Consumers are tired of how Airbnb (ABNB +2.75%) and other companies display their pricing and some folks in Washington, D.C., are trying to do something about it. It's been in the works for a few years now, but the Hotel Advertising Transparency Act would require companies to show the total price of their stay instead of tacking on the fees late in the booking process.
The fees on Airbnb are arguably the worst part of the experience. And thankfully for users, Airbnb's management isn't waiting to be forced to do something about it. The company is proactively introducing its "all-in" pricing.
Here's what it could mean for investors -- and it's surprisingly not a buy signal necessarily.
Airbnb's new pricing strategy
Airbnb reported financial results for the third quarter of 2022 on Nov. 1. The stock sold off sharply afterwards as some fretted over guidance for Q4. However, other investors were instead encouraged by record quarterly revenue of $2.9 billion and record net income of $1.2 billion.
NASDAQ: ABNB
Key Data Points
However, what caught my eye was Airbnb's new pricing strategy. Co-founder and CEO Brian Chesky said on Twitter: "I've heard you loud and clear -- you feel like prices aren't transparent and checkout tasks are a pain. That's why we're making 4 changes." In the conference call with investors, it was called "all-in pricing."
In December, Airbnb guests will be able to see the entire price of their desired stay, including cleaning and service fees. The best deals will be prioritized by Airbnb's search algorithm. And because it's changing the algorithm, it'll be providing tools to hosts to ensure their prices are competitive and will rank well in search results.
This summarizes the first three changes for Airbnb but the fourth is just as important. Some hosts have required guests to clean up after themselves despite charging them hefty cleaning fees. Chesky says that's changing as well. Asking guests to turn off the lights is a reasonable request. Requiring guests to vacuum the entire house is not reasonable and will no longer be allowed.
It's hard to objectively quantify exactly how good these moves are for Airbnb. But suffice it to say that fees were perceived as sneaky and some house rules could be ridiculous. Airbnb is addressing these real issues with its platform -- issues that could have been pushing people toward hotels. Therefore, I'd say these decisions are generally good for Airbnb guests and I'd expect more bookings to result from these changes.
What it could mean for investors
I don't believe that I need to convince readers of the merits of this decision from Airbnb; every company should try to make its customers happy. And I'd much rather be invested in a business actively trying to improve its user experience than a company that's indifferent.
However, Airbnb's all-in pricing could have an unintended adverse effect on its business. As Chesky said, its algorithm is going to prioritize value stays and hosts will be given tools to assess how good of a value their space is.
This could result in a pricing war among hosts. And if that happens, the average daily rate (ADR) for an Airbnb property could go down.
At the end of 2019, the average stay on Airbnb cost about $110 per night. But this number has consistently climbed. In Q3, its ADR was up 5% year over year to $156 per night. Consider that there were nearly 100 million nights and experiences booked in Q3. Therefore, the $46 difference in ADR between 2019 and now results in a massive $460 million difference in gross booking volume.
Airbnb takes a cut of booking volume to generate revenue. Therefore, if ADR falls as a result of its new pricing strategy, revenue would take a haircut even if bookings remained strong.
To be clear, I believe there is room for a pricing war among Airbnb hosts. Consider that Airbnb ended 2021 with its highest supply of homes ever and Q3 supply was up another 15% year over year. Many Airbnb hosts have moved to the platform in recent years, attracted by the possibility of high cash-on-cash returns (a desirable investor metric) for their real-estate investments.
There's a lack of good data to establish an average profit margin among Airbnb hosts. But anecdotal evidence from the real-estate investing community points to healthy profit margins with ample room to come down. After all, for many hosts, it's better to lower prices to get bookings and stay cash-flow-positive than to have spaces sit empty.
I would hardly suggest selling Airbnb stock on this news. To the contrary, I'm still a buyer. However, the company's ADR is worth monitoring extra closely in coming quarters to see whether a downward pricing trend is hurting Airbnb's revenue.
