Over the last several years, the popularity of two-side marketplaces has exploded. Apps like Airbnb, Uber, Hello Sitter and many others have captured broad audiences because of the utility they provide both the “seller” and “buyer.”
The Airbnb model is a great showcase for the flagship work we perform at Blue Label Labs which is creating two-sided on-demand marketplaces. So let’s explore this app and discuss how it makes money for hosts and the platform as well as provides a much-needed service for guests.
An overview of Airbnb
The easiest way to sum up Airbnb is that it’s an on-demand hotel service. Hosts can place their home on the platform where they can be browsed then rented by guests for a term and rate negotiated between the host and renter where a percentage of which is paid to the platform which allows them to grow.
Airbnb requires that both hosts and renters verify their identity as this helps keep both the renter and property as safe as possible. The platform handles all the booking and payment features – as a host, you simply need to create a profile for your home, list the amenities offered, then set a price. The app takes care of all the basic scheduling (too, it can set a price for you – more on that later) so there’s no need to use an external calendar unless you rent the home on another platform or privately through some other setup.
The app handles all payment processing as well, allowing hosts to link a bank account which is ultimately funded through a kind of escrow process. The renter pays the fee negotiated for the place which is held in an escrow and is then released as soon as a few days after a location is rented. On the backend, the payment process is handled by either Braintree or PayPal which are among the most secure ways to handle these exchanges.
Too, there is a messaging feature so hosts and tenants can communicate on the platform without having to use a third-party tool. This is useful in the event that some kind of issue surfaces as support can use messages to help resolve any issues that might surface if the two parties can’t hash things out themselves.
It’s free for both hosts and guests to sign up – fees are only incurred when there is a transaction which is part of how the platform makes money. We’ll explore their financial model more in the final section.
Building a two-sided marketplace for rentals
There are several successful digital real estate apps in the industry but few have the autonomy Airbnb gives to its users. Too, the nature of the service is different – apps like Zillow and Trulia connect buyers, renters, and sellers but in a less dynamic fashion than Airbnb.
Unlike traditional eCommerce platforms, where a company manages its digital storefront and is the only touchpoint for the customer, real estate apps connect different buys and sellers allowing them to communicate and exchange information. You can think of these models as being 2D whereas Airbnb is in the third dimension as it adds exponentially more features, capabilities, and backend business affairs.
Zillow and Trulia are more like Craigslist where the platform isn’t involved in whatever transaction is proposed on the platform. Airbnb has a responsibility to handle payments, take care of disputes, and an ethical obligation to keep everyone safe or lose reputation and revenue as a result. As such, Airbnb as a two-sided marketplace has much more under the hood than these more basic platforms.
Airbnb financials: an ongoing cycle of raising funds, earning income, and a lot of marketing
Entrepreneurs look at on-demand two-sided marketplaces as a great opportunity to make money. As a designer of said marketplaces, we can confirm this is true but there is a caveat or two.
Airbnb got its start thanks to a series of seed investments that allowed founders Brian Chesky, Nathan Blecharczyk, and Joe Gebbia to get into the game after a modicum of success at other entrepreneurial endeavors. They eventually scored a sum of $600,000 in 2009 after being rejected by several investors – just over a decade later, the company is now worth tens of billions, despite reporting losses in 2019.
This shows us that the costs to get started are pretty substantial – funding development is one thing but their biggest challenge was finding enough users to latch on. This was not only essential for the platform to make money and fund itself but has also proved to be a major factor in raising additional funding to scale the platform into what it is today.
The company had to sink an immense amount of money into instilling the idea in prospective users – namely, hosts – that it was a viable way to make income. Renting rooms as though your home is a hotel was not a model most of Airbnb’s present users had done – or even considered – prior to this app becoming a popular service.
Getting users (i.e. guests) to sign up is fairly easy as the value is immediately present. In most cases, you get an entire home at the rate of a hotel room, so what’s no to love?
What this should tell you is that your marketing needs to focus on providing both sides what they need to know to see the value in your service. We can see that Airbnb put specific efforts to show value toward the individual or group on the merchant end, meaning the host side.
Imagine if there were a ton of Airbnb guests but hardly any hosts. The platform would likely have flopped if Airbnb hadn’t produced literature that caters to hosts throughout the years. Harvard Business School does an ok job of describing how Airbnb and other on-demand two-sided marketplaces got their start by focusing on the service side. With Airbnb it was about leveraging them as better options than their next biggest competitors, Homeaway and Booking.com as well as a superior option for those already renting rooms or homes on Craigslist.
To make sure the platform would have enough places to satisfy customers (i.e. renters) which is the easiest part, Airbnb targeted users of other platforms to convert them into users.
Airbnb shows us that it can take some time before an app becomes self-sustaining. The Airbnb story tells entrepreneurs and investors that these models can become incredibly lucrative but it takes time to build enough of a community until profits begin to stack up.
Their model today is truly solid as being able to charge on 3% is one of the major reasons their user base slowly grows to attract more people. There’s little risk for users and at such a low rate, it’s hard for anyone to complain plus, it undercuts the competition.
Blue Label Labs can build your on-demand, two-sided marketplace
At Blue Label Labs, our specialty is building two-side marketplaces like the aforementioned Hello Sitter and our private contractor listing and hiring platform, Hyer. Apps like Airbnb have great potential to put users in touch with much-needed services as well as make everyone money when executed properly. Get in touch so we can help you build your own two-sided marketplace.
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