Essay: Airbnb Porter’s Five Forces Analysis

Introduction

Airbnb’s primary business is a provision of an accommodation marketplace where people can list their living spaces to rent for short periods of time. The history of the company originated in the apartment of the two founders Brian Checky and Joe Gebbia in San Francisco. The two flat mates were struggling with rent money and thought of hosting people in airbeds in their apartment for some extra money. The rest is history and at the moment, Airbnb operates in 191 countries and more than 81,000 cities. This was made possible due to the fact that it operates as an intermediary between buyers and providers of the service. Airbnb can best be thought of as a ‘disruptive innovation’, due to its unique appeal to visitors and innovative online-based business model.  Given its disruptive potential, Airbnb’s transformed the tourism accommodation sector worldwide in a very short time.

Porter’s Five Forces present an analytical framework of techniques that aid a company or other entity in evaluating the industry as a whole, making forecasts about its future, understanding its rivals and its own position, and transforming this analysis into a competitive strategy for a particular business. The aim of a competitive strategy of a firm is to find a position in the industry where it can shield itself against the competitive forces or influence them in its favor. According to the model, the competitive nature of the industry could be seen as a combination of the following five major factors: Rivalry Among Existing Competitors, Threat of New Entrants, Threat of Substitute Products or Services, Bargaining Power of Suppliers and Bargaining Power of Buyers.

Scaling and repeatability of a successful competitive online platform such as Airbnb seem challenging. This essay analyzes each of the 5 forces of Porter applied to Airbnb and evaluates the competitiveness of this particular industry. Data are processed using descriptive analysis.

Competitive Rivalry

Airbnb’s Competitive Rivalry

The first force of the five is Competitive Rivalry. It is about the greatness of your competitors.

In order to benefit from a competitive rivalry a company should identify what their strengths are, who its rivals are, and how they compare with their competitors.

There is a chance where the competitive rivalry is minimal and the company is a monopoly. However, if a business is profitable, monopoly or oligopoly will last for a short period of time.

Until 2007, hotels (more luxury and more facilities for short-term) were their main competitors, but the market had so many needs that Airbnb was not a problem for them. Also, other categories of hospitalities, that were and still are very important competitors of Airbnb, and many do not count them, are hostels (backpackers traveling alone, cheaper, socialize) and Couchsurfing (sofa or a place to stay people with no cost at all).

Except for hotels, hostels and Couchsurfing, the most famous Airbnb competitors are Booking.com, TripAdvisor, FlipKey, VRBO, and HomeAway. However, there are a lot more, Airbnb was the first one that succeeded in this area of hospitality. This is why it is at the top of the customers’ preferences. However, this doesn’t imply that the company is in a safe zone, and to stay competitive it has to keep up with its rivals.

Alternative risks that Airbnb must focus on

Apart from competition, there are many factors Airbnb has to focus on:

1. Privacy – An online survey conducted in 2015 concluded that 15% of customers did not book through Airbnb because of privacy and safety factors, including, but not limited to, fake advertisement and fraud.
2. Political risks – Different policies in countries may lead to unstable situations and changes in the law.
3. Global Economy – Events in the global economy could have an adverse effect on the company’s strategy and profitability.

Most companies do not give the appropriate attention to the aforementioned factors.

Table 1 Changes in preferences over the past decade

• 51% of respondents said they were more likely to use Airbnb than any traditional hotels.
• 35% to replace family hospitality with Airbnb
• 22% over rental sites
• 17% over corporate apartments

With the entrance of Airbnb, the market changed and many people changed their options when they wanted to travel (either for vacations or for work), which is evident from the graph.

Like any other company, the biggest rival of Airbnb is itself. So, Airbnb has to provide properties that their competitors cannot (at least in the same quality) and provide more and more facilities.

For Example

• In a survey that took part in 2017, Airbnb customers voted in a percentage of 55% that were ‘very satisfied’ with their experience. This happened because co-founders hired a very qualified staff, the last years, who knows what changes are appropriate and remaining stable is harmful to the business.
• In most cases, Airbnb provides kitchen and wash machines or wash dryers
• More space (so it is likely, one to live for a longer period in an apartment and not just to do their job and leave)

Last but not least, Airbnb has dominated the market and at present is at the top of the preferences list “Where is the best place to stay”. Competition, economy, current and future competitiveness are very important issues and Airbnb must always have an eye on them.

