STR 581 University of Phoenix Week 4 Airbnb Strategy Case study

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Business Finance

STR 581

University of Phoenix



Develop a business strategy that will allow Airbnb to meet local, state, and international regulatory requirements and motivate individuals to benefit from participating in this space of the accommodations market. Address the following questions:

  • How can Airbnb ensure the ethical treatment of consumers?
  • Should there be a separate strategy for the international component of their business model?

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1 > a JAG OVERVIEW OF ACCOMODATION MARKET Hotels, motels, and bed and breakfasts competed within the larger, tourist accommodation market. All businesses operating within this sector offered lodging, but were differentiated by their amenities. Hotels and motels were defined as larger facilities accommodating guests in single or multiple rooms. Motels specifically offered smaller rooms with direct parking lot access from the unit and amenities such as laundry facilities to travelers who were using their own transportation. Motels might also be located closer to roadways, providing guests quicker and more convenient access to highways. It was also not uncommon for motel guests to segment a longer road trip as they commuted to a vacation destination, thereby potentially staying at several motels during their travel. Hotels, however, invested heavily in additional amenities as they competed for all segments of travelers. Amenities, including on-premise spa facilities and fine dining, were often offered by the hotel. Further, properties offering spectacular views, bolstering a hotel as the vacation destination, may contribute to significant operating costs. In total, wages, property, and utilities, as well as purchases such as food, accounted for 59 percent of the industry's total costs-see Exhibit 1 EXHIBIT 1 Hotel, Motel, and Bed & Breakfast Industry Costs as Percentage of Revenue, 2017 Costs Hotels/Motels Bed & Breakfasts Wages 24% 19% Purchases 27% 21% 10% 9% Depreciation Marketing 2% 2% 0 M a JA 6 Marketing 2% 2% Rent and Utilities 8% Other 13% 22% Source: Bed and breakfasts, however, were much smaller, usually where owner operators offered a couple of rooms within their own home Page 7 to accommodate guests. The environment of the bed and breakfast one of a cozy, home-like ambience-was what the guest desired when booking a room. Contrasted with the hotel or motel, a bed and breakfast offered a more personalized, yet quieter atmosphere. Further, many bed and breakfast establishments were in rural areas where the investment to establish a larger hotel may have been cost prohibitive, yet the location itself could be an attraction to tourists. In these areas individuals invested in a home and property, possibly with a historical background, to offer a bed and breakfast with great allure and ambience for the guests' experiences. Thus, the bed and breakfast competed through offering an ambience assoļiated with a more rural, slower pace through which travelers connected with their hosts and the surrounding community. A comparison of the primary market segments of bed and breakfasts and hotels in 2017 is presented in Exhibit 2 EXHIBIT 2 Major Market Segments for Hotels/Motels & Bed & Breakfast/Hostels Sectors, 2017 Market Segment B&Bs Hotels Recreation 80% 70% Business 12% 18% . M * 个 > a АА Recreation 80% 70% Business 12% 18% Other, including meetings 8% 12% Total 100% 100% "The bed & breakfast market was primarily domestic Includes both domestic and international travelers Approximately 20% was associated with International travelers. Source: While differing in size and target consumer, all hotels, motels, and bed and breakfasts were subject to city, state, and federal regulations. These regulations covered areas such as the physical property and food safety, access for persons with disabilities, and even alcohol distribution. Owners and operators were subjekt to paying fees for different licenses to operate. Due to operating as a business, these properties and the associated revenues were also subject to state and federal taxation. In addition to regulations, the need to construct physical locations prevented hotels and motels from expanding quickly, especially in new international markets. Larger chains tended to expand by purchasing preexisting physical locations, or through mergers and acquisitions. such as Marriott International Inc.'s acquisition of Starwood Hotels and Resorts Worldwide in 2016. C A BUSINESS MODEL FOR THE SHARING ECONOMY Startup companies have been functioning in a space commonly referred to as the "sharing economy" for several years. According to Chesky, the previous model for the economy was based on ownership. Thus, operating a business first necessitated ownership