Most of us will have heard of Airbnb, but what lessons in funding and entrepreneurship can the upstart teach other potential disruptors, asks Tony Grundy
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This article was first published in the September 2016 international edition of Accounting and Business magazine.
Why do I need a home office when 99% of my information is on my laptop? What can I do with my children’s empty bedrooms while they’re away at university for most of the year? Many of us have underutilised space at home that we could be using to generate cash, supplement our pensions and become part of the sharing economy. It’s all the rage.
Airbnb is a leading example of how the sharing economy can transform lives and disrupt an entire sector. Searching the accommodation supplier’s website for space to rent in my local area in south London, I found seven rooms and one flat within a mile of my house. At the average rental less the average Airbnb fee, my three rooms could bring in £100 a night. At an assumed 50% occupancy, that would be £350 a week or £1,500 a month.
As with operators in any open market, Airbnb is about matching supply with demand. But Airbnb is lean, keeping its overheads to an absolute minimum simply by providing a platform to facilitate that transaction and charging a commission on it. In addition, it has tapped into a supply and demand that is latent and where the value created is shared fairly between supplier and customer. It has also proved that it is possible to detect a new business model in everyday human experience.
It all started in 2008 when two friends, Brian Chesky and Joe Gebbia, decided to capitalise on the shortage of hotel rooms due to a big conference taking place near Gebbia’s San Francisco flat. Struggling to meet their own rent on their loft room, they rented out space on airbeds (hence ‘Air’; ‘bnb’ refers to ‘bed and breakfast’). They were soon joined by Nathan Blecharczyk and so began the experience of exponential growth that has been eating into the hotel market.
Their means of obtaining some start-up capital was novel. After maxing out their credit cards, the founders decided to launch a cereal brand to chime with the times. This was during the 2008 US presidential campaign, and they sold ‘Obama O’s’ and ‘Cap’n McCain’s’ at US$40 a pack; they made over US$30,000.
Many others are rushing to embrace this business model of using latent supply – Uber (taxis), BlaBlaCar (car sharing – see AB, June 2016), Groupon (vouchers for leisure activities), Empty Leg (private planes) and Purplebricks (estate agency). The businesses themselves are often simply platforms to connect customers with the service supplier but are becoming increasingly sophisticated, enabling two-way feedback, which helps quality control and trust.
As can often be found with disruptors, they are not afraid to turn carnivore and make acquisitions. For example, in the German market Airbnb bought NabeWise, a business providing tourist information. For Airbnb, organic and acquisitive development are not mutually exclusive but complimentary.
As in all of these examples we also notice the dynamic nature of competitive advantage; these business are constantly upgrading their functionality and adding value. And they need to. Recently there has been evidence of more established brands spotting an opportunity to take on the disruptors at their own game, such as Ryanair recently launching a service that allows air passengers to book hotels and private rooms; the airline says it aims to become the ‘Amazon of the skies’.
What may be needed in the future to protect dominant market share and a healthy operating profit margin, and to promote further growth, are:
- continuous product and service innovation and new value creation to widen margins inch by inch
- improving customer service
- deep thinking to evaluate new strategies, and prioritisation and phasing of global development plans
- local tailoring of the service
- continued scanning for potential competition
- making the brand more familiar and meaningful
- reviewing the board to ensure that the business doesn’t outgrow the skills of the original founders.
In terms of management theory, Airbnb’s strategic situation is highlighted by the ‘resource-based theory’ (RBT) of competitive advantage. RBT suggests that strategic performance is improved by identifying the distinctive – and hard to imitate – resources and skills an organisation has. In Airbnb’s case, that is:
- continuous product development
- low costs
- first-to-market advantage.
These might look a little brittle and, as we have seen with Ryanair’s new proposition, this dominance will be challenged. But as a customer or supplier, or both, for now I will enjoy this cunning breakthrough.
Dr Tony Grundy is an independent consultant and trainer, and lectures at Henley Business School