As one of the co-founders said, “the key to success is Airbnb to keep growing”.

Threat of New Entrants

According to Porter’s model, the threat of new entrants is a key factor in determining the competitive dynamics of a particular industry and consequently the profitability of the existing business.  If there are few barriers to enter the market, more competitors will enter, therefore sales and market share will be redistributed among them. This would lead to decreasing profit potential of the industry as a whole.  Consequently, a higher threat of new entrants makes the industry less attractive.

Determining the Threat Level for Airbnb

The following are the major barriers that determine the level of threat of new entrants:

1. Economies of scale –Does profitability require economies of scale?

Airbnb operates through outsourcing to individual contractors. Since it does not have economies of scale on its own, on the aggregate basis, there is no efficiency. In distributed networks such Airbnb, the costs cannot be centralized, so it does not actually directly take advantage of economies of scale, despite being an absolute leader in the industry.

2. Capital Requirements – Is there a need for high initial capital investment?

Regarding the capital requirements, the first successful fund-raising of Airbnb was in April 2009, when they secured a $600,000 seed investment from Sequoia Capital. Later on, in 2010, Airbnb raised $7.2 million in venture funding. That’s when the company hit the accelerator on growth and took their business to a new level. The above chart presents the funding history of Airbnb from 2010 to 2015. Its direct competitors have been surpassed due to the different approach to vacation housing, and the rising popularity of the service. In March 2017, the company was valued at $31 billion.

Answering the second question if there is a need for a high initial capital investment, if you have to face a competitor like Airbnb, the above-mentioned numbers indicate a confident YES!

3. Brand Loyalty – Are brand names strong and well recognized?

The Airbnb community is generally very loyal. The company has managed to create a trustful brand over the last 9 years. Recently it has invested heavily in advertising and partnerships with different airlines and real estate businesses. Their customer service is excellent and it can be confidently said that Airbnb is a worldwide recognizable brand.

4. Government Regulations – Are the government regulations, laws and policies complicated?

Regarding the government regulations, when Airbnb first entered the market in 2009 the market was almost totally unregulated, as it was the first of its kind. Government regulations were definitely not a factor to account for when Airbnb team was thinking of how to successfully crack the market at the time. Currently, there have been several backlashes from major cities and countries in the world, calling it a ‘war’ on Airbnb.  Japan, Spain, Netherlands, and Iceland are just a few of the countries that have imposed strict taxes and regulations on hosts and the administrating platform. Airbnb has been piloting a number of tests to encourage landlords and developers in these markets and to overcome the new law restrictions (such as partnering with Century 21 real estate agency in Paris). Even though it was not a factor when Airbnb first entered the market, currently we may say that government regulations are a serious factor to account for when considering entering the sharing industry

5. Access to distribution channels – Is it hard to align with and access existing distribution channels?

The main Airbnb distribution channels are its website and its mobile application. Airbnb app is the most downloaded travel app and its website has a monthly average of 70 million visits.  Over the years the company has been picky as to which brands it allows access to its content for travel search purposes.  Evaluating the distribution channels it can be concluded that there is some weak threat.

A strong yes of the above questions would imply a weak threat of new entrants. Evaluating the threat level of new entrants to Airbnb we can conclude, that there is no significant threat.

Threat of Substitutes

The threat of substitutes is the risk of a firm’s products being replaced by similar ones that offer the same benefits to consumers.

According to Porter, the threat of substitutes shapes the competitive structure of an industry. The more substitutes on the market, the easier it is for a consumer to switch from one product to another. As a result, there is less control of the company to decide how to sell its product and at what price. Moreover, the more substitutes there are, the more competitive the industry is. This leads to decreased potential profits for the company.

Determining Factors

1. Switching Costs: If the consumer’s cost to change from one product to a substitute is low, then a consumer is more likely to do so. In absence of factors like brand loyalty or differentiation, the lower the cost, the easier it is for someone to move over to another product he or she may explore.

2. Product price: When the substitute’s price is higher, the risk of consumers shifting to the substitute is lower. In addition to that, the price of the product acts as a barrier to the pricing strategy of the company.

