbnb removed those rules.
- Chesky and Gebbia also discovered that several users could rent out the full apartment that the Airbnb site didn’t support at that time. They added an option to rent an entire residence.
The research had transformed Airbnb’s website and differentiated it from competitors.
Chesky and Gebbia continued to collect user feedback and made improvements/tweaks to the site & other customer touchpoints.
The founders also applied the user research in thinking every business decision from a customer’s perspective. Whatever the choice, ask whether it would add value to the customer — This thought had penetrated every aspect of their business.
4.0 HOSTS — THE POWERFUL LINKAGE
In the initial years, one factor helped Airbnb to gain a massive advantage over its competitors — It was the number of listings on its website. At that time, every competing website was lopsided towards travelers, as it was much easier to scale that side. On the other hand, Chesky and Gebbia worked hard to convince millions of real people to open up their most personal spaces to strangers.
The Crisis — Initially, even Airbnb struggled to convince people to list their homes. With only a few houses, none would use the site, and if no one else was going to book it, then nobody wanted to list his or her home. It was a catch-22 situation. So, from the beginning, Chesky and Gebbia realized that to build a sustainable business, they would have to dedicate additional effort to grow hosts as it was inevitably becoming harder to convince them.
The Way To Solution — During their first two years of business venture, Chesky and Gebbia made personal visits to potential host’s homes, observed them.
The Denouement — The research helped the founders to understand the potential host’s critical problems, fears, and concerns. The insights guided the team to formulate the right strategies, choose relevant communication channels, and compose appropriate prospect language to address the host’s fears.
Let’s see some of Chesky and Gebbia’s initiatives which not only addressed the host’s fears but also enticed them to try the service —
- One of the significant highlights was Free Professional Photographs — It played a crucial role in bringing loads of guests to the site. As a result, host signups also went up.
- Airbnb decided not to charge its hosts except for the payment processing fee. The listing was made free. It turned out to be an attractive proposition for hosts as all other websites of that time, charged a considerable amount as a fee for a listing.
- The research showed that hosts struggled to arrive at the right price for their property. So, the company introduced Smart Price tips based on several factors that could guide the host to determine the best price so that he or she could get more guests.
- Airbnb introduced the Host Guarantee scheme that provides up to $1,000,000 in protection for instances when guests damage a host’s property.
- The company launched a comprehensive Host Development program to help hosts gain consistent revenue by teaching them the methods to provide a better experience to guests.
- The company formed a Resource Center that helped in providing the best hospitality practices/tips to hosts. It featured locally-tailored video lessons and resources.
- Host Mentorship Program — Airbnb also has options for a new or inexperienced owner to choose an experienced host as a mentor. The mentorship program had resulted in massive benefits for the company as well as for the host.
- Airbnb hired Chip Conley, a hospitality expert, who traveled extensively, met hosts, gave them training and tips. He also made it easy to share a host’s success story, innovative ideas, or a new practice across the network so that it could benefit others.
- Chip Conley also created a set of hospitality standards to guide the new hosts. He also formed an online host community center to provide constant peer support.
4.1 HOST MEETUPS
Airbnb encouraged hosts to form a local meetup group and frequently interact both online and offline to share, learn, and strengthen their voices.
From Airbnb website —
As an Airbnb host, you open your community, culture, and craft to guests from around the world. So it makes sense that you might want to connect with other nearby hosts, online and in-person, to share strategies for long-term success. Together we’re building local experience host communities and events, where hosts can go to inspire, support, and empower each other.
On any given week, there would be Airbnb Host Meetups taking place at multiple locations. These meetups could have an educational workshop or a barbecue meeting or a social gathering around a bonfire.
One of the host’s comments on meetups in the Airbnb website, “Meetups with the group are moments of happiness, information sharing, friendliness, and creativity. The topics we cover and the ideas that emerge allow me to improve my hosting experience every day!.”
4.2 AIRBNB OPEN
Airbnb Open was the company’s annual summit of hosts from all over the world.
From the Airbnb website — Airbnb Open is our community’s moment to come together and become stronger and more connected. Over three days, festival participants discover ways to become more successful, and they take part in engaging talks and workshops.
The keynotes, discussions, and workshops at the summit would revolve around travel, creativity, hospitality, and innovation. Airbnb co-founders Brian, Joe, and Nate would meet, discuss, and answer queries from members of the community.
At the 2016 Airbnb Open meet held at LA, several hospitality legends like Danny Meyer and Chip Conley gave lectures. Experienced super hosts shared their tips. Attorney General Eric Holder spoke about his work to promote equality and fight discrimination. It was a summit of motivation, practical tips, and creativity.
