Three Keys to Success: How to Make Your Engine Run!

In the world of commerce, there are three vital items to make the engine run—costing, pricing and selling. Determining your costs and then the price are the basic bits of profitability. You must address that bottom line and be viable. Most pricing, today, falls into one of two categories: value-based price/value-optimized pricing or cost-plus pricing.

A value-based pricing strategy sets prices primarily, but not exclusively, per the perceived or estimated value of a product or service to the customer rather than per the cost of the product or historical prices. In cost-plus pricing, you add together the direct material cost, direct labor cost and overhead costs for a product, and add to it a markup percentage (to create a profit margin) to derive the price of the product.

Pricing & Hospitality

Customers and clients are naturally susceptible to and simultaneously skeptical of pricing schemes. And probably none more so than in the hospitality industry. Guests are notoriously price conscious when it comes to checking into a hotel or alternatives. The biggest disrupter in hospitality is none other than Airbnb. The name is derived from their early roots of serving thrifty “couch-surfing” tourists, by shrinking the concept of “air mattress B&B” to Airbnb.

Airbnb was started in 2008, mainly as a platform for renting out primary residences as lodging for traveling guests. The guests, who search through Airbnb’s extensive website, are seeking out accommodations that have a homey feel about them, especially for families—something hotels just cannot provide. The people who provide this home-like lodging are looking for ways to supplement their income. Airbnb acts as a channel between hosts and travelers. They have effectively established a marketplace where hosts and travelers can safely interact.

At the onset of Airbnb, the strategy was to disrupt the entire hospitality model by enabling and empowering private citizens to get into the hotel business. This created an entire alternative hospitality industry. The perceived value of staying in a nice apartment or house is very high. Airbnb has a formula for setting the pricing of these residences.

In an article entitled “GROUP SANITY,” dated 14 December 1970, L. Ron Hubbard states:

“Anything must be sold for a price comparable to its value in the eyes of the purchaser.”

Airbnb started its life in co-founder Joe Gebbia’s apartment in San Francisco, spreading to 2,000,000 listings in over 191 countries, creating a new economy for thousands of people around the world. In addition to Gebbia, there are two other co-founders: CEO Brian Chesky and Nathan Blecharczyk, the CTO.

The Sharing Economy

Airbnb takes advantage of a relatively new phenomenon known as the sharing economy. Participating in this model allows people to borrow or rent assets owned by someone else. For centuries, communities have shared assets, but the dawn of the Internet created a linking and sharing ability heretofore undiscovered. Thus, these sharing communities enable groups and individuals to create income from their assets. As an example, a car owner could rent out his car when not using it or could drive people around for a fee (Uber). A condominium owner could very easily rent out his or her condo to accommodate someone’s vacation while they are away (Airbnb).

Brian Chesky, weighing in on the subject, said the following: “We used to live in a world where there were people, private citizens, a world where there [were] businesses. Now we’re living in a world where people can become businesses in 60 seconds.”

For Airbnb, the trick is how to cost out the various types of facilities, taking into account neighborhood, design, demand, etc. Mr. Hubbard explains it this way:

“COSTING is a precise art by which the total expenses of the organization administration and production must be adequately covered in the PRICING allowing for all losses and errors in delivery and adequate to produce a reserve.”

How Airbnb Makes Money

Airbnb has nearly a million listings in almost 200 countries. With that kind of database and raking in between 6 and 12 percent in fees, it is easy to see why they have created such a high value for themselves. They also charge a 3 percent service fee to handle the transactions and processing of guest payments.

Imagine creating an overall value of over $25 billion, worth more than hospitality giants (Hyatt and Wyndham) without exchanging any goods or services directly. The Airbnb platform simply connects buyers with sellers, guests with hosts, and reaps the benefit of a nominal service fee to fill its coffers. They never really have to get their “hands dirty,” so to speak.

Mr. Hubbard continues:

“PRICING however does not necessarily limit itself to only covering immediate cost of a product. A painting with a dollar’s worth of paint and canvas may have a price of half a million dollars.”

Online Salesmanship

It can be readily seen that Airbnb does an excellent job promoting itself. Selling is achieved in the safety-harbor marketplace confines that Airbnb has created.

Airbnb has grown considerably in size and stature from appealing to the thrifty to now securing higher-end guests as well as business travelers who want more from their travels than a cold hotel room.

As L. Ron Hubbard states:

“The skill of the salesman is devoted to enhancing the desire and value in the eyes of the buyer and obtaining adequate payment.”

Joe Gebbia relates the following regarding the sharing economy: “Have ideas, and go do them. Start creating things and put them out into the world.” Now, that is salesmanship!