It’s fun to see two different business models go head to head in the same market.  It’s also fun to watch a gigantic marketplace change its business model.  Both of these phenomena are happening in the C2C lodging space.  Airbnb and HomeAway have different business models and HomeAway is changing its business model. (By the way, it is much more fun to watch these changes than to have to execute them, as I learned at Ariba!)

A week ago, the Washington Post had a good article about this clash of titans, which you should read here, so I’ll be brief about the changes themselves.

Airbnb

Airbnb has a “traditional” commerce-based model offered by many marketplaces these days.  Airbnb has no fee for either travelers or hosts to search or list properties, respectively, on the marketplace.  Airbnb earns its keep by taking a percentage of each transaction consummated on the platform.  (According to the WaPost, this fee ranges from 6-12%.)  Airbnb’s business model makes it easy for travelers and hosts to participate and aligns the marketplace’s interest with users.  Of course, with no cost to listing, this business model can make it easy to fake listings, or deploy bait and switch techniques if it is not policed properly.

HomeAway

HomeAway had a business model that asked the host, or property owner, to pay a listing fee to be part of the marketplace.  HomeAway had five listing types with different resulting levels of placement in search results and geographic reach. The business model was basically a classified ad model adapted to an internet directory. Fairly old school.  (This business model likely resulted from how early HomeAway began and how many disparate properties the company purchased.)

HomeAway is transitioning to a commerce-based model closer to Airbnb’s approach, but with both sides paying fees.  Here are some of the key changes:

• HomeAway is simplifying (but not eliminating) the property owner’s listing fee.  HomeAway will now offer just one listing plan.  (As mentioned above, HomeAway previously had five subscription listing plans–so many they ran out of precious metals by which to name them!)
• And HomeAway is saying that the listings will now be presented in the order of a “Best Match” algorithm–rather than based on the subscription plan the host purchased.   It’s a more “organic” approach. However, the most important factor in the algorithm is whether the property owner is using HomeAway’s booking tool.
• But the biggest change was announced around the time that HomeAway sold to Expedia and is being implemented now (see my blog post here) .  HomeAway decided several months ago it would add a fee for buyers (travelers) of 5.5-9% to its business model. The Washington Post article claims that with this buyer fee now in place, some property owners are pushing back saying the new fee has hurt business. (To be fair, only anecdotal evidence is given to support this claim.)

As HomeAway moves to a commerce-based model, from a listing/ad-based one, it must be sure commerce takes place and is tracked, so that fees can be charged.  By forcing property owners to use the booking tool to show up in the search results, HomeAway can ensure commerce is conducted through the system.

Lessons in How to Implement Two-Sided Marketplace Fees from HomeAway

When a one-sided marketplace (listing fees) moves to a two-sided model (listing and buyer fees), there’s the perception the marketplace is “double-dipping”.  After all, from the property owner’s perspective the HomeAway marketplace was working just fine when it was free for buyers.   It is hard for suppliers to see how they gain from the new buyer fee.  Of course, the new buyer fee is not really designed to benefit property owners, it is designed to benefit Expedia (which, after all owns the entire “property” called HomeAway)!

As a practitioner of price changes in two-sided markets, it is interesting to see how HomeAway is trying to pull this off.   HomeAway is using several smart techniques:

• First and foremost, this business model change is not called a price increase.   After all, no one likes that term and this price increase is for buyers, not suppliers.
• Second, HomeAway communicated the change well in advance and has robust communications directed to the community, including a snazzy video.  The company is also phasing in the new subscriptions (it would be hard to do otherwise).
• Third, HomeAway is giving property owners and renters some tangible improvements while changing the fees:  24/7 customer support, a buyer guarantee, and better listings–including a tab on the Expedia website.  These are features that do not cost much, but sound good and add a little value. A little “pixie dust” goes a long way.
• Fourth, HomeAway is telling property owners why these new fees are necessary and how the fees will be invested back in the business.  (Versus the incremental fees going directly to Expedia shareholders!)

Here’s an excerpt from HomeAway’s web pages dedicated to explaining the new buyer fee to property owners:

Basically the copy says “our cost of doing business” on your behalf is going up, it is better that buyers pay than you, and we are doing this for you!  In a two-sided marketplace, where the whole community can weigh in, it is critical to give customers a plausible “reason why” prices are higher today than they were yesterday–even though hosting costs, etc. are dropping like a rock.  This is HomeAway’s attempt to justify the increase.  No matter what, clients need a justification to feel they are being treated “fairly”.  The alternative answer: “we are raising prices because we have market power and so we can” is never acceptable, even when all the marketplace participants know it to be true in their hearts!

Summary

Will HomeAway succeed in this price change?  Will the price change force some participants in the HomeAway community towards Airbnb?  (As the WaPost points out, Airbnb’s users have typically been more urban, younger and less interested in long-term vacations.)  Interestingly, when marketplace users (in this case travelers and property owners) frequent more than one marketplace simultaneously, economists call that “multi-homing”, a term which is a real double entendre in this market!)

Because of the approach HomeAway is taking, their buyer service fee will be an added line item on top of rental fees.  This will make the buyer fee much more visible to buyers than it is on the Airbnb marketplace.  This visibility is not optimal. Less visible fees raise less attention.

In the end, what matters is which company ends up with the higher total “take rate” relative to the revenue it generates for its property owners and which model continues to best encourage participation of both parties.