Airbnb’s initiatives had not only brought hosts together to form a community but also resulted in building loyalty to the brand.
5.0 TRUST — THE STRATEGIC LEVER
To build a sustainable business, a company has to find a way to retain old customers as well as attract new ones. At the same time, the effort required to retain existing customers and attract new ones should decrease over some time.
How to achieve that? By becoming a trusted brand.
Trust takes time and effort to build. A business becomes a trusted brand only if it delivers quality products/services consistently. When consumers believe in a brand, they demonstrate loyalty. They also become brand advocates. A brand then could leverage the existing customer’s loyalty and advertise its trust to attract new customers.
How did Airbnb build the trust?
The Crisis — In the beginning, Airbnb faced a double-edged sword — On one end, travelers thought that it would be it risky to stay in a stranger’s house. On the other hand, potential host feared that it might be dangerous to allow a foreigner to share his/her home. Both of them were justified in their fears. The solution — To build trust.
The Denouement — Airbnb took steps to help customers overcome those anxieties. Chesky and Gebbia introduced several safety features to improve customer’s confidence. Those safety initiatives built trust.
The founders made sure that the company treats every customer well and quickly address any customer problem. They showed how the company would protect the privacy and security of personal information.
Because of those initiatives, the customers turned loyal to the company. Later, Airbnb leveraged existing customer’s loyalty to advertise the brand’s trust to attract new customers.
Let’s see some of Airbnb’s significant initiatives that made customers trust the brand.
5.1 REVIEW SYSTEM
The one decisive factor that exhibited the brand’s trust and attracted new customers is the Review System, where hosts and guests appraised each other. As both parties were looking for long-term benefits from the platform, they became proactive in reviewing each other. The Airbnb site has reviews of more than 70 percent of stays.
Later, Airbnb leveraged the review system to reward good host behavior by elevating him/her to a super host status. Superhosts enjoy a better chance to show higher up in the search results on Airbnb, dedicated customer support line, exclusive perks, insider access to new products, and an expanded set of business tools.
Thus, the review system encouraged good behavior among hosts and guests.
REPUTATION ASSESSMENT — Airbnb also has a Reputation Assessment program that authenticates travelers. It’s a rigorous verification process that confirms a connection between a person’s online and offline identities.
Opening your home to a stranger is a relatively foreign concept for most new hosts. So, the Review System, along with Reputation Assessment, has helped the brand to establish the credibility of those strangers in the host’s minds.
The research also shows that more than 90 percent of customers rely on online reviews to choose a product/service. So, Airbnb’s review system boosted the sales as both hosts & the guests gained confidence.
It has become a massive competitive advantage for the brand.
5.2 SAFETY — THE TRUMP CARD
Airbnb’s initiatives to ensure the safety of guests, hosts, and their premises also helped in building the brand’s trust among the customers.
SAFETY DIVISION — Airbnb opened a stand-alone Safety division that would focus only on issues of security, safety, and emergency response. The division has three big operational centers and hundreds of employees. The unit is divided mainly into an operations team, a law-enforcement-liaison team, and a product team. The teams proactively work to identify suspicious activity in advance, recognize potential fraud or bad actors, and also handle the incoming emergency issues.
TRUST ADVISORY BOARD — There’s also a Trust Advisory board whose function is to prevent accidents from happening. They search for likely accident scenarios using machine learning and look for possible preventive solutions. The unit also has a crisis-management team, insurance experts to analyze claims, and cyber experts to detect payment fraud.
Every initiative toward’s customer’s safety ensured that the brand stays at the top of a customer’s mind.
5.3 DEDICATED CUSTOMER SERVICE — THE DRIVE
Placing strangers at night in people’s homes is indeed a risky affair. Things could go wrongly on certain occasions. A few Airbnb hosts/guests were unfortunate to be at the receiving end of those disturbing incidents. It prompted the company to develop a robust customer-service mechanism. The brand now calls it a Customer Experience Unit. This division has the highest number of employees in the company. It provides 24-hour customer support over various communication channels. It also serves as the front desk for the customers.
The founders formed the division intending to provide quick response/resolution to customer’s queries/problems. Unexpectedly, they also observed an additional benefit — when a customer approaches the company & if his/her problem is solved as soon as possible, then he/she becomes a brand advocate.
Thus, dedicated customer service further improved the customer’s confidence in Airbnb. It converted customers into missionaries.
5.4 PAYMENT SYSTEM
At the time of Airbnb’s launch, in most of the competitor websites, the payments were handled between guests and hosts directly. Their sites mostly functioned as online bulletin boards, where an owner advertised a space and directly interacted with potential customers.