3. Product performance: If the substitute product performs similarly or better, the risk of consumer migration highly increases.

4. Product quality: Substitutes’ quality being higher will attract consumers. Other things being equal, people will want to switch over a product that has a better quality than the one they are using.

5. Substitute availability: For all of the above to come into play, availability of substitute products must exist in the market. Companies should be cautious to identify potential threats and look beyond the existence of traditional competitors.

How to Keep your Product Safe from Threats?

When creating a product, a company always needs to keep an eye on threats and identify their appeal. Spotting them is essential so that a firm can develop strategies that will counter them in long-term.

If your product is threatened, then there are actions you need to do in order to not let consumers choose other available products.

1. Differentiation: A unique product that will satisfy people’s needs.
2. Value for money: A product that maximizes benefit by spending the least money.
3. Brand loyalty. Build a strong relationship with your customers.

The threat of Substitutes Applied to Airbnb Case

Typical accommodation (e.g. hotels) is not the only competitor as it has been mentioned. Airbnb is a peer-to-peer (P2P) accommodation network that gets the most attention, but it is not the only one that exists.

The substitutes do not have to be identical, and they are usually not. Most commonly, they are trying to satisfy the same needs but with a differently oriented product. Firstly, we have hotels and hostels which provide the most typical accommodation. Then, Airbnb came in to revolutionize this and offered a new service perspective to its customers which now had the ability to have more flexible bookings, more space for less money, live like locals and so on. Lastly, there are platforms like couchsurfing.com which accommodates you for free. Consequently, it is obvious that threats can be found through many types of services that have a very different approach to accommodation.

Determining Factors of Airbnb

1. Switching cost: Both hosts and guests have a minute cost, if not zero, of switching services. It is very common for a host to have their property on two or more different accommodation networks on the same price. Since hosts will pay a fee on proportion to the reservation subtotal, either way, people have the option to use whichever platform finds him a guest with no switching cost at all. Also, high demand and supply on the market make it even easier for both to simply switch from one network to another if they want to so that they have a wider picture of what the market can offer.
2. Product price: Airbnb usually charges a 3% commission to host and 5%-15% to guests out of the reservation subtotal (the higher the amount the less the percentage). This fee is not refundable if the guest cancels their booking, but if host cancels then the guest is fully refunded. Compared to its main substitutes, Airbnb is very reasonably priced. For instance, booking.com which charges a 15%-20% commission while HomeAway charges the hosts minimum 8% per reservation (or a fixed $349 to $499 per year) and a 6%-12% for travelers.
3. Product performance: One of the key factors that has led Airbnb to be so well-known is the user-friendly features it has. It is easy to use and understand and it is designed to be efficient and fast.
4. Product quality: There has been given extreme focus by Airbnb on the convenience of all parties: client and supplier. In addition, Airbnb protects its users, both hosts, and guests, through certain policies, like refunds under certain conditions.
5. Substitute availability: There are many available substitutes in the market. Some of them like HomeAway provide services very similar to the ones of Airbnb and others like Couchsurfing have a different approach. All of the companies mentioned though, claim a percentage of the same pie of network accommodation.

How Airbnb keeps its services safe from threats

Airbnb gives people the opportunity to fully personalize their needs and act freely while using it. This minimizes the limitations of the service it provides. In addition, it creates a healthy balance between supply and demand without any intervention which is very attractive for anyone who wants to join the platform.  Also, Since the beginning and through the years of operation, the company provided convenience, comfort for tenants as well as specialty providers which led to a big and strong loyalty base. Finally, Airbnb always gets better and upgrades the service’s quality. Usually renews its platform to run faster, be more eye-pleasing, easier to use and add useful functions.

What most Airbnb users perceive as unique is the confidence it provides not only as a brand but also because it is structured in a way where both parties can be fully informed for each other. The immediacy through direct communication, reviews etc. is essential to someone who gets to choose whom he is putting into his home and the same logic applies for the guest.

Bargaining Power of Suppliers

Bargaining power of suppliers is one of the forces that shape the competitive structure of an industry. It is determined by the structure of the industry in which suppliers operate. If the supplier has monopolistic power over the product, in our case the provision of short-term accommodation, it can demand higher prices for its product and therefore produce more profit from the industry. The providers of this service can exert bargaining power over participants in the industry by threatening to increase the prices of their services or conversely decrease the quality of their product.

