How can a company that promotes sleeping on lounges as opposed to a comfortable bed at the Intercontinental Hotel significantly disrupt the hotel industry with a valuation of $10b, five years after opening? It’s a very good question. The Answer is that it is a peak example of Disruptive Innovation, and that this has allowed it to rise to the top of it’s market.
Since opening for business five years ago, Airbnb has taken the travel accommodation industry by storm. Effectively, it created and now dominates a new market segment — private homeowners use its cloud-based platform to list and collect payments for their rooms and houses, with mobile apps and social integrations all greasing the wheels of the Airbnb machine.
Airbnb now has over 600,000 listings across nearly 200 countries. The WSJ reported earlier this month that revenues in 2013 were about $250 million, more than double what it made the year before. Like Uber and other companies that have disrupted older and more established industries, that rapid growth has drawn a lot of heat from incumbent competitors — in Airbnb’s case from the hotel industry.
What’s even more interesting about this meteoric rise to fame is how Airbnb used the Lean Startup and Design Thinking principles as it built its business. When Airbnb first started, the photos displayed on its website were not great quality – they were the typical photos people would take of their lounges with their smartphone. In 2009, Airbnb was close to going bust. Like so many startups, they had launched but barely anyone noticed. The company’s revenue was flatlined at $200 per week. Split between three young founders living in San Francisco, this meant near indefinite losses on zero growth. As everyone knows, venture investors look for companies that show hockey stick graphs and according to co-founder Joe Gebbia, his company had a horizontal drumstick graph. The team was forced to max out their credit cards.
What they did was put themselves in the customers’ shoes, and realised that the quality of the photos was a big turn off, and if the quality could be improved, it would make a huge difference. Gebbia bought out a completely non-scalable and non-technical solution to the problem: travel to New York, rent a camera, spend some time with customers listing properties, and replace the amateur photography with beautiful high-resolution pictures. The three-man team grabbed the next flight to New York and upgraded all the amateur photos to beautiful images. There wasn’t any data to back this decision originally. They just went and did it. A week later, the results were in: improving the pictures doubled the weekly revenue to $400 per week. This was the first financial improvement that the company had seen in over eight months. They knew they were onto something.
This was the turning point for the company. Gebbia shared that the team initially believed that everything they did had to be ‘scalable’. It was only when they gave themselves permission to experiment with non-scalable changes to the business that they climbed out of the ‘trough of sorrow’. This experimental style is common in Disruptive innovation, and the quick trialling of new solutions allows start-ups much greater agility than their traditional competitors.
Now if you look at Airbnb’s website, it is much more of a travel site, enticing you to stay in parts of the world that you wish you could go to – and now you can, because it’s cheap.
Airbnb, is an excellent example of Christensen’s disruptive innovation – start small at a place where no one expects you to start, create a market opportunity where one did not exist and then push aside many of the incumbents.
If you’d like to identify and commercialise a business idea through disruptive innovation, contact us today. You can also learn more about innovation strategy by discovering the 5 elements you need in an innovation strategy.
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