Airbnb revolutionized the short-term rental market, providing a decentralized platform for travelers seeking more unique, home-like accommodations. It disrupted the traditional hotel industry by connecting homeowners with millions of potential guests through an easy-to-use digital interface. However, since going public in 2020, Airbnb has faced significant challenges that threaten its long-term survival. The company’s business model, which initially seemed poised to scale endlessly, now appears burdened by a growing list of stakeholders—each with its own financial interests. Combined with eroding consumer trust due to increasingly opaque pricing practices, Airbnb’s future is looking far less certain than it once did.
About the author: Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.
Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.
Too Many Mouths to Feed
One of the most significant hurdles for Airbnb’s long-term sustainability is its extensive network of stakeholders, each requiring a piece of the financial pie. The beauty of the platform economy is its ability to scale rapidly by reducing transaction costs. However, Airbnb’s marketplace involves many players—property owners, property managers, maintenance crews, homeowner associations (HOAs), and various levels of government—all needing their share of the profits.
The Breakdown of Costs
Unlike hotel chains, which are vertically integrated and able to control costs across all aspects of the business, Airbnb is primarily a middleman. Traditional hotels handle everything from maintenance to guest services in-house, streamlining operations and reducing costs. In contrast, Airbnb relies on external partners—property owners, third-party managers, and local contractors—which fragment control and raise costs.
This fragmented approach leaves Airbnb with less room to reduce expenses while still maintaining service quality. Hotels benefit from economies of scale—centralizing services like cleaning, maintenance, and guest support—allowing them to lower costs. Airbnb’s decentralized structure, while offering more variety, does not allow for the same operational efficiencies. The Airbnb model is subject to negative economies of scale, especially in a high-touch business like lodging. In the article Unlocking Wealth in the Platform Economy, we show Airbnb's environmental score as a B- with the property manager Vacasa having an environmental score of C-. Since Airbnb and Vacasa are linked in the same decentralized ecosystem, Vacasa puts downward pressure on Airbnb. As they say... a chain is only as strong as its weakest link...
Furthermore, there are regulatory and tax issues. Cities and states have wised up to the short-term rental market and often impose similar taxes as on hotels, including transient occupancy taxes and stricter zoning regulations. Additionally, HOAs in many residential areas have evolved to impose restrictions or fees on short-term rentals, further complicating the financial equation for property owners and Airbnb alike. These compounding costs add pressure to an already thin-margin business model, particularly when compared to hotel chains that have honed cost management over decades.
Eroding Guest Trust: The Hidden Fee Problem
Another growing issue for Airbnb is the erosion of guest trust. In its early days, Airbnb was synonymous with affordability and transparency. Guests could stay in a cozy apartment or unique home for far less than the cost of a hotel room. But over the years, the platform has increasingly relied on hidden fees—cleaning, service, and other “junk fees”—to pad its bottom line, creating an experience where guests often feel misled by the initial price displayed.
Hidden Fees: The Trust Killer
The "hide the fee" tactic has become a major pain point for Airbnb users. Potential guests often click on an enticingly low nightly rate, only to discover that the total cost is inflated by a series of additional charges that can sometimes double the initial price. This bait-and-switch pricing model undermines the trust that Airbnb was originally built upon and is beginning to backfire.
Many consumers have taken to social media to voice their frustration, posting screenshots of exorbitant cleaning fees and comparing Airbnb stays unfavorably to hotel bookings, which often include more transparent pricing. Unlike hotels, where taxes and fees are generally upfront and standardized, Airbnb’s decentralized model results in wide variability depending on the property, the host, and the local market.
This erosion of trust is particularly damaging because trust is central to the platform’s value proposition. Unlike hotels, where brand consistency is key, Airbnb built its brand on the idea of trust between hosts and guests. By undermining that trust with hidden fees, Airbnb risks alienating the very consumers it relies on for growth.
The “hide the fee” tactic is a direct consequence of the underlying cost issue. With so many stakeholders involved in the decentralized short-term market, concealing fees becomes a way to stay competitive against hotels. However, this approach is not sustainable in the long run. Eventually, guests will walk away when they feel misled.
Airbnb’s Phase 3 Transition and the Push for Short-Term Profits
When Airbnb went public in December 2020, it entered what is commonly referred to as Phase 3 of platform company development—the stage where public markets demand short-term profitability. In this phase, companies are under intense pressure to deliver quarterly earnings, often at the expense of long-term strategy and innovation. For Airbnb, this transition has meant that the company now prioritizes short-term gains, like boosting revenue through additional fees, rather than focusing on maintaining the integrity of its platform or innovating new solutions to rising operational costs.
