Case Analysis

CASE: E470

DATE: 04/12/13

This case was made possible by the generous support of Mr. John W. Jarve.

Sara Rosenthal (MBA ’04) and Andrew Rachleff, Lecturer in Strategic Management, prepared this case as the basis

for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

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AIRBNB The combination of an Aerobed and the Internet has now made everybody into an innkeeper.

--Eric Schonfeld, TechCrunch

Brian Chesky and Joe Gebbia were nothing if not creative. Two years after graduating from the

Rhode Island School of Design in 2005, the friends moved to San Francisco where they shared a

three-bedroom apartment in the trendy South of Market neighborhood. When a major design

conference came to town in the fall of 2007, the aspiring entrepreneurs recognized an

opportunity to earn a little extra rent money. Hotel rooms were filling quickly, rates were steep,

and they had room in their own apartment to host guests. Reasoning that a soft place to land and

a roof overhead was all they themselves needed for a good night’s sleep, the pair built a

rudimentary website using blog software advertising an air bed and a hot breakfast for $80 per

night (see Exhibit 1). Assuming they would attract recent college graduates on a tight budget,

the friends were surprised at the response. Gebbia recalled, “We had a 38-year old female who

worked at Razorfish. And then an industrial designer from Salt Lake City who was even older.

They slept on air mattresses on our kitchen floor.” 1 Add in a design researcher from India and

Gebbia explained, “They broke every assumption we ever made about who would stay on an air

bed at a stranger’s house.” 2 This realization, together with a fun and memorable experience

getting to know their guests, spurred the friends to think that their initial scheme to earn some

extra cash might have the makings of a real business.

As the pair began to dig into the logistics of developing their idea, they looped in Nathan

Blecharczyk, a previous roommate of Joe’s and a software whiz. Nate, the lead developer at a

small San Francisco startup at the time, agreed to work on the technical backend of the “Airbed

1 Danielle Sacks, “The Sharing Economy,” Fast Company, April 18, 2011,

http://www.fastcompany.com/1747551/sharing-economy (February 20, 2013). 2 Ibid.

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and Breakfast” website as a side project in his spare time. The threesome began to search for an

upcoming event which would draw a large number of attendees seeking accommodations to use

as a testing ground for scaling up their concept. (See Exhibit 2 for cofounders’ bios.)

SOUTH BY SOUTHWEST

South by Southwest (SXSW), held in Austin, Texas, every March, was one of the largest music

and film festivals in the country with over 150,000 attendees. The Airbed and Breakfast

cofounders identified the 2008 event as the perfect opportunity to connect festival goers with

local residents willing to offer a bed (blow up or otherwise) for a reasonable price. Like the San

Francisco design conference, SXSW would establish a connection and sense of trust between

guests and hosts through the shared experience of the festival.

As the cofounders strategized how to reach their target audience—hosts willing to rent space in

their homes and festival attendees seeking lodging—they first looked to the festival website, the

hub for all event-related information, from music venues and transportation options to ticket

sales and restaurant recommendations. Included on the website was a link to local hotels, which

the Airbed and Breakfast team saw as the perfect vehicle to push traffic to their site. When

Gebbia contacted the event organizers to suggest adding Airbed and Breakfast to SXSW’s

lodging lineup, he received a quick “No.” The festival’s event team did not want to jeopardize

the relationships they had already established with dozens of local hotels offering bulk discounts

by offering a competing option. If the Airbed and Breakfast team wanted to be included in the

festival lodging lineup, they could arrange for a meeting with the event organizers a few months

after the upcoming festival to begin discussions for the subsequent year.

Disappointed at the outcome but determined to move on, the team launched the second iteration

of the Airbed and Breakfast website two weeks prior to the festival, relying on local blogs and a

variety of social media sites to advertise their service. The site provided a list, similar to

Craigslist’s apartment postings, of the 80 lodging options they had amassed (see Exhibit 3).

Each listing provided a brief description of the accommodation (e.g., air bed on the living room

floor, queen bed in a guest room, couch in a trailer, etc.), the nightly rate, and the owner’s

contact information so the guest could call or email the host directly to make arrangements.

