9/30/20 · Research

What is the formula used to set lodging prices in Airbnb?

Social media standing, the apartment's amenities and the cancellation policy? key price-setting factors on the platform

A restrictive cancellation policy is perceived as a sign of trustworthiness
Photo: Jarek Ceborski / Unsplash

Photo: Jarek Ceborski / Unsplash

Deserted airports, the Ramblas uncrowded by foreign tourists and thousands of empty apartments all bear witness to the dramatic drop in tourism caused by COVID-19. The economic crisis triggered by the virus has brought giants that just a few months ago seemed invincible to their knees. This is the case of Airbnb. The platform, which operates in more than 110,000 cities in 220 countries around the world and used to provide accommodation for 2 million people every night, is immersed in a crisis that has shaken it to its core. The lack of tourists is having a direct impact on the lodging prices announced on the platform. But how do hosts decide how much their homes are worth? Finding this out is the main goal pursued by a study undertaken by Josep Lladós, Antoni Meseguer and Inma Rodríguez, professors at the UOC's Faculty of Economics and Business. The study only includes accommodation managed by private hosts and not large property owners who run the apartments as a business.

"It took us twelve years to build Airbnb and we have lost almost everything in four weeks", lamented Brian Chesky, the company's CEO and co-founder, shortly after the pandemic broke out. This lodging platform's business model is based on creating, facilitating and maintaining constant interaction, through its application, between two user pools: owners and lodgers. And within this equation, in which Airbnb earns money with the commissions it charges for connecting these two profiles, price is one of the key variables. How is it decided? What are the factors that determine the price that an owner thinks his or her home is worth?

"COVID-19 is having a three-fold effect: prices have dropped, a number of properties have been taken off the platform and some owners are looking for alternative uses for their accommodation", Professor Josep Lladós reflected. One of the keys to Airbnb's success is the fact that prices are cheaper than traditional hotel rooms. However, the researchers believe that the accommodations' main price drivers are the functionalities they offer: space, services, privacy. "There is also the perception that the user will feel more at home and will become more deeply immersed in the place he or she is visiting," he explained. In the case of traditional hotels, the first information that a potential guest will have about its quality is the classic star system, which classifies hotel accommodation in accordance with certain minimum quality standards. 

The platform's online leap and structure provide users with access to much more detailed information about the place they are thinking of booking and enable them to filter how good they think the accommodation is on the basis of their own criteria. It is these details that decide between one price or another. To track them, the UOC researchers have worked with a database of 20,423 properties within Airbnb's Barcelona network, one of the tourism platform's most active cities. And they have focused particularly on the behaviour of the amateur owners and not so much on the professionals running multiple properties, who operate with a different logic within the platform.

Many factors can be involved in an individual's decision to set a given price over another: the number of square metres, whether it is a shared or individual room, whether it is the entire apartment that is being rented, and what amenities it offers. Other factors that may have a positive or negative effect are the lodging's distance from the city centre or the location's main tourist attractions.

Social media standing is another decisive factor at Airbnb, and one of the key themes of the UOC team's study is the relationship between the apartment's qualitative rating and its popularity. The results show that high ratings may play a key role in attracting prospective customers, who will then decide whether or not they stay at that accommodation. "Having a high score is not enough. It is only important if it is accompanied by a large number of positive reviews, as a high volume is perceived as a sign of trustworthiness," said Lladós. This is because the range of ratings is very limited, as is the capacity for discrimination, as most of the city's lodgings have a very good rating. The study has also detected that the lower-priced lodgings have the most reviews, reflecting the high demand they draw. However, when comparing similar lodgings, the prices are higher when they have a large number of reviews with a high rating.

Another trend detected by the researchers, and which seems illogical, is the effect of a high accommodation supply in the same area. The basic laws of competition would say that increased supply would pressure prices downwards. In the case of Airbnb, this is not the case, as the UOC's study shows. "In the districts with more choice, the proximity of alternative Airbnb lodgings does not have any downward effect on prices," the researchers concluded. In other words, in a city like Barcelona, even though a high number of Airbnb apartments are concentrated in neighbourhoods such as the Gothic Quarter, the Born or the Eixample, their owners will not engage in a price war because the high supply is supported by a high demand. In fact, in these neighbourhoods, demand still outstrips supply.

Beyond the users' online reputation or the apartments' amenities, another key feature of the Airbnb platform that affects a lodging's price is its cancellation policy. In many cases, this policy may be more restrictive than that of the traditional hotel sector. And, contrary to what one may think, the researchers have found that a less flexible or stricter cancellation policy is perceived as a sign of trustworthiness and greater engagement by the hosts to ensure that their guests' stay is pleasant and meets their expectations. "Hosts protect the value of their assets," explained Lladós, which enables them to charge higher prices and turn this into an advantage rather than a drawback.

UOC R&I 

The UOC's research and innovation (R&I) contribute to solving the challenges facing the global societies of the 21st century by studying ICTs' interactions with human activity, with a specific focus on e-learning and e-health. Over 400 researchers and 50 research groups work among the University's 7 faculties and 3 re-search centres: the Internet Interdisciplinary Institute (IN3), the eLearn Center (eLC) and the eHealth Center (eHC).

The United Nations 2030 Agenda's Sustainable Development Goals and open knowledge provide stra-tegic pillars on which the UOC's teaching, research and innovation are built. More information: research.uoc.edu.

 

Reference article

Lladós-Masllorens J.; Meseguer-Artola A.; Rodríguez-Ardura I. (2020). «Understanding Peer-to-Peer, Two-Sided Digital Marketplaces: Pricing Lessons from Airbnb in Barcelona». Sustainbility. DOI: 10.3390/su12135229 

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