Airbnb's ‘breakdown’: Good idea, big market aren't enough for long-term success

Airbnb, which was founded in 2007, has aggregated over 4 million hosts who have welcomed 1.4 billion guest arrivals in almost every country. Unlike many startups, it is profitable. In 2022 (it uses the calendar year as its fiscal year), it declared $8.4 billion in revenues with a net profit of $319 million and in the first six months of 2023 (January-June), it posted $4.3 billion in revenues and $767 million in profits.

So why does Chesky claim the business is “broken"? It’s running into trouble with local and municipal authorities in many places. It receives a slew of customer complaints and host complaints and struggles to deal with these. Chesky admitted in interviews that the company has scaled up too fast.

Common issues disgruntled customers highlight in reviews include hidden charges that are not stated on the website, flattering pictures that conceal flaws with the property, outright fake properties, organised theft targeting travellers, and so on. Municipal authorities in many places like New York, Paris and Florence, have started to impose rules to regulate short-term rentals, apart from levying taxes, tightening licensing requirements and setting ceilings on the maximum days a property can be rented out. Many hosts also complain their margins are being squeezed.

One way to try and understand the problem is to think about the company and its business slightly differently. Airbnb is an online marketplace that targets travellers and matches them to potential hosts. It’s a home-sharing service.

Compare this model to that of Uber which targets transportation. Uber (which is certainly not perfect) has a much easier job. It inspects driving licenses, criminal records of drivers, and prospective vehicles. All three are certified by the state, and easily physically validated. Then Uber matches rides to hailers using a dynamic pricing system. Again, there’s a base rate to start with, in most places, since cabs have mandated fares (whether they follow them or not).

Airbnb needs to develop robust physical quality checking systems where it periodically inspects every property on the books, and runs a fine toothcomb over new properties before signing them. It needs to check out hosts including criminal records, credit checks, etc.

It doesn’t have a “mandated hotel rack rate" to use to build dynamic pricing structures. It needs to scrape a lot of data in order to derive indicative hotel rack rates in each city, in each season, and in each locality, and it needs to check the services available. It also needs to ensure there are no hidden charges. Beyond this level of due diligence, it may need to help hosts fight legal battles against municipalities, which are cracking down on short-term rentals. It also needs to create a smooth, easy system for handling customer relationships and escalations, including sweeteners like loyalty programmes, working on feedback and handling complaints.

Does it have the feet on the ground and the skills across so many locations to do this? How does it absorb the extra costs of legal assistance, local facilitators, etc.? The scaling up has been commendable and kudos for being financially profitable. But a services business runs on reputation and if that goes south, the business could quickly go south.

There’s a lesson here for aspiring new-age companies. Finding a good idea that addresses a market need and one that can scale is just one of the many strategies to run a successful and sustainable services business.