It is desirable to buy from suppliers who can maintain their position in the industry in terms of the service that they provide. This factor makes sure that the firm will maintain or improve the quality of its inputs in order to maintain its competitiveness. This also ensures that the chances of switching suppliers are fewer.

Determining Factors: Bargaining Power of Suppliers

1. Supplier-buyer ratio. This is the number of suppliers available relative to the number of buyers of the service. When there are few buyers in the industry, the bargaining power of buyers increases. This forces suppliers to increase the quality of their goods and services, and to decrease the cost. If there are only few suppliers in the industry, the bargaining power of suppliers increases. Therefore, they can potentially decrease the quality of their goods and services provided and increase the prices. Airbnb hosts are the suppliers, and guests are buyers. As of November 2018, there are 2.9 million hosts recorded by Airbnb.
2. Reliance of a sale of a supplier on a particular buyer. The category of people who are the main buyers of the service is of great importance to the supplier. Companies pay more attention to their relationships with suppliers. A good, reliable supplier base can give a firm an edge in its competitive environment. The buyers of the service provided by suppliers in the peer-to-peer industry may be guests who want to feel “at home”, or people who would want the experience that is more “local”. The suppliers are the ones who can offer this type of experience. Therefore, for a particular category of guests, suppliers in Airbnb have such an advantage. Airbnb creates personal relationships between buyers and suppliers, creates thousands of micro-business globally, and creates accommodation supply when the cities cannot meet the demand.
3. Switching costs of a supplier. These are the costs incurred by buyers as a result of changing the supplier of a particular service. If a company’s booking fees are lower, it is more attractive for potential suppliers to use it. As mentioned previously, Airbnb has a fee of 3% for hosts who want to rent their property, it is competitive in comparison to other peer-to-peer accommodation providing platforms.
4. Availability of substitutes. Highly-differentiated product offered by a particular service may grant an advantage to the supplier in terms of its bargaining power. A high number of firms that provide similar peer-to-peer accommodation services can diminish the bargaining power of the firm that supplies an analogous product. Airbnb is the market leader in the short-term renting service, however, there are many other platforms in the market that in the long-term may be to the detriment of suppliers that use Airbnb.
5. Availability and ease of access of suppliers for immediate purchase. The barriers to entry are low in the peer-to-peer industry. Airbnb makes it attractive for potential hosts to use their service, as it is free for the hosts to sign up and the company offers an option of “instant book”, which makes it easier for guests to book, and which may be attractive for the suppliers, because they will be able to make profits at a faster pace and without any difficulty. All that needs to be done is the reservation of the chosen accommodation.

Low supplier power creates a more attractive industry and increases profit potential as buyers are not constrained by suppliers. High supplier power creates a less attractive industry and decreases profit potential as buyers rely more heavily on suppliers.

Overall, we can say that the individual bargaining power of each supplier of Airbnb is low. This is because the hosts (the suppliers of services) may have a limited number of ways (other platforms) of connecting to guests. Since Airbnb allows hosts to easily post information about their product (accommodation), it makes it attractive for suppliers to use this particular service, therefore the number of suppliers is high. The bargaining power of individual host who may not be satisfied with the mix of what they contribute at which risk for which benefit is limited. Realistically, they can only put their accommodation listing down.

Bargaining Power of Buyers

The strongest competitive forces determine the profitability of an industry and hence are of greatest importance in strategy formulation. Different forces take on prominence, of course, in shaping competition in each industry. Buyer Bargaining Power which is one of Porter’s Five Forces refers to the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service, and lower prices. Buyer power is one of the key forces that help shape the competitive structure and business strategy of a company.

The idea is that the bargaining power of buyers in an industry affects the competitive environment for the seller and influences the seller’s ability to achieve profitability. Strong buyers can pressure sellers to lower prices, improve product quality, and offer more and better services. All of these things represent costs to the seller. A strong buyer can make an industry more competitive and decrease the profit potential for the seller. On the other hand, a weak buyer, one who is at the mercy of the seller in terms of quality and price, makes an industry less competitive and increases profit potential for the seller. The concept of buyer power Porter created has had a lasting effect in market theory. (Wilkinson, 2013) A buyer groups power can be compared on various factors like Buyer Concentration, Competition, Bargaining Power, Information Asymmetries, Switching Costs and Price Sensitivity.

