The world’s biggest hotel doesn’t own any rooms and the world’s biggest taxi cab company doesn’t own any cars. How can this be? It’s because the hotel company, Airbnb, and the taxi company, Uber, rely focus on creating a great customer experience, and let other people handle the rest.
Let’s look at the hotel industry. Travelers have a set of needs when they visit a new city. They want a place to stay that’s comfortable and safe that’s somewhere close to the activities that they want to do. So how can a supplier deliver a great experience to the traveler? Before Airbnb, hotels needed to own the whole building (or have a franchisee own it). They would deliver a consistent experience by having a set of corporate standards that represented the brand. So a traveler knew exactly what to expect when they went to a Mariott Courtyard. A Marriott Courtyard in Shanghai looked the same at a Marriott in Topeka Kansas. Consultants would often joke that traveling around the world is quite boring when you realize that you’re just staying at the same Marriott Courtyard all around the world.
For years, staying at a hotel was the only way that a traveler could trust that they would get a good experience. Conventional wisdom said that you obviously needed to own the hotel, hire the staff, run the restaurants, etc. When Airbnb came along, most people rejected the idea. In fact, Airbnb was rejected for seed funding by the first seven investors that they approached. I heard that is was a combination of the two worst ideas in Silicon Valley:
- Staying in the home of a stranger
- Renting out your spare room to a stranger
But Airbnb saw that they could change the game. Each business is organized into different segments. In the travel business, you have travel agents (or reservation websites), rooms, and restaurants. In the computer business, you have laptop manufacturers, operating systems, and applications. The industry structure determines what different types of companies do.
However, when a business is disruptive, they can change how the industry functions. The classic example is Microsoft vs. IBM in the creation of the PC business. IBM thought that because they owned the entire value chain, they’d control the ecosystem. Microsoft realized that by owning the operating system, they could create their own monopoly and actually commoditize IBM by working with other computer manufacturers like Compaq.
And that’s what Airbnb did with the hotel industry. With a traditional hotel, the hotel companies thought that owning most of the value chain let them control the industry. But remember, people don’t want to necessarily stay in a hotel, they just want the benefits of staying in a hotel, namely, cleanliness, location, comfort, and safety. Customers need to be able to trust that they can get this when they make a reservation.
Airbnb was able to deliver on customers’s needs and set expectations for the traveler during the booking and reservation process. Instead of focusing on broad standards like bed type, free breakfasts, and free Wi-Fi, Airbnb can focus on individual customer experiences for each room that’s rented out. This lets Airbnb use vendors to manage the experience of each individual room and still maintain a consistent Airbnb experience. It also lets Airbnb source from much smaller and diverse suppliers who have extra rooms. So Airbnb becomes the most important player in the experience and therefore the most valuable component in the value chain. By leveraging smaller owners to maintain the rooms, they also can provide a much more customized and authentic experience. For ideas on how incredible an experience you could theoretically have at an Airbnb, take a look at Airbnb’s 11 Star Experience by Airbnb’s CEO Brian Cheskey.
NOTE TO LEE: THE BELOW SHOULD BE REDONE WITH THE WORD INTEGRATED CHANGED TO OWN AND MODULARIZED CHANGED TO VENDOR.
Airbnb shows how an entire industry was upended by focusing on customer experience. The most important piece to remember is that the customer cares about what they’re getting and what their experience is. Even though those needs were met in a certain way in the past, doesn’t mean it’ll stay that way in the future.
For more on this, check out the site Stratechery, where Ben Thompson talks about how Airbnb (and others) changed the game.