The Crisis — Initially, even in Airbnb, payments were handled directly between guest and host. One day, Chesky used the Airbnb site as a traveler, booked one of the listings in the site, went, and stayed at the place. He lived as a customer and went through the whole process. During that research, Chesky observed that paying rent to a host posed several difficulties. He felt that there could be an easy way of doing it.
Chesky and Gebbia began to observe more customers & they found that most of them faced problems with the payment. The founders then realized that Airbnb has to handle the transactions on its own. Chesky felt that it would eliminate embarrassing situations related to in-person cash exchange, availability of cash, and would also support any conflicts between the guest and host if things go wrong. To accomplish that, he realized that the company needed a sophisticated payment system.
Unfortunately, in the beginning, the founders couldn’t find an off-the-shelf solution for their problem. So, the situation forced Airbnb to build a payments infrastructure on their own. It ultimately became one of the brand’s sustainable competitive advantage.
The Complexities — Airbnb’s payment system requirements posed several challenges — It had to handle bidirectional domestic/international transfers in multiple currencies. Moreover, as Airbnb expanded internationally, it encountered problems in specific countries, where the local culture determined the customer’s terms and mode of payment. The company had to accommodate all those outlier requirements. The payment system also has to recalculate the price, fees, and taxes quicky when the guest alters the reservation. Additionally, the payment system has to accommodate resolution settlements, security deposits, professional photography costs, local taxes, insurance, coupons, and several other customer monetary benefits.
Airbnb’s team worked for years to build such a system that could handle those complexities. The payment system continues to evolve.
The Long-Term Gain — As Airbnb kept expanding to several countries, the founder’s decision to build such a bigger in-house payment system has turned out to be a strategic advantage for the brand. It had become its core strength. The payment system ensures Airbnb’s core value offering of seamless experience to customers.
Why can’t the company outsource that activity? — Instead of building on its own, Airbnb could have worked along with a third party payment processing company to handle the payment system.
Airbnb’s payments product manager Brian Wey, says, “In that case, we would be beholden to someone else’s priorities. They are not going to expand to markets we need to expand at the right time.”
Also, at the same time, the payment system is a critical part of providing a seamless experience to the customers. A brand shouldn’t outsource an activity that would impact the core value proposition.
Bey also adds, “Similar to how PayPal was critical to eBay’s success as the first global online marketplace, payments at Airbnb is critical to Airbnb’s growth as a global platform for travel.”
So, the payment system has become a critical factor in building brand trust in the minds of customers.
6.0 MACHINE LEARNING
One critical reason behind Google, Amazon, and Netflix’s success is leveraging of Consumer Behavior Data & Analytics. Netflix’s real-time customer data guides its movie recommendation algorithm. The streaming brand also uses the information as a reference for determining the content of Netflix Originals.
Similarly, Airbnb has been leveraging its consumer data for the benefit of all stakeholders — the hosts, the occupants, and Airbnb. The company could grow if its host earnings and the guests’ costs are balanced well.
Airbnb could maximize its revenue only if the number of units available for rent on its platform increases and also if the listings are rightly priced at various times to optimize the occupation levels. This needed complex algorithms to interpret data.
6.1 SMART PRICING
One of the prominent advantages of Airbnb’s data analytics is Smart Pricing tips for hosts.
For determining the right price for a listing, Airbnb’s algorithm interprets the data based on the day of the week, season, neighborhood listings, special events, property types, quality, facilities, reviews, hosting style, his/her likes/dislikes, guest’s interests, demand, and several other factors. The focus of the algorithm is to maximize the likelihood of the unit being rented, at the best possible rate at a given point of time.
Airbnb’s Smart Pricing is one of the best in the market. It sharpens the brand’s competitive edge.
6.2 SEARCH MECHANISM
Airbnb’s long term success depended on how best the site could match both the host and guest’s likes/dislikes, interests, needs, and desires within a short time.
The Complexities — In the Airbnb platform, every listing is unique — It varies in size, feel, facilities, neighborhood, availability, hosting style, the host’s set of rules, preferences, and the price. On the other hand, guests have a wide variety of needs. It’s a two-sided matching problem.
All the above complexities necessitated that the website should have an advanced search mechanism. Airbnb hired hundreds of engineers to develop its search ranking algorithms.
From the Airbnb website, “The goal of the Airbnb search ranking algorithm is to help guests find the perfect listing for their trip — and help hosts find guests who are a great fit for their space.”