Buyer Bargaining Power Applied to Airbnb

Looking at the Buyer’s bargaining power towards Airbnb leads to a clear analysis of buyers being limited in power, leading to buyers being weak and having no significant impact on the workings of the company. The buyer’s power towards Airbnb is weak due to many factors, them being:

1. Buyer Concentration: A buyer group is powerful if it is concentrated or purchases in large volumes. Large volume buyers are particularly potent forces if heavy fixed costs characterize the industry—as they do in metal containers, corn refining, and bulk chemicals. Airbnb is rather weak in buyer concentration as transactions are usually single bookings for a single apartment and do not constitute a large part of entire Airbnb’s sales.
2. Switching Costs: These refer to the costs associated with the movement of buyers going to other sellers. If the cost of movement to another seller is high the buyer might not change the seller even though the costs might be high. Switching Costs are also largely dependent on the product in the industry being standard or undifferentiated. If the product is standard, then switching is easier as the buyer can shift to another company but not if the product is undifferentiated. Airbnb has a market monopoly as although hotels and apartments exist, none operate on the same model as Airbnb, this makes it a unique business model. This makes switching costs of buyers high as Airbnb operates a monopoly due to its unique business model.
3. Price Sensitivity: When a buyer is not concerned with the product due to it representing a small fraction of their income they are usually less price sensitive. Therefore, price sensitivity revolves around buyers’ profitability, where people with higher income being less concerned with a company’s pricing. Buyers using Airbnb’s service are unaffected by this factor as they can choose accommodation according to their price. Due to excess demand for rooms, sellers often charge a premium for their homes, knowing that rooms will get booked.
4. Bargaining Power: This refers to the ability of different parties’ ability to exert influence on each other for trades. If there are a high number of buyers then the buyer might not be able to negotiate a better price, as the seller does have a large number of consumers to sell to. This applies to Airbnb as there are a large number of people wanting to have a place to stay, leading to the weak and limited bargaining power of buyers. The bargaining power of the buyer is strongest when giving host reviews, any person who books an Airbnb can review the place where they stayed at. This influences other buyers’ decisions as they can see whether that place is genuine or far exaggerated from its supplier claims. This bargaining influences the suppliers’ business and profits, giving renters the bargaining ability to judge the rented space. This is the only extent of bargaining power a buyer can exercise towards Airbnb.
5. Information Asymmetries: In theory, this refers to a situation when one party has more information than the other party. This can create leverage in favor of the party with more information. This affects buyer power as they don’t know enough about the other party to negotiate better contracts. In Airbnb’s case, buyers don’t know enough about the workings of the travel industry to create a significant difference against company policies and pricing.
6. Competition: Competition greatly influences a business profitability, working, target audience, demand and most importantly how it affects buyer power. A monopolistic firm can exercise a high degree business freedom in terms of setting the prices and strategy, this might not be the same for a similar firm in a perfect market. Airbnb’s business model puts it in a unique environment where there is lack of competition, which renders the buyers of Airbnb with limited power as they cannot do much to influence the price listed on Airbnb.

The bargaining power of buyers is limited and weakened by the lack of competition in the space, high switching costs and information asymmetries. These factors lead to buyers having a negligent impact on Airbnb’s business model, pricing and strategy of the company. The analysis of bargaining power exercised by its buyers leads to the conclusion that Airbnb is greatly able to profit from its consumers and has a much higher discretion in taking management decisions.

Conclusion

Airbnb is a company that revolutionized the accommodation industry. With the peer-to-peer platform network, booking a place to stay became easier, more efficient and less costly. It is an example of how it has dislodged the hotel industry and it is interesting to note that these competitive forces play an exceptional role in policy formulation. Its unique business model creates a Network Effect, which relies on the value of consumers connecting to its network and joining based on the number of other people already connected to it. It has created a brand loyalty and a strong relationship with its customers which are the main reasons why it keeps being such a dominant company in the industry. All the above give Airbnb a monopoly in its market segment, which is profited on by the company, which is seen in the analysis of Porter’s competitive forces.