The Shareholder Dilemma
One of the most pressing issues for public companies like Airbnb is the tension between managing short-term shareholder expectations and addressing the long-term health of the business. Since its IPO, Airbnb has been under enormous pressure to demonstrate consistent earnings growth, often leading to decisions that prioritize immediate revenue generation over sustainable value creation.
While this focus may satisfy investors in the short term, it comes at a cost. By emphasizing higher fees and cost-cutting measures, Airbnb risks alienating both hosts and guests, the two groups it depends on to function. Hosts, for instance, face growing operational costs while earning less per booking due to Airbnb’s increased fees. At the same time, guests are growing increasingly frustrated with the platform’s unpredictable pricing.
Hotels Are Winning the Cost War
The hotel industry, despite its initial disruption by Airbnb, has shown remarkable resilience. Hotels have maintained and even grown their market share by playing to their strengths: consistency, cost control, and transparency. Major hotel chains like Marriott, Hilton, and Hyatt have perfected their operations over decades, allowing them to offer a predictable and often more affordable experience.
Hotels benefit from vertical integration, owning and controlling all aspects of their operations—from room cleaning to guest services. This allows them to manage costs far more effectively than a decentralized platform like Airbnb. While Airbnb relies on individual property owners and third-party services, hotels can centralize their operations, allowing them to cut costs while maintaining a higher level of consistency.
Moreover, hotels have responded to Airbnb’s rise by improving their own offerings, making their services more personalized and technology-driven. With mobile check-ins, loyalty programs, and enhanced cleanliness protocols, hotels have adapted to the modern traveler’s needs while maintaining control over their cost structures.
The Moral Hazard of Airbnb’s Business Model
Another challenge Airbnb faces is what economists call “moral hazard”— also known as the "principal-agent problem." The idea is that one party - the agent - takes risks because another party - the principal - bears the cost. In Airbnb’s case, this manifests in several ways. The platform allows hosts to set their own cleaning fees, cancellation policies, and other charges, with little oversight from Airbnb itself. While this hands-off approach gives hosts flexibility, it also creates opportunities for abuse. For example, some hosts charge excessive cleaning fees, allowing them to take a portion of the fee for themselves. They do this knowing that Airbnb enables them to shift the costs onto guests with minimal consequences.
This dynamic also exists in the property management side of the business. Many property managers, particularly those using Airbnb as a sales platform, face few repercussions for providing subpar services to guests or neglecting the long-term maintenance of rental properties. As a result, the guest experience can suffer, leading to negative reviews and lower guest retention, further damaging the platform’s reputation. The misalignment between the principal and the agent manifests as a moral hazard. This may drive a wedge between Airbnb - the agent - and the hosts - the principals - they depend upon to supply properties to the short-term rental market. In the hotel business model, moral hazards are minimized via increased centralization of factor inputs.
Can Airbnb Survive?
The fundamental problem Airbnb faces is that its original business model—connecting homeowners with guests in a simple, transparent way—has become increasingly convoluted as more stakeholders demand a share of the profits. Between property managers, maintenance teams, HOAs, local governments, taxing authorities, and now shareholders, Airbnb is trying to satisfy too many masters, with each one adding additional costs to the system. At the same time, it’s losing consumer trust by employing pricing tactics that are more associated with airlines than with hotels or rental properties.
For Airbnb to thrive, it needs to address both its rising cost structure and its eroding trust problem. This could involve more vertical integration, where Airbnb takes greater control of the services it provides, much like hotels do. Alternatively, the company could focus on restoring guest trust by simplifying its pricing model and enforcing stricter standards for hosts. Without meaningful changes, however, Airbnb risks losing out to more efficient and transparent competitors, including the hotel industry it once disrupted.
Conclusion
Airbnb’s journey from a disruptive startup to a public company has come with significant growing pains. While its platform offered a unique alternative to traditional hotels, its current business model is struggling under the weight of too many stakeholders and opaque pricing practices. As costs continue to rise and guest trust erodes, Airbnb’s future looks increasingly uncertain. If it cannot address these issues—either through operational improvements, better pricing transparency, or even vertical integration—it may struggle to survive in the long term, leaving room for other players to step in and capitalize on its weaknesses. The question remains: Can Airbnb evolve quickly enough to survive in a competitive and increasingly distrustful market?
Primary article source:
Hulett, Jeff. Unlocking Wealth in the Platform Economy: Strategies for Investors and Consumers. The Curiosity Vine, 2024.
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