The Factors — Airbnb’s advanced search algorithm hunts listings based on several elements. The company writes that they look at nearly 100 different factors for every listing in each search. Though most of the factors are kept confidential, Airbnb has published some of them in their website— Guest needs, their place of searching, previous trip history, wish list, past guest behavior, past browsing/purchase behavior, guest’s past clicking history, duration of the trip, number of guests, the reason for traveling, urgency, guest’s price band, host needs, hosting style, property/host reviews, ratings, price, location of the listing, host’s response rate, rejection rate, instant book listing, seasonal demand, neighborhood status, behavior pattern matching of similar guests, and several other factors.
Enhanced, Personalized Customer Experience — The company also leverages behavior data to provide a more engaging, personalized experience to an individual customer. The brand suggests places that a consumer would have a little chance to find on his/her own. Customers loved returning to sites to find those little gems.
Leigh Gallagher writes, “The ability to tailor the travel lodging search experience to the preferences of the user's cuts to the core of what is described as “sticky information.” The “sticky information” concept stems from the idea that people do not know precisely what they want until it is presented to them, a condition that is especially prevalent among travelers.”
The Summary — Airbnb’s machine learning engine had galloped the brand to achieve exceptional success within a short time. It was efficient than other competitors and not easy to replicate in a short time.
7.0 NETWORK EFFECT
In the initial years, when guests returned to their country after staying at Airbnb in foreign locations, they wanted to rent part of their homes and become hosts. They also began to advocate the Airbnb host benefits to their friends and neighbors. Leigh Gallagher writes that the more people who travel, the more appealing it becomes for people to list on Airbnb.
As listing grew, the choices multiplied. It brought more travelers to the site. When the number of bookings increased, it drew more hosts to list their properties. When the consumer base reached a critical mass, it began to attract more customers. The rate of adoption of the Airbnb idea accelerated.
This way, Airbnb quickly expanded to several countries. The brand scaled up rapidly at low cost, without the founding team’s initiatives. It was a viral expansion.
Leigh Gallagher writes, “New markets are formed quickly, cheaply, and organically, without staffers or teams ever having to set foot in them. No need to physically launch in each new market. No fresh investment, employees, and other resources.”
Psychology says, ‘An individual’s action to try a brand often depends on a perception of how many other individuals are using it’.
Non-Customers — As the number of consumers increased, the perceived value of the Airbnb service increased. It prompted more non-customers to try the service. It further improved the trust among existing consumers.
Personalized Experience — The more the users, the more the data. The more the user experience, the more the right recommendations. The larger quantity of behavior data helped the brand to provide a highly engaging, personalized experience to the customers.
Airbnb’s business is fundamentally about leveraging a network effect. It discourages potential competitors.
8.0 INTERNAL CULTURE
When you observe ‘Good’ to ‘Great’ companies, you could realize that a strong ‘Internal Culture’ had played a critical role in differentiating the brand and in building a sustainable business.
From the beginning, Chesky and Gebbia believed that their company’s successful growth depends on its organizational culture. So, they became ardent promoters of building and maintaining a vibrant internal culture.
Chesky says that it doesn’t matter how good your original product is, but if you can’t build a great company around it, the product won’t endure. He further added, “The stronger the culture, the less corporate process a company needs. When the culture is strong, you can trust everyone to do the right thing. People can be independent and autonomous. They can be entrepreneurial.”
As the company began to grow, the founders took steps to build the right internal culture.
The Foundation — Chesky read several books about corporate culture. Through their investor Sequoia’s network, Chesky met leaders from Zappos, Starbucks, Apple, Nike, and other successful companies and listened to how they built the culture.
From his studies, Chesky observed that to build an exceptional culture, those great companies began by defining their Purpose and a bigger Vision. Their purpose went beyond just making money or being number one in the market. Those companies had an idea of the kind of future they want to be in & they could communicate it clearly to everyone in the organization. So, Chesky, Gebbia, and Blecharczyk began to define the company’s purpose, mission, and core values. The did that before hiring anyone.
The core values guided the organization’s decision making. It also helped the employees to clearly understand how they would have to behave in various contexts, the type of relationship with customers, what sort of decisions they need to take, and the type of people they need to hire.
8.1 HIRE RIGHT PEOPLE
A founder alone cannot raise a sustainable brand. He or she would build a great company if he or she could find a colleague who had ‘shared common interests’ and who could bring different strengths to the company.
The Importance Of First Hire — Chesky believed that building an organizational culture begins with the first person the company hires. He felt that if all went all, that person would bring in hundreds of people like him or her. His earlier research has helped him to understand the type of people he should hire. His team took more than six months to recruit the first person after a thorough vetting process.