Chesky found his own festival accommodations through the site and was pleased to arrive at a

conveniently located, nicely furnished house owned by a 30-something couple, Jim and Nancy.

After exchanging niceties, Jim asked Chesky for the $240 they had agreed upon for his three-

night stay. Somewhat embarrassed, Chesky admitted he had forgotten to get cash but promised

he would pay the following day. When Chesky returned to the house the next evening, Jim

pleasantly asked for the money and Chesky realized that, once again, he had forgotten to

withdraw cash. The previously amicable host/guest relationship quickly turned tense as Jim

grew skeptical about his guest’s willingness and ability to pay (Chesky did pay his host the next

morning), and Chesky took note that building a pre-payment mechanism would be one of the

team’s first order of business upon his return to San Francisco.

A Better Way to Stay

Despite Chesky’s awkward experience, the cofounders received generally positive feedback after

the event. They had connected half a dozen festival goers with accommodations, and a number

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of fans of the concept had subsequently asked if they could make similar arrangements for

upcoming business and pleasure travel. The team had assumed that an event would be needed to

build the trust required to let a stranger stay in someone else’s home, but otherwise there was no

harm in allowing non-event related listings on the site, particularly as they worked out the kinks

of the event-based model. The SXSW experience had brought several key issues to light, among

the most glaring being that once the event was over, the inventory was essentially worthless.

The team would have to generate a new pool of inventory with each new event as dates, venues,

and circumstances changed. There were also few events throughout the year of comparable size

and scale to SXSW, meaning they would have to gather (and re-build) inventory for hundreds of

smaller events to build a business of any meaningful size.

The SXSW experience shed light on a number of ways in which the team could improve the user

experience as well. One of the first actions the cofounders took after the festival was to establish

a partnership with PayPal to allow guests to pre-pay for their stay with a credit card, eliminating

the hassle and logistics of a face-to-face transaction. Enabling an online payment mechanism not

only streamlined the user experience, but protected against possible “Craigslist scams” where a

scammer would advertise and receive payment for a property that did not exist. Photographs

were added to the catalog of listings, allowing site visitors to view a snapshot of the place they

would stay. A user who found a listing he liked in New York, for example, would be taken to a

page with three equally sized images: a photo of the interior of the home or condo, a photo of the

host, and a map of the accommodation (see Exhibit 4). The team created a mechanism which

enabled users to book space in someone’s house similar to the process of reserving a hotel room

online, so the entire transaction could take place without need for multiple back-and-forth calls

or emails. Finally, the team added a “Reviews” feature where guests could provide a description

of their accommodation, host(s), and overall experience as a reference to other guests seeking

lodging.

AIRBED AND BREAKFAST LAUNCHES

Chesky, Gebbia, and Blecharczyk officially launched Airbed and Breakfast with its new and

improved website in August 2008. The threesome had high hopes for their idea, though

Blecharczyk and Gebbia continued to work on their own side projects to keep money flowing

while their start-up gained traction. Airbed and Breakfast’s “coming out” was publicized by a

variety of media outlets, including The Wall Street Journal and Tech Crunch which explained,

“The combination of the Aerobed and the Internet has now made everybody into an innkeeper.” 3

This version of Airbed and Breakfast was marketed to business travelers and conference goers

seeking a more affordable alternative to hotels, and the team set its sights on the Democratic

National Convention (DNC) at the end of August as the next big opportunity.

Democratic National Convention

3 Erick Schonfeld, “Airbed and Breakfast Takes Pad Crashing to a Whole New Level,” August 11, 2008,

http://techcrunch.com/2008/08/11/airbed-and-breakfast-takes-pad-crashing-to-a-whole-new-level/ (February 25,

2013).

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The DNC was scheduled to take place in Denver over four days at the end of August, and was

expected to attract 75,000 attendees to the city. 4 Airbed and Breakfast advertised its service via

local media outlets, bloggers, Twitter, and Facebook, garnering mentions in the local, state,

national, and even international media. DNC delegates had access to 900 lodging options

through the Airbed and Breakfast website, which were set at prices ranging from $20 per night

for an airbed to $3,000 for an entire house. 5 Most, though not all, listings included a photo of the

host and the accommodation, along with a brief description. If a person found a listing s/he

liked, s/he would click a “Book It” button, and then enter her/his contact and payment details.

