BIG DATA TO BIG PROFITS

When Airbnb began as a means for its founders to rent out their air mattress (hence the air in Airbnb) few predicted that it would transform the real estate rental market. By now, Airbnb is a legitimate means for selecting rooms or houses for rent in many markets. As an example of the success and efficiency in the new sharing economy, it has brought together unmatched supply and demand and allowed for market-driven evaluation of assets. It is brilliant. However, it is disruptive in a few ways that are unexpected in the real estate market, and it offers a great view on how start-ups can best leverage digital platforms and Big Data. Let’s take a look.

It was recently announced that Airbnb is in negotiations with multiple large apartment REITS (real estate investment trusts). These firms own and manage thousands of apartments, often in large US cities. Many REITS and landlords prohibit subleases of leases, meaning that Airbnb rentals are not permitted in such apartments. In early reports of the Airbnb-REIT alliances, a REIT would partner with Airbnb, in order to control and therefore capture some of the rental income being paid to the tenant. It would allow the REIT transparency and even some oversight of the process. More apartments become available; Airbnb wins, the tenants gets some rental income by now legally renting out the apartment, and the REIT can monitor, control and even profit from the process. That is interesting, but it is not a game changer for a REIT.

Consider a REIT that owns apartments in a highly desired city. The value of the apartment is tied to the housing market and might even be rent controlled. A hotel room is generally much more expensive per day than an apartment. Consider that the average apartment rents for $1240 per month and the average hotel rents for over $120 per day. So a hotel room rented out each month would generate about $3600 per month. That is a three times increase! This is where Airbnb comes into transforming real estate with Big Data and Digital Platforms. So, Airbnb means that apartments can be worth upwards of three times as much. In special events, we see that demand really increases for Airbnb, meaning that hotels are not benefiting on the margin during such events and Airbnb is capturing the demand (See graphic from the Economist). Note the large demand in Omaha for the Buffett meetings!  Warren, maybe it is time to invest in the sharing economy.

1. Airbnb is a Very Effective Digital Platform: Like Amazon, eBay and many successful online marketplaces, Airbnb allows buyers and sellers to connect. It also provides prospective buyers free access to information, such as pictures of the room, reviews, and pricing information. That is critical in developing trust in markets. And, as a successful digital platform, you can fully find, select, and rent a room from your mobile app. In short it is convenient, but convenience is about the execution. All execution is digital and even the customer is recognized by the digital sign-in. Digital platforms and their great relevance to mobile phone users, in particular, are driving how we do business in the digital economy.
2. Airbnb Separated Rooms from Hotel Services: In the gilded age of the hotel industry, hotels were chosen not just for the room but for the services that came with it. The services were important to guests, but services were also high margin businesses to the hotel. Get a room from Airbnb and there is no restaurant, bellman, or front desk to call. In the digital economy, people could of course find great places to eat on Yelp and get services from other providers (or do task themselves). In a small, but powerful manner, the value proposition of the hotel was challenged and led largely by millennials, the value proposition was proved unreasonable. Instead of staying in a small hotel room with services that might not be fully used or enjoyed, you could spend less, stay in a bigger (and likely) nicer room via Airbnb. It is all about the room, anyhow. Who owns rooms? REITS have them by the thousands! And as it turns out rooms in apartment complexes (without restaurants and front desks on site) are attractive to guests. It was a big surprise!
3. Transparency and Flexibility Allow for Mirco-Market Formation: Although hotels expose prices on their websites and offer discounts on various aggregators, the yield aggregators often have lower prices, meaning the best deals are not easy to track. Hotels have no incentive to share their occupancy levels either. By not sharing such information, hotels are attempting to manage and created their own markets. Certainly they want to drive you to stay in a specific property, even if that is not ideal for you. Want a room in Chicago? Then you check out the hotel sites for prices and locations. Hotels cannot easily move, of course. Hotels are not flexible on location and may not have the best location. Airbnb data through insideairbnb.com, can provide transparency on pricing, reviews, occupancy, and specific location. Airbnb forms mirco-markets without the constraints of a single property. Supply and demand can more naturally form. New rooms can come to market when a new location is highly desired. Want to stay in the highly popular Wicker Park neighborhood of Chicago – great; Airbnb has many options. By the way, there are no major hotels in this neighborhood and Airbnb is cheaper than the few BnBs in that neighborhood.
4. Marketing and Operations are Separated in Airbnb: In business we think about how running a business (its operation) is linked inherently to its marketing. It is absolutely true in most every business. Interestingly, for Airbnb and its rise of an effective digital platform, a property owner need not invest significantly in marketing, brand creation, or even a customer loyalty program. The brand is Airbnb and the awareness is all through Airbnb. The property owner can focus on operating the property well and allow Airbnb to be the marketer and marketing channel. The major chains like Marriott, Starwood, and Hilton are surely jealous. They not only have to run the properties but have to also market their offerings in many ways that are important and expensive. Of course, marketing through Airbnb means that you pay Airbnb, but just as thousands of online stores market through Google, Amazon, and eBay, property owners can now be successful hoteliers without the burden of building a brand and funding general marketing activities. It is a real game changer in the digital economy. Property owners get the benefits of economy of scale, access to data systems, customer reservation portals, online services, and even analytics to help set prices. Big Data comes to the small property owner, made available by Airbnb. The hotel chains have to fund each of these on their own. Plus, Airbnb, like other successful digital platforms can facilitate targeted marketing using the Big Data of customer reviews, customer preferences in ways that are not possible for a single property owner. It is a great example of how the sharing economy allows property or asset owners inexpensive access to broad markets. And, as buyers, we benefit from it and love it!

These ideas on the importance of data and analytics in creating value are some of those that I explore in great detail in my recent book, From Big Data to Big Profits: Success with Data and Analytics (Oxford, 2015).

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“From Big Data to Big Profits: Getting the Most from Your Data and Analytics”

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About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Associate Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University.

His most recent book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.

You can find him at @RussWalker1492 and russellwalkerphd.com

Airbnb, Analytics, Big Data, Big Data Analytics, Big Data to Big Profits, Data Analytics, Data Capture, Data Monetization, Data Products, Data Science, Digital Economy, Digital Platforms, Disruptive Technology, Entrepreneurship, Mobile, Real Estate, Sharing Economy, Start-Up, Technology, Uber, Uberfication, Uberize

By Russell Walker, Ph.D.  -      
Russell Walker helps companies develop strategies to manage risk and harness value through analytics and big data. He has done novel research in data monetization and digital disruption and advises leading firms on these topics. As Director of Experiential Learning in Analytics and Associate Teaching Professor of Marketing and International Business at the Foster School of Business, at the University of Washington, Dr. Walker is an academic thought-leader on analytics. Russell Walker has developed and taught leading executive programs on Big Data and Analytics, Strategic Data-Driven Marketing, Enterprise Risk, Operational Risk, and Global Leadership. Previous to moving to Seattle and the Foster School, Dr. Walker was Clinical Professor at the Kellogg School of Management of Northwestern University, where he founded and taught many popular courses in analytics and risk management. His is the author of the book From Big Data to Big Profits: Success with Data and Analytics (Oxford University Press, 2015) which examines data monetization strategies and the development of data-centric business models in the new digital economy. He is also the author of the award-winning text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management as a competitive advantage. Dr. Walker consults with firms on the topics of Big Data and Analytics, Data Monetization, Risk Management, and Business Strategy. Russell Walker can be reached at: russell@walkerbernardo.com @RussWalker1776 russellwalkerphd.com

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