Brands in the News

Airbnb’s Incentives Problem

13 Jul 2022  

Airbnb’s stock is way down this year. Back in November, the stock was trading over $205. Today it is less than $95.

So, should you invest? The price is down much more than the stock market overall, so perhaps this is the moment.

While Airbnb is a remarkable brand, it is facing some complex incentive problems: the stakeholder groups Airbnb relies on are not always motivated to help the company.

Understanding stakeholder incentives is critical. In general, when all the players involved in a brand have an incentive to support it, the organization will flourish. Everyone works together in a positive cycle.

Take my institution: Northwestern University’s Kellogg School of Management. Professors have a big incentive to teach well: everyone likes having happy students and positive evaluations. The school administrative team has an incentive to create a great experience for students. Students have an incentive to make the most of their time, creating programs, making improvements, bringing excitement and enthusiasm. The alumni have an incentive to support the school however they can. Everyone has a reason to work together to make Kellogg a special place.

When people have mixed incentives, things become more challenging.

The Opportunity

On the surface, Airbnb looks like a supremely promising company. First, it is an exceptionally strong brand. People know Airbnb, and the overall proposition is clear. Second, the business in on-trend. Travel is rebounding, and home stays have an edge over hotels in a world of remote work and social distancing. Third, Airbnb provides a service people want. Owners need to find travelers, and Airbnb fills that need. Travelers want to identify places to stay, and Airbnb fills that need, too.

Airbnb also benefits from network effects and limited competition. It would be very difficult for a new entrant to enter the market in a significant way.

What could go wrong?

The Incentives Problem

The issue is that Airbnb has a massive incentives problem. Travelers, owners, local governments: These key stakeholders are not incented to help Airbnb succeed.

Owners

Property owners have a big incentive to deliver a great experience. One thing that works well on Airbnb is the traveler review process. Owners often focus on the customer reviews and want travelers to be happy. This incentive is critical to Airbnb’s promise and success to date.

The problem is that owners don’t have an incentive to flag the problem renters. There are some terrible renters out there – people break things, hold massive, wild parties, and disturb the neighbors. I rent a place in Colorado and this winter had one set of renters depart leaving all the doors and windows wide open. Apparently, this isn’t uncommon behavior – the fresh air blows away the cannabis smoke. The house was scheduled to be empty for several days, so I was very lucky that I saw the problem and all the pipes didn’t freeze.

But why would an owner post a bad review on a guest? There is no immediate benefit for being honest. Helping the community is of course great, but that is a fairly intangible benefit. There are some very real costs, however. If you go after a bad renter, they won’t be happy. They also know where to find you. They know your house. They can post a bad review, or worse. A motivated renter is dangerous. Remember: we’ve established that this is not a good person. Why annoy someone like that?

As a result, many of the bad guests don’t get flagged. They just move on. A bit like when people behave inappropriately at a firm; the company usually just lets the person leave to “pursue other opportunities.”

These bad renters are hard to catch and make people reluctant to list their houses.

Travelers

One would think travelers have a big incentive to help Airbnb. But this isn’t really the case. Travelers want to minimize their expenses and maximize their experiences. There aren’t many downsides for misbehavior.

Have a big party? This might not be approved behavior but what is the worst thing that will happen?

Put 20 people in a house limited to 5 people? Sure.

Play music late at night in a quiet neighborhood? Why not?

Two things protect the traveler. First, the owner isn’t likely to report bad behavior; the traveler can always threaten to post a bad review “A nice place but the bed bugs were bothersome.” Second, Airbnb doesn’t have great options. Kicking someone out of a property in the middle of their stay? That would be complex to execute. How do you do that? Ban someone from Airbnb? Perhaps. But the traveler can get a new email address and show up as a different person.

Travelers have an incentive to take full advantage of a property, not to treat it with the care the property owner wants.

Local Governments

A growing threat to Airbnb and other short-term rental firms is regulation. More and more communities are taking steps to limit the number of licensed properties, impose onerous fees and create massive administrative hurdles for owners.

The issue here is that local governments have a huge incentive to do this. Who are the voters? The people who live in the community. These are usually not the property owners. They certainly aren’t Airbnb employees.

Even people who have rental properties have an incentive to support regulations. If you currently have a short-term rental property, what is your incentive? You likely want to create regulations that block additional properties. The more competition, the lower the prices. For existing property owners, regulations make a lot of sense.

The Outlook

Put it all together, and Airbnb is facing a tough future. The number of new properties isn’t likely to grow, due to local regulations and nervous owners. If anything, the number of properties might fall. Stories of terrible renters will drive away your casual renter. Who wants that risk for a few thousand dollars?

Prices will go up, as the robust demand reaches a shrinking supply.

Travelers might then feel more entitled than usual. If you are paying a huge amount, why not fully enjoy the setting?

The question for Airbnb is this: how do you reshape some of these incentives? How do you encourage owners to post honest reviews? How do you encourage travelers to behave responsibly? How do you make short-term rentals a positive for local towns?

I would like to provide a solution, but I’m stumped. Any ideas? Without solutions, Airbnb is facing a bumpy future.

Maybe that lower stock price isn’t such a bargain after all.


2 Responses

  1. Daniel says:

    Great Analysis, Professor Calkins. Thinking about a solution for the reviews, what if the owners can flag the issue to AirBnB and the renter gets a fine to the credit card if proofs of the miss behavior are uploaded? The report can be private as the information of renters shown to property owners. I am sorry to hear what happened with your property in CO. All the best to you!

    • Tim Calkins says:

      Hi Daniel—Something like this could work. Of course, often the bad renters don’t do significant physical damage — being disruptive, loud, dirty, etc. are all concerning but it is hard to quantify this sort of damage. Fortunately, most renters are super-nice.

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