The host would be notified and given the opportunity to accept or decline the reservation request

within 24 hours. If the host accepted, the guest would be charged for the accommodation. The

company charged the guest a service fee of 6 to 12 percent for a booked reservation, and the host

a 3 percent commission fee. For example, if a property was listed at $100 per night, the guest

would pay $112, the host would receive $97, and Airbed and Breakfast would receive $15 ($12

from the guest and $3 from the host).

The Airbed and Breakfast site booked 50 accepted reservations during the convention, validating

the cofounders’ growing belief that a highly functioning marketplace for home-based lodging

was viable. However, after the convention, the team once again found themselves with a heap of

inventory that no longer had value, particularly in a town like Denver which was not considered

a hot spot destination. As Blecharczyk and his partners evaluated their position, he recalled

thinking, “We are back to square one in terms of how to attract customers.” 6

Now that “the crickets were chirping” and their next big event, the presidential inauguration, was

three months away, the threesome began to brainstorm strategies to get the Airbed and Breakfast

name out in the media and in front of potential customers once again. In a play on the

“breakfast” in Airbed and Breakfast, Chesky and Blecharczyk put their creativity and design

skills (as well as those of a number of others whom they convinced to help out) to work, creating

500 beautifully designed cereal boxes in two different styles, “Obama O’s” and “Cap’n

McCain’s.” The first 100 of these were mailed directly to political reporters around the country

who were intensely focused on the upcoming election (see Exhibit 5). The unique and playful

advertising ploy generated much publicity for the cereal boxes (which were sold on the website,

netting $30,000 in revenue), but less so for the company as a provider of accommodations.

Nonetheless, the threesome could only hope that their strong relationship with political reporters

and the upcoming inauguration in January would help push customer acquisition to a tipping

point that would result in sustained business growth.

WAKE UP AND SMELL THE COFFEE

From September through December 2008, Airbed and Breakfast’s revenue had been flat at

approximately $200 per week, and Blecharczyk admitted that the three friends looked at the state

4 “Obama Launches Historic Campaign,” BBC News, August 29, 2008,

http://news.bbc.co.uk/2/hi/americas/7586375.stm (February 25, 2013). 5 Schonfeld, loc. cit.

6 Interview with Nathan Blecharczyk, January 9, 2013. All subsequent quotations are from this interview unless

otherwise noted.

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of the company and asked whether it was time to give up. However, the inauguration in January

2009 was rapidly approaching, and was anticipated to draw 2 to 5 million visitors to the

Washington D.C. area. Hotel rooms had been sold out months in advance, offering the perfect

opportunity for a much-needed infusion of cash and customers. Through the Airbed and

Breakfast-sponsored website, www.crashtheinauguration.com, people could secure lodging

ranging from $10 for a couch in Silver Springs, Maryland, to a few thousand dollars to rent an

apartment in the heart of D.C. 7 As with previous events, the cofounders were able to generate

publicity through local media and blogging sites, ultimately posting over 1,000 listings on the

site and successfully booking about 150 reservations.

Despite their success at the inauguration, the company was not able to sustain its momentum (see

Exhibit 6). The inventory they had generated to date retained little value once the artificial

driver of demand (the event) was gone. With a final bit of resolve, they decided that if this

company truly had a chance to succeed, they would need to put their heads down, stop work on

any unrelated projects, and dedicate 100 percent of their time to the effort over the next six

months. On the advice of a mentor at the time, they applied to and were accepted to Y-

Combinator, a start-up incubator which provided seed funding, access to investors, and

mentoring to help start-up teams refine and launch their idea. Blecharczyk had moved to Boston

earlier in the year to be with his girlfriend (soon-to-be fiancée), but he packed up his belongings

and moved back to San Francisco so that the team could be in one location for this next, and

possibly final, push.