Chesky and Gebbia involved themselves in every step of the hiring process so that they could meet the team-building goals. It is crucial to spend time and effort to hire the right people.
Airbnb’s Global Head of Employee Experience, Mark Levy, says, “Every candidate that makes it through to an interview goes through a set of interviews related to their role, and they have two additional interviews related to core values.”
Levy also notes that Airbnb is looking for missionaries, not mercenaries. He also adds, “The minute people start talking about job titles or are more interested in the equity over changing the world through connecting people via local and authentic travel experiences, we know that they are probably barking up the wrong tree. We’re very true to our core values in the hiring process.”
Be What You Preach — Culture change begins when the brand’s leader breathes and lives by the core values. Chesky and Gebbia worked/lived/behaved in a way they wanted their organization to emulate. They respected people, customers, and other stakeholders. They treated everyone equally.
The founders saw their colleagues as partners in the company and not as employees. They listened to everyone — They loved spending time with customers. The employees followed them unconsciously.
Freedom and Responsibility — Chesky and Gebbia trusted their people. They believed that everyone wanted to do a great job, provided he/she has enough freedom. The founders despised micromanagement. They treated people as responsible people, interested in the company’s growth.
This autonomy made employees perceive that they are valued in the company. They felt free to use their talents. Freedom encourages risk-taking, creativity, and experimentation. This resulted in innovations, helping the growth of the Airbnb business. People also grew professionally and personally. They became loyal to the company.
SHARING INFORMATION — Chesky and Gebbia shared every information with all the stakeholders and employees — revenues, profits, strategic decisions, the reasons behind the choices, plans, and all other necessary details. It built trust between employees and management.
OPEN COMMUNICATION — The founders believed in open communication — They encouraged an open door policy. Anybody can go to the head of the company and talk about his concerns/ideas. The founders believed that a company could progress only if the people aren’t afraid of bringing out the issues for public scrutiny.
Airbnb’s Global Head of Employee Experience, Mark Levy, says, “To encourage people to be open and honest, Joe Gebbia, threw out this idea that he called “elephants, dead fish, and vomit” — a nomenclature the company has adopted to open up a dialogue. Elephants are the big things in the room that nobody is talking about, dead fish are the things that happened a few years ago that people can’t get over, and vomit is that sometimes people just need to get something off their mind and you need someone to just sit there and listen,”
Airbnb’s founders have created a fearless environment where people would feel free to open up and be honest in their opinions.
ADD LITTLE WEIRDNESS — Great brands find a way to add fun and little weirdness in their culture. Being formal all the time seems to be boring and uncreative.
To bring the culture alive, Airbnb encourages frequent, fun meetings among its employees — birthday celebrations, anniversaries, baby showers, creatively themed events, new launches, business achievement celebrations, cookie time Tuesdays, new-hire tea time, hosted bar, human tunnels, and other rituals. Airbnb’s culture motivates employees to think up all crazy ideas to fight monotony and have fun.
Those functions and rituals had not only brought fun to the workplace but also strengthened the bonds between the people. Every person felt that he/she is part of a big community.
Chesky and Gebbia, believe that becoming a culture-first organization has helped in stabilizing the Airbnb during its viral growth.
Imagine that a company is building a service like Airbnb. Indeed, they could easily replicate the Airbnb platform but, the competitor would fail to provide a seamless experience — Because the experience is dependent on network effects, feedback loop, review system, payment system, search mechanism, data for machine learning, internal culture, and the trust. Every factor has to interact, complement, enhance, and reinforce one another. It is called Strategic Fit. The ‘fit’ determines the brand’s success. A competitor would find it difficult to copy all the activities and its interlinking.
AVAILABLE ON AMAZON -
References: The Airbnb Story by Leigh Gallagher, Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne, Positioning: The Battle Of Mind by Al Ries and Jack Trout, What is Strategy-HBR Article by Michael E. Porter, Good To Great by James C. Collins, Principles by Ray Dalio, Radical Candor by Kim Scott, Crucial Conversations by Patterson, Grenny, McMillan, Switzler, The Fearless Organisation: Interview by Amy C. Edmondson, Reid Hoffman’s Blog, How Airbnb is building its culture through belonging-Article in cultureamp.com, Scaling Airbnb’s Payment Platform by Angela Zhu & Karen Kim, Airbnb Payments Engineering, The Technology Stack Behind Airbnb-Article in Yalantis.com, Airbnb Leverages Machine Learning-Article in digital.hbs.edu by Schwas, What Seven Years at Airbnb taught me about building a business in Medium by Lenny Richitsky, the Airbnb website.