Since the introduction of sharing-economy services such as Airbnb, hotels have struggled with how to compete against the alternative accommodations market.
Among hotels’ concerns is how Airbnb impacts their pricing and distribution strategies, which, according to new research from the Tepper School of Business at Carnegie Mellon University, might be more dramatic than hoteliers may think.
The study, called Competitive Dynamics in the Sharing Economy: An Analysis in the Context of Airbnb and Hotels and shared in the INFORMS journal Marketing Science, pitted flexible-capacity Airbnb against the fixed-capacity lodging industry to uncover how the sharing economy has changed the way the hospitality industry accommodates demand fluctuations and how traditional hotels should respond.
The study took into account market conditions, seasonal patterns, hotel pricing and quality, consumer makeup and Airbnb supply, as well as Airbnb’s strategy toward business travelers, government regulations on Airbnb and changes in hosting costs, to arrive at four key findings.
1. Airbnb cannibalizes hotel sales
The research found Airbnb cannibalizes hotel sales, particularly for low-end hotels, while at the same time creating market expansion.
Cannibalization can be stronger in cities where demand is more seasonal, high-end hotel prices are lower, the quality of low-end hotels is lower or the fraction of leisure travelers is higher, it states.
Leisure travelers are found to be more price sensitive and tend to travel seasonally, and their shift to Airbnb shows a 3.2x greater reduction to hotel sales than that of business travelers.
Their Airbnb consumption, however, comes from overall market expansion, and the flexible supply from Airbnb helps accommodate demand volatility and amplifies the underlying demand.
2. Airbnb can stabilize or increase demand during peak seasons
Airbnb mitigates the dampening of demand during peak seasons due to higher hotel prices, the report states.
The study found that the estimated underlying demand is more volatile and higher than the observed demand during high-demand seasons.
“Before, because hotels could charge higher prices during high demand [seasons], that could have a dampening effect on demand,” says Hui Li, one of the report’s authors. “Now, Airbnb has more supply that could actually help amplify demand.”
Hotels’ seasonal pricing - i.e., higher prices during high-demand seasons - dampens the underlying demand by 13.7% on average, while Airbnb’s seasonal supply - i.e., more listings during high-demand seasons - has an amplifying effect and can help recover 67.5% of that loss or even stimulate more demand.
That said, with seasonal pricing, only 34.3% of that loss is actually recovered, but Airbnb still helps partially resolve the tension between cyclical demand and fixed hotel capacity to help the industry meet seasonal demand.
3. Airbnb may minimize the need for hotel seasonal pricing
In some markets, Airbnb’s flexible capacity may upend traditional pricing strategies, allowing hotels to benefit from conducting less seasonal pricing or from considering counter-seasonal pricing, the report finds.
During peak seasons, higher demand drives hotels to raises prices, yet it also increases Airbnb supply, which may reduce competitive prices.
In the off-peak seasons, meanwhile, softening demand drives hotels to reduce prices, yet also reduces Airbnb supply, which may increase competitive prices.
For some hotel types in some markets, they should rethink the wisdom of seasonal pricing and reduce prices during peak seasons to avoid inviting more competition from Airbnb
Hui Li - Carnegie Mellon University
“When hotels try and raise prices during peak demand, they invite more competition, more listings from Airbnb, and that limits their ability to raise prices,” Li says.
“For some hotel types in some markets, they should rethink the wisdom of seasonal pricing and reduce prices during peak seasons to avoid inviting more competition from Airbnb.”
Hotels may benefit from conducting less seasonal pricing or counter-seasonal pricing when the hotel market share is smaller, when Airbnb’s market share is larger or when Airbnb’s supply elasticity is greater, the report says.
The conditions are most likely in cities that have higher hotel prices and lower hotel quality, a higher fraction of leisure travelers, a stronger and longer presence of Airbnb and a larger total number of potential hosts.
4. High-end hotels will be most affected by Airbnb targeting business travelers
Although leisure travelers make up 90% of Airbnb sales, Airbnb is making a push to court the business travel marketplace.
“Business travelers are the core customers of high-end hotels,” Li says. “As Airbnb targets more business travelers, high-end hotels will be the most sensitive to changes.”
High-end hotels are the most likely to be impacted due to the higher or lower operating costs faced by Airbnb in their markets. (Host costs may increase, for example, due to government regulations, or may decrease because hosts are using third-party services for things like room cleaning and key exchange.)
Hotel profits therefore increase or decrease as Airbnb host costs increase or decrease.
However, the report finds that the benefit of higher Airbnb host costs levels off as the costs increase, whereas the loss from lower Airbnb host costs continues to decrease as the costs decrease.
Therefore, Airbnb regulations that raise the cost of hosting do not help hotel profitability beyond a certain point, yet reducing Airbnb host costs can increasingly hurt hotel profitability.
Challenges for hotels
Li says most hotel revenue management algorithms are purely based on fixed capacity, and many hoteliers have yet to systematically change their pricing models to account for flexible capacity.
“Flexible capacity completely disrupts the basis of [hotels’] pricing algorithms,” she says.
“Most hotels either think they’re completely differentiated from Airbnb and they don’t have to worry about it, or they try and become Airbnb themselves and be more flexible in terms of supply.”
Patrick Bosworth, co-founder and CEO of hospitality revenue strategy platform Duetto, says hotels have been on a decades-long quest – before the advent of Airbnb - toward greater flexibility in pricing, though the competition brought by the home-share service does mean hotels need to be more careful with how they manage pricing and distribution.
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It’s been difficult for hotels to innovate quickly for two primary reasons, he says: “First, the changing market conditions were recognized as a threat, but until the last decade their impact was relatively small.
“Second, the hotel technology ecosystem is antiquated and brittle, which makes changing strategies very difficult and slow with hotels taking a very cautious approach. There has been a desire to innovate for a number of years but only recently has progress been discernible.”
Bosworth says seasonal pricing will remain important to a hotel’s revenue strategy, “which is how it should be and that will not ever change,” however, hotels need to optimize “each day and each stay pattern at the micro level in which there can be very distinct demand characteristics even within the same season. No hotels today should be using a flat seasonal pricing strategy, and in fact very few still are.”
Hotels interested in making changes to their pricing strategies or revenue management models need to ensure people, technology, process and culture are aligned, he says, “which is difficult in this highly fragmented industry in which each role is often filled with different players with divergent motivations.
“But if everyone understands that the stakes are high and change is needed to survive and thrive, then it is possible to achieve great success despite the barriers.”