Y-Combinator

With the inauguration over, the team looked forward to the 13-week Y-Combinator experience

as an opportunity to evaluate the business and develop a strategy to jump start its growth. The

program began in January 2009, and one of the very first things they did was change the

company’s name to Airbnb, a catchy play on the original. They also met with Paul Graham, one

of Y-Combinator’s cofounders and a well-known investor, technologist, and entrepreneur.

Among Graham’s first questions was, “Where are your users?” The team’s response:

“Everywhere.” The organic nature of customer acquisition meant that the company had one or

two users in a multitude of cities around the world, though a few dozen listings were

concentrated in New York City. Based on Graham’s belief that sometimes it was necessary to

“do things that don’t scale,” he advised the threesome to fly to New York to meet with users and

in doing so, perhaps find answers to what would drive sustained engagement and growth.

More is More or Less is More?

As Chesky, Gebbia, and Blecharczyk evaluated the state of the company in preparation for their

trip to New York, one thing was undeniably clear—their current model was flawed. Despite

three successful events over the past year—South by Southwest, the Democratic National

Convention, and the presidential inauguration—they could not achieve enough post-event

momentum to keep the company in business. General travel-related listings, on the other hand,

7 Jayne Clark and Laura Bly, “Start your campaign ASAP to be in D.C. for the inauguration,” November 11, 2008,

USA Today, http://usatoday30.usatoday.com/travel/destinations/2008-11-20-inauguration_N.htm (March 4, 2013).

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had grown steadily over the last few months, indicating an opportunity to build inventory in this

sector and perhaps expand offerings beyond space in someone’s home to vacation rentals,

houses, and apartments. What was not yet clear was whether they should continue accumulating

inventory through organic, if somewhat scattered, growth, or undertake a more methodical, city-

by-city approach, starting with a popular tourist destination like New York, for example, before

moving on to Boston, Chicago, or San Francisco. They also considered their target audience—

they had heard from numerous people that there still existed a level of discomfort with the

concept of hosting or bunking up with a stranger. Perhaps they should reach out to property

managers and/or boutique hotels, and bombard the site with a handful of more traditional lodging

options as a way to create momentum. Alternatively, they could initiate a guerrilla marketing

campaign to educate and familiarize the general public with the concept, illustrating real-life

stories that de-stigmatized the experience. Whatever the answer, growing inventory and driving

traffic was only part of the equation—they also needed to explore facets of their existing

inventory to identify anything and everything that might be impeding their growth.

New York, New York

Despite approximately 40 properties listed in New York, bookings were low at around 15 per

month, begging the question were users looking for a broader selection or were the listings

themselves poor quality? If the latter, could they develop a more rigorous process for

determining the types of accommodations they wanted to post on their website? For example,

should they require an in-person meeting or onsite visit for every listing, at least in this early

stage of the company’s growth? Or perhaps they could institute ratings for accommodations

similar to eBay’s ratings for sellers so that buyers could to weed out lower quality listings?

Alternatively, it could be that the homes themselves were fine but that the website presentation

was less than stellar. Some listings simply included a brief narrative about the property, with no

photo at all, while others included a photo of the host and the interior of the accommodation

which was posted, along with a map, on the listing’s main page. Photos were typically taken by

the host, often with a camera phone, though a handful of listings posted professionally shot

photos which tended to increase booking rates two to three times. It was a fine line between

gathering quality data and demanding too much from hosts, and the Airbnb team evaluated

which criteria should be required for a listing to make it on to the site.

Like the photos, hosts had complete discretion over the written description of the property. As a

result, the content and length ranged from a three-paragraph write-up about the host’s well-

appointed studio sublet to “Queen bed in two-bedroom apartment.” If the “Queen bed” listing

was also not accompanied by a photo or a guest’s review, there was little information on which a

prospective guest could make their decision. Though the data was inconclusive, it seemed clear

that the more information presented about the property the better, and perhaps the Airbnb team

could facilitate the process, either by creating an online form with mandatory fields or simply by

editing the description with the host’s approval.

