Airbnb may have just fixed the worst part of its business. Time to buy?

Consumers are fed up with the way Airbnb (NASDAQ: ABNB) and other companies are posting their prices and some people in Washington, DC 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 list the full price of their stay instead of adding the fee later in the booking process.

The fees on Airbnb are arguably the worst part of the experience. And luckily for users, Airbnb management isn’t waiting to be forced to do something about it. The company is proactively introducing its “all-inclusive” pricing.

Here’s what it could mean for investors — and it’s surprisingly not necessarily a buy signal.

Airbnb’s new pricing strategy

Airbnb released its financial results for the third quarter of 2022 on November 1. The stock subsequently sold off sharply as some worry about the orientation for Q4. However, other investors were instead encouraged by record quarterly revenue of $2.9 billion and record net profit of $1.2 billion.

However, what caught my eye was Airbnb’s new pricing strategy. Co-founder and CEO Brian Chesky said on Twitter: “I heard you loud and clear – you feel like pricing isn’t transparent and payment tasks are a pain. That’s why we’re bringing 4 changes.” On the conference call with investors, this was referred to as “all-in pricing”.

In December, Airbnb guests will be able to see the total price of their desired stay, including cleaning and service fees. The best deals will be prioritized by Airbnb’s search algorithm. And because it changes the algorithm, it will provide tools for hosts to ensure their prices are competitive and rank well in search results.

This sums up the first three changes for Airbnb, but the fourth is just as important. Some hosts asked guests to clean up after themselves despite the high cleaning fee. Chesky says that’s changing too. Asking customers to turn off the lights is a reasonable request. Requiring guests to vacuum the entire house is unreasonable and will no longer be permitted.

It is difficult to objectively quantify the exact quality of these moves for Airbnb. But suffice it to say that the fees were seen as sneaky and some of the house rules could be ridiculous. Airbnb is tackling these real issues with its platform — issues that could have driven people to hotels. Therefore, I would say that these decisions are generally good for Airbnb customers and I expect more bookings as a result of these changes.

What this could mean for investors

I don’t think I need to convince readers of the merits of Airbnb’s decision; every business should try to make their customers happy. And I would much rather be invested in a company that is actively trying to improve its user experience than an indifferent company.

However, Airbnb’s all-inclusive pricing could have an unintended negative effect on its business. As Chesky said, its algorithm is going to prioritize value stays and hosts will be given tools to assess the value of their space.

This could lead to a price war between the hosts. And if that happens, the average daily rate (ADR) of an Airbnb property could go down.

At the end of 2019, the average stay on Airbnb cost around $110 per night. But this number has continued to increase. In the third quarter, its ADR rose 5% year-over-year to $156 per night. Consider that there were nearly 100 million nights and experiences booked in Q3. Therefore, the difference of $46 in ADR between 2019 and today results in a massive $460 million difference in gross booking volume.

Airbnb takes a reduction in booking volume to generate revenue. Therefore, if ADR drops due to its new pricing strategy, revenues would suffer a discount even if bookings remain strong.

To be clear, I think there is room for a price war between Airbnb hosts. Consider that Airbnb ended 2021 with its highest housing supply on record, and supply in Q3 was up another 15% year-over-year. Many Airbnb hosts have switched to the platform in recent years, attracted by the possibility of high cash returns (a desirable metric for investors) for their real estate investments.

There is a lack of good data to establish an average profit margin among Airbnb hosts. But anecdotal evidence from the real estate investment community points to healthy profit margins with room to fall. After all, for many hosts, it’s better to lower prices to secure reservations and maintain positive cash flow than to have empty spaces.

I would hardly suggest selling Airbnb stock on this news. On the contrary, I am still a buyer. However, the company’s ADR is worth watching more closely in the coming quarters to see if a downward price trend is hurting Airbnb’s revenue.

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Jon Quast has positions in Airbnb, Inc. The Motley Fool has positions and recommends Airbnb, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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