Service Fees: The Secret to How Airbnb Is Making Money in the Billions

Airbnb Strategy

Airbnb: Top IPO to Watch for 2015?

With oil prices tanking and fears the global economy might rout the markets, many investors are turning their attention to possible initial public offerings (IPOs) in 2015. After the successful launch of Alibaba Group Holding Limited (NYSE/BABA) and GoPro, Inc. (NASDAQ/GPRO), the IPO watch is on for private juggernauts like Airbnb, which has been raking in billions lately.

What Is Airbnb?

Founded in August of 2008 and based in San Francisco, California, Airbnb helps people monetize their greatest asset—their homes. Airbnb is an online marketplace where people from around the world list, discover, and rent accommodations at every price point.

Since its humble beginnings, Airbnb’s web site has helped more than 25.0 million guests find accommodations for a night, week, month, or longer. With more than one million listings, Airbnb is currently available in 40,000 cities and 190 countries.(1)

And it continues to get more popular daily. On December 31, 2014, Airbnb helped nearly 550,000 travelers find somewhere to rest their head—the biggest day in the company’s history. By comparison, on December 31, 2009, only 2,000 people used Airbnb to help ring in the New Year. Of the 550,000 travelers this past New Year’s Eve, 91,000 (16.5%) were first-time users.(2)

Airbnb’s $13.0-Billion Valuation

It’s that rapidly growing user base that has helped Airbnb become one of the most valuable companies backed by venture capitalists in the world. In July, the company closed on a $475-million round of funding, bringing its then total to $801 million.(3) There is also talk that Airbnb is considering an employee stock sale that could raise the company’s value from $10.0 billion to about $13.0 billion.(4)

With that kind of valuation, Airbnb is worth more than well-established hotel chains, including Wyndham Worldwide Corporation (NYSE/WYN), which has a market cap of $10.4 billion; Intercontinental Hotels Group PLC (NYSE/IHG), with its market cap of $9.33 billion; and Hyatt Hotels Corporation (NYSE/H), with a value of $8.8 billion. At $13.0 billion, Airbnb is also five-times more valuable than HomeAway, Inc. (NASDAQ/AWAY), a vacation-rental site that publicly listed in 2011.

Why the high valuation? It’s the company’s simple recurring revenue stream.

How Airbnb Makes Money: One Simple Revenue Stream

Unlike online giants like Facebook, Inc. (NASDAQ/FB) that make money from advertising, Airbnb simply charges its users (guests and hosts) service fees.

Here’s how it works: Individuals post their accommodations and decide how much they want to charge per night, week, or month. Airbnb charges a guest service fee of six percent to 12% every time a reservation is booked based on the size of the reservation and similar factors. There are four additional types of fees guests may need to pay in addition to the base price: a cleaning fee, an extra guest fee, an Airbnb guest fee, or a currency exchange fee.

On top of that, the accommodation industry is regulated city by city, and Airbnb operates in 40,000 cities, so some transactions may incur taxes based on the location. For example, in November, Airbnb said it would be adding a tourist tax to its Chicago listings. The 4.5% tax is expected to put an additional $1.0 million in tax revenue into the city’s coffers.(5)

On the other end, Airbnb also charges hosts a three-percent host service fee. For example, if a guest books a four-night reservation at $100.00 a night with a cleaning fee of $50.00, the three-percent host service fee is applied to the $450.00 subtotal, which rounds up to $14.00.

That simple revenue stream has helped, we presume, Airbnb bring in some serious money. While it’s not clear where Airbnb’s annual revenue stands, estimates put it anywhere from $1.0 billion to $2.0 billion.

Airbnb to IPO in 2015?

Will 2015 be the year Airbnb IPOs? It depends on how you interpret company CTO and co-founder Nathan Blecharczyk’s cryptic words: “Going public is a means, not an end goal. It’s a way of raising capital, and our company is currently very well capitalized, so there’s no need to think about an IPO right now.”(6)

But really, can any company have too much money?