After the stay, guests were encouraged to write up reviews of the property which other guests

used as a basis for evaluating the various aspects of their experience, from the friendliness of the

hosts to the comfort of the bed. Reviews were not a required portion of the listing and, like the

property descriptions, were highly variable if they existed at all. Guests’ write-ups could be as

brief as “Very nice guy. The perfect host!” to a colorful half-page description of the property’s

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amenities and hot pancake breakfast. As Airbnb looked to strategically expand beyond event-

based accommodations, the team believed reviews would become critically important for

establishing a host’s credibility and trust with prospective guests, particularly among first-time

users. The cofounders began to think through ways to incentivize users to write descriptive,

colorful, and honest reviews that would add richness to the listing and value to the site.

The last major issue which the Airbnb team wrestled with was the pricing itself. The nightly rate

for each listing was based solely on the host’s determination of value, with no maximum,

minimum, or guidance as to what an appropriate price might be. There was the possibility that

the company was losing potential revenue through underpriced listings, or conversely, losing

potential customers who were turned off by inflated nightly rates. With few competitors in the

space at the time, and a limited data set of comparable property types, it was difficult to assess

exactly where the problem lay.

CONCLUSION

As Chesky, Gebbia, and Blecharczyk returned to the Bay Area in March 2009 after a week of

meetings with their New York-based users, both hosts and guests, they thought through the

questions, big and small, they now must answer. Should they focus all their energies on building

up a large number of diverse listings with the assumption that more options would attract more

users to the site? Or should they create a more rigorous process for filtering the listings that did

end up on their site to ensure they did not become an overwhelming dumping ground for any

shack that had a bed? Was it time to take more control over every aspect of their listings, or

should they let the users of the site continue to drive the content as they had to date? Inevitably,

every question they asked only spurred more, as they evaluated which issues to attack first in

their quest to revive the company.

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Exhibit 1

Original Concept

October 2007

Source: Airbnb.

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Exhibit 2

Cofounders’ Bios

Brian Chesky, CEO & Co-Founder

Brian drives the company's vision, strategy and growth. Always pushing the status quo, Brian

aims to disrupt the industry with ideas that change the way people live. To grasp the full impact

and experience of Airbnb, Brian rid himself of an apartment and has been living in the homes of

the Airbnb community since June of 2010. He is committed to assembling a passionate, top tier

team to deliver on this promise.

Before Airbnb, Brian ran an industrial design shop in Los Angeles; even these days he is rarely

seen without a drafting pen and sketch book in hand. Brian holds a Bachelor of Fine Arts in

industrial design from the Rhode Island School of Design.

Nathan Blecharczyk, CTO & Co-Founder

Nathan is the technical architect behind Airbnb. A pragmatist who translates vision and design

into tangible product through fast iterations, Nathan uses data to identify and pursue high-growth

opportunities. Under his leadership, the engineering team has developed a robust, secure

marketplace which now facilitates a massive amount of commerce each day.

Nathan got an early start in business and technology when he founded an online marketing

company while still in high school. Since then he has worked as a program manager at

Microsoft, engineer at OPNET Technologies, and lead developer at Batiq. Nathan graduated

with a degree in Computer Science from Harvard University.

Joe Gebbia, CPO & Co-Founder

Joe defines the Airbnb experience. He is dedicated to creating an inspiring and effortless user

experience through sharp, intuitive design, and crafts the product roadmap to make it so. Joe

values products that simplify life and have a positive impact on the environment, and ensures

that the company adheres to these tenets.

Prior to Airbnb, Joe was employed by Chronicle Books, co-founded a green design website, and

developed several consumer products. An alumni of the Rhode Island School of Design, Joe

earned dual degrees in Graphic Design and Industrial Design. He also founded the school's

basketball team and led as student body president.

Source: Airbnb.

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Exhibit 3

Screenshot from Airbed and Breakfast website for South by Southwest

March 2008

Source: Airbnb.

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Exhibit 4

Screenshot from Airbed and Breakfast website

August 2008

Source: Airbnb.

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Exhibit 5

Cereal Box Campaign

Source: Airbnb.

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Exhibit 6

Airbnb Revenue

August 2008 – January 2009

Source: Airbnb.

Inauguration

Weeks

$0

Regular Travel

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