of the assets required to do business. Any spare capacity the business faced-either within production or service-was a direct result of the purchase of hard assets in the daily activity of conducting business. Airbnb and other similar companies, however, operated through offering a technological platform, where individuals with spare capacity could offer their services. By leveraging the ubiquitous usage of smartphones and the continual decrease in technology costs, Page 8 these companies provided a platform for individuals to instantly share a number of resources. Thus, a homeowner with a spare room could offer it for rent. Or, the car owner with spare time could offer [his or her services a couple of nights a week as a taxi service. The individual simply signed up through the platform and began to offer the service or resource. The company then charged a small transaction fee as the service between both users was facilitated, Within its business model, Airbnb received a percentage of what the host received for the room. For Airbnb, its revenues were decoupled from the considerable operating expenses of traditional lodging establishments and provided it with significantly smaller operating costs than hotels, motels, and bed and breakfasts. Rather than expenses related to owning and operating real estate properties, Airbnb's expenses were that of a technology company. Airbnb's business model, therefore, was based on the revenue-cost-margin structure of an online marketplace, rather than a lodging establishment. With an estimated 11 percent fee per room stay, it was reported that Airbnb achieved profitability for a first time in 2016. Airbnb's revenues were estimated to increase from approximately $6 million in 2010 to a projected $1.2 billion in 2017- see Exhibit 3. However, it was announced in an annual investors' meeting that the company had recorded nearly $3 billion in revenue and IL WUS in an an Investors meeling that the company had recorded nearly $3 billion in revenue and earned over $90 million in profit in 2017.3 EXHIBIT 3 Alrbnb Estimated Revenue and Bookings Growth, 2010-2017 (in millions) 2010 2011 2012 2013 2014 2015 2016 2017 Estimated Revi nue $6 $44 $132 $264 $436 $675 $945 $1.229 Estimated Bookings Growth 273% 666% 200% 100% 65% 55% 30% Source: All Rafat, "Airbnb's Revenues Will Cross Hair Bon Mark in 2015. Analysts Estimate, March 25, 2015, revenues wilcross-half 40% D EU Q A CHANGE IN THE CONSUMER EXPERIENCE AND RATE Airbnb, however, was not just leveraging technology. It was also leveraging the change in how the current consumer interacted with businesses. In conjunction with this change seemed to be how the consumer had deemphasized ownership. Instead of focusing on ownership, consumers seemed to prefer sharing or renting. Other startup companies have been targeting these segments through subscription-based services and on-demand help. From luxury watches to clothing experiencing and not owning-assets seemed to be on the rise. Citing a more experiential-based economy, Chesky believed Airbnb guests desired a community and a closer relationship with the host- and there seemed to be support for this assertion. A recent Goldman Sachs study showed that once someone used Airbnb, their preference for a traditional accommodation was greatly reduced. The appeal of the company's value proposition with customers had allowed it to readily raise capital to support its growth, including an $850 million cash infusion in 2016 that raised its estimated valuation to $30 billion. A comparison of Airbnb's 2018 estimated market capitalization of $31 billion to the world's largest hoteliers is presented in Exhibit 4. EXHIBIT 4 Market Capitalization Comparison, 2018 (in billions) Competitor Market Capitalization Marriot International Inc. $49 Airbnb $31 Hilton Worldwide Holdings. $25 Latincentimetro Su Oldata uuid-3a1b215bf30b43aae7095751b1b7FA1FZS data udabe75010046859 > R Q JA 6 Competitor Market Capitalization Marriot International Inc. $49 Airbnb $31 Hilton Worldwide Holdings $25 Intercontinental Hotels Group $11 Source: Yahodenance (accessed April 2013 "Airbnb Announces It Won't Go Public in 2018." Business Inside dirbnb announces-tw Recognizing this shift in consumer preference, traditional brick-and-mortar operators were responding. Hilton was considering Page C9 offering a hostel-like option to travelers. Other entrepreneurs were constructing urban properties to specifically leverage Airbnb's platform and offer rooms only to Airbnb users, such as in Japan? where rent and hotel costs were extremely high. To govern the community of hosts and guests, Airbnb had instituted a rating system. Popularized by companies such as Amazon, eBay, and Yelp. peerto-peer ratings helped police quality. Both guests and hosts rated each other in Airbnb. This approach incentivized hosts to provide quality service, while