Why Airbnb is losing the recovery

 

Airbnb is doing a crazy, pandemic-induced experiment: not advertising on Google. While all companies are taking this time to cut costs and operate leaner, this is different, and will likely destroy a tremendous amount of value while adding fuel to already growing competitors. For Airbnb’s sake and the property managers and owners that depend on them, I hope they reconsider this strategy, and fast! There are data-driven reasons why resuming Google spending is critical for Airbnb’s long term success.

 

Competition

Booking.com built its entire business – the most valuable in the online travel industry – on the simple premise that customers don’t care where they book. Hotel bookings are a very high margin business, and through competitive pricing and massive advertising on Google, Booking.com built the largest travel business in the world – over 6 times larger (by market cap) than Expedia.

 

Not advertising on Google opens up a channel (the largest channel) for aggressive, well funded competitors to acquire customers. According to The Information, VRBO’s sales are up 61% vs 16% for Airbnb in June precisely because VRBO is not doing this experiment. Instead VRBO is aggressively taking market share from Airbnb.

 

Travel is a global industry. People travel to anywhere from everywhere – 160+ countries to 160+ countries; over 25,600 possible combinations. As Airbnb pulls back, some countries will create home-grown champions with direct host relationships in popular destinations for their own markets. Airbnb has great brand recognition in the US, but there are probably 50 to 75 countries where literally nobody has heard of it. It’s easy to forget that in San Francisco.

 

Fragmentation is very difficult to compete against at global scale, because it’s 5-10% of a lot of different segments. Some may be much larger: Ctrip has turned into a major force in online travel over the last decade by focusing on China. Additional, local channels will simply be one click away in property management software (PMS) or channel managers used by thousands of hosts already,

 

Market position

The value of OTAs like Airbnb is to bring new customers into the market. Without google spending, they are missing a significant percentage of these – which not only hurts Airbnb, but as the largest player, also hurts the industry. Some percentage of those customers will inevitably choose hotels, who spend huge sums of money for better presence in google search results.

 

Moreover, the more astute participants in the market will begrudgingly acknowledge this role of Airbnb expanding the vacation rental market. If Airbnb pulls back on ads, not only will Airbnb be less important to its supply-side customers, but also it will have less justification for charging high fees.

 

The future without Google ads

The hospitality industry tends to work with many channels, or places you can book their rooms. For example, one hotel we spoke with sells through 3,000 different channels – hundreds of websites plus thousands of travel agents. In short-term or vacation rental, many hosts get 100% of their business from Airbnb. Many more get all their bookings from Airbnb and VRBO. As more competitors emerge or get a significant share of the market, the competition will persist and reduce Airbnb’s market power over its suppliers.

 

As an example, Stubhub, which experimented with bundling fees, created competitors where none existed and hurt its margins and market position permanently. Bundling, or adding fees to the ticket prices at the start (rather than as an upsell/surprise in the purchase flow), resulted in massive penalties in Google. Sales went down as competitors with lower prices were both ranked higher and chosen by customers (would you want to pay $80 or $100 for the same ticket?). Of course these people ended up paying the same – but they were in the purchase flow on competitor sites. Stubhub now has to contend with aggregator sites like SeatGeek which were not a factor before.

 

Just like Airbnb, Stubhub sells inventory available elsewhere. Without the first bite, without the most market share, the company will be in a worse position forever. This is not a “when the pandemic is over” problem. If VRBO or Booking.com can capture more share of wallet – more travelers, and more of the share of revenue for hosts – Airbnb will suffer long-term.

 

Aribnb’s suffering will be long-term, as consolidation is coming for vacation and short-term rental. The industry is professionalizing, and as every mom-and-pop industry that has ever professionalized, consolidation will follow. This slowed with the pandemic but it will resume.

 

Summary

Not only will competitors take advantage of Airbnb’s reduced Google presence in the short-term, in the long-term Airbnb will lose market share globally and allow an industry it controls to fragment. As hosts learn that they can get bookings elsewhere, they’ll expand their footprint (easy today, with channel managers and property management software) and take share of revenue from hosts. Hosts will then value Airbnb less, and Airbnb will lose business permanently.

 

Instead of eliminating Google spending, optimizing it is a far better way to conserve cash while extending reach. In a massive Google budget there is bound to be millions in waste; integrating more closely with product, availability – there are many ways to save money on Google ads while not opening the channel to competitors. Airbnb might consider that strategy, instead.

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