The Business Of
Sharing | Airbnb | What Are Their Margins?
Morning All!
So, yesterday we dug into how Airbnb makes money. And we saw that 394 million nights were booked on Airbnb in 2022. The average booking value per night was $160. And Airbnb took 13.3% of the gross value exchanged on their platform. With most of Airbnb’s take rate coming from guests vs hosts!
But that’s enough with revenues. Today, let’s turn our attention to costs and look at what’s really necessary to operate Airbnb’s business model. Let’s start with a split of the company’s cost structure.
We can see that whilst the cost buckets are fairly evenly spread out. ‘Cost of Revenue’ and ‘Sales and Marketing’ make up nearly half of Airbnb’s costs.
But here’s a question - what really is the cost of revenue for a platform business like Airbnb? Well, without further ado, let’s find out!
A Small Detail, Worth Millions Of Dollars
Okay, so cost of revenues. We’ve seen in previous TBO newsletters that cost of revenue (COGS) for Netflix is the cost of acquiring/creating the content on their platform. For Huel, COGS is the cost of the raw materials needed to make their products.
But Airbnb aren’t creating any goods or selling any products. They’re simply a platform where a renter and homeowner interact. So, it’s a good question - what is the cost for Airbnb to make this interaction happen?
Well, let’s think about it, using yesterday’s Ross-Rachel trip example. When Ross books that trip on Airbnb, what happens? Well, he needs to make a request to Rachel to stay in her property. And Rachel needs to accept the request. But this communication doesn’t happen telepathically!
Airbnb uses a communication partner called Twilio who help orchestrate that communication. Twilio’s services allow Airbnb to send text messages to homeowners whenever a booking request has been made. Now, this may seem like such a small detail. But I can’t imagine the millions of dollars this feature must’ve saved Airbnb. Think about the number of hosts who would’ve missed a request if they weren’t texted about it! And every time a text is sent to a host (like Rachel) Airbnb pay Twilio!
Okay, so the booking request has gone through. It’s been accepted. And Ross’s payment has been sent to Airbnb. But there’s another cost here for Airbnb. And that’s payment processing fees! Payment processing fees are basically costs that businesses have to go through in order to accept a card transaction. One of the most popular payment processing providers is Stripe. And Stripe’s standard charge is ~2% of every transaction. Which means that from the $456 Ross paid Airbnb for his trip, Airbnb have to pay about £9 of that to Stripe.
But Twilio and Stripe aside, there’s very little else required for Airbnb to facilitate the Ross-Rachel trip. And because of this, we see something pretty spectacular in Airbnb’s gross margin. It’s incredibly high… at 82%!
And in fact, that’s so high, that Airbnb have the highest gross margin of any company we’ve seen so far on TBO! That’s right. Not Nvidia, not TSMC, not McDonald’s, or anyone else. But Airbnb!
Software Developers Don’t Come Cheap!
Okay, so we’ve got super high gross margins. But what’s another major cost for Airbnb? Well, it wasn’t actually broken out separately in our cost split chart earlier because this cost line covers all areas. But employees make up a huge % of Airbnb’s costs. The company has ~6,800 employees in total and they’re spread out over sales, marketing, operations, etc.
But the main area where Airbnb have their employees is in product development. And these employees are software developers. And this makes sense right? Airbnb is a website and app. It looks great, has nice features, and gives smart, personalised recommendations. You need great software developers for that! And in fact, I was pretty mind blown at just how many software developers Airbnb do have… ~2,000?!
So, out of ~6,800 employees, 28% of them are software developers. However, in terms of cost, I think it’s a safe guess that these developers’ salaries take up more than 28% of overall employee salaries. Especially if the recent leaked documents of Google’s salaries are anything to go by…
… the average software developer at Google makes a tidy $279k! Now, I imagine it’s a bit less for developers at Airbnb - but probably not by too much!
How Did Staying In A Stranger’s House Become Normal?!
Alrighty, so we’ve seen the cost of revenues (Twilio and Airbnb) and people costs (salaries). But I just want to pause for a moment. Because we do need to realise how crazy Airbnb’s business model was when they were founded. I mean, initially, how many people would’ve been comfortable staying in a stranger’s house? Or even more ludicrous, how many people would’ve opened up their home to complete strangers?! Not many! I certainly wouldn’t have.
But Airbnb were able to change the mindset. And make the idea less crazy by using a very convincing tool. Free money!
And not just a bit of free money - I mean loads of free money! When Airbnb first launched, their referral program saw them give out an incredible $100 in free travel credit whenever someone referred a friend!
All these referral credits would have been accounted for as ‘marketing costs’. Now, these referral credits have gone down since then (unfortunately for me as an Airbnb user)! And Airbnb have much more normal marketing costs now (e.g. TV, social media ads). But it shows the lengths that Airbnb were willing to go to get people to try their platform.
You can also see the different referral bonuses for if your friend took a trip ($25) vs if they rented out a place ($75). Like we mentioned yesterday, Airbnb really prioritised the supply side - using strong incentives to convince people to rent out their properties and become hosts.
21% or 35%… Someone Tell Me What’s The Right Margin?
Alrighty, so we’ve seen (most of) the costs that are involved in operating a business model like Airbnb’s. But what kind of margins do these costs translate into?
Well, the chart below paints a pretty pleasant picture! Airbnb’s EBIT margin turned positive in 2021, and their 2022 EBIT margin was a very healthy 21%. But as we can also see, Airbnb’s Adjusted EBITDA margin was an even healthier, 35% in 2022! And I’m sure some of you may be thinking… what’s the ‘right’ margin to look at? Is it the 21% or the 35%?
Well, in order to decide whether to look at EBIT margin or Adjusted EBITDA margin, we need to know the difference between the two! And so, tomorrow, we’ll be diving into share based compensation costs - something we haven’t yet covered in TBO - because it’s this cost line that makes Airbnb report these 2 different margin figures.
But a final note on Airbnb’s margin. A key driver of the company’s margin expansion has been the beauty of scale. Economies of scale. As Airbnb got more users and bookings, and grew their revenues quickly, their costs didn’t have to grow as quickly. And when costs don’t need to grow in-line with revenues, we get operating leverage. Which leads to margin expansion!
27th Sep 2023
And that’s a wrap for today! I hope you enjoyed diving into Airbnb’s cost structure. Tomorrow we’ll look at the EBIT vs Adjusted EBITDA margin question. And take a deep dive into the world of stock options!
Have a fabulous day!
The Business Of Team