encouraging guests to leave a property as they found it. Further, the peer to peer rating system greatly minimized the otherwise significant task and expense of Airbnb employees assessing and rating each individual participant within Airbnb's platform 0 ET Class STR 51 Connect M ME (15) SEAFOOD MGANG. x Anti-Shox player 483 repubc2F62F324 Seduta uvid-621900a5406340436698b1754775a302F%2F10) + a JA 6 NOT PLAYING BY THE SAME RULES Local and global businesses criticized Airbnb for what they claimed were unfair business practices and lobbied lawmakers to force the company to comply with lodging regulations. These concerns illuminated how due to its business model, Airbnb and its users seemed to not need to abide by these same regulations. This could have been concerning on many levels. For the guest, regulations exist for protection from unsafe accommodations. Fire codes and occupation limits all exist to prevent injury and death. Laws also exist to prevent discrimination, as traditional brick and mortar accommodations are barred from not providing lodging to guests based on race and other protected classes. But, there seemed to be evidence that Airbnb guests had faced such discrimination from hosts Hosts might also expose themselves to legal and financial problems from accommodating guests. There had been stories of hosts needing to evict guests who would not leave, and due to local ordinances the guests were actually protected as apartment leasees. Other stories highlighted rooms and homes being damaged by huge parties given by Airbnb guests. Hosts might also be exposed to liability issues in the instance of an injury or even a death of a guest. Finally, there were accusations of businesses using Airbnb's marketplace to own and operate accommodations without obtaining the proper licenses. These locations appeared to be individuals on the surface, but were actually businesses. And, because of Airbnb's platform, these pseudo-businesses could operate and generate revenue without meeting regulations or claiming revenues for taxation. Airbnb continued to respond to some of these issues. A report was written and released by Airbnb in 2015 detailing both discrimination on its platform and how it would be mitigated. Airbnb also settled its lawsuit with San Francisco in early 2017. The city was demanding Airbnb enforce a city regulation requiring host registration, or incur significant fines. As part of the settlement, Airbnb agreed to offer more information on its hosts within the city. And in 2018. Airbnb began partnering with local municipalities to help collect taxes automatically 9:23 Airbnb enforce a city regulation requiring host registration, or incur significant fines. As part of the settlement, Airbnb agreed to offer more information on its hosts within the city. And in 2018, Airbnb began partnering with local municipalities to help collect taxes automatically for rentals within their jurisdictions, helping to potentially recoup millions in lost tax revenue. 10 11 c e 8. 4F62F32658data-uuid 63639b2100834b31a7d662068befaecf5R2F412F1.0) S Ask a new questo stupor X 6 + 1 O a. А 6 "WE WISH TO BE REGULATED, THIS WOULD LEGITIMIZE US" Recognizing that countries and local municipalities were responding to the local business owner and their constituents concerns, Chesky and Airbnb have focused on mobilizing and advocating for consumers and business owners who utilize the app. Airbnb's website provided support for guests and hosts who wished to advocate for the site. A focal point of the advocacy emphasized how those particularly hit hard at the height of the recession relied on Airbnb to establish a revenue stream, and prevent the inevitable foreclosure and bankruptcy. Yet, traditional brick-and-mortar establishments subject to taxation and regulations have continued to put pressure on government officials to level the playing field. "We wish to be regulated, this would lcgitimize us," Chesky remarked to Noah in the same interview on The Daily Show.12 Proceeding forward and possibly preparing for a future public offering. Chesky would need to manage how the progressive business model-while fit for the new, global sharing economy-may not fit older, local regulations. D 09:23
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Airbnb Strategy Case

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➢ For Airbnb to thrive in local, state, and international markets, the company
management creates essential policies to control its operations and ensure its partners
conform to specified standards (Roma, Panniello, and Nigro, 2019). Due to its
operations in accommodation services, a good example of standards would be health
and sanitization requirements
➢ Creating policies and programs which encourage increased customer engagement
rates. The use of ratings...

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