Intro
We believe Sonder ($SOND) has the opportunity to generate >1,000% return in the next 5 years.
In a previous post, we compared Sonder to its competition with big-box hotels and explained Sonder’s favorable strategic position in that context.
In this post, we take a look at Sonder’s position & prospects relative to Airbnb.
What's the Difference Between Airbnb and Sonder?
At first glance, Airbnb might seem like a formidable competitor to Sonder. They’re not like your Marriott or Hilton. They’re tech-native, design-forward, and appealing to millennials and Gen Z, much like Sonder. But a deeper look shows that, at this stage, the relationship is more symbiotic than competitive.
Airbnb at its core is a marketplace, more akin to Expedia, Booking.com, or Google than a hotel like Hilton or Marriott. Meaning, it’s the meeting place where lodging seekers connect with lodging providers. Airbnb is not primarily the lodging provider itself.
For Airbnb to succeed, it actually seeks lodging providers, which is why Airbnb singled out “attracting the next generation of hosts” as 1 of 3 key company priorities for 2022.
Sonder, on the other hand, is primarily a lodging provider. In fact, Airbnb uses Sonder properties to supply their marketplace.
It’s a mutually beneficial relationship - Sonder provides the supply for Airbnb’s guests to stay. Airbnb provides the demand/eyeballs for Sonder’s listings to be discovered.
The difference in business models allows for a non-competitive, symbiotic dynamic (at least in the near term).
That said, Sonder’s business model could actually be more compelling in the long-run, which is likely to entice Airbnb to eventually compete more directly.
The Long-term Potential of Sonder’s Model
Marketplaces like Airbnb are compelling because their margins are huge. They take a cut of each booking (17% for Airbnb), but that cut is mostly margin (~70% if including customer service/etc).
Sonder’s revenue, on the other hand, incur notable costs (e.g. lease payments, furniture, building maintenance, etc.) so their property-level margins are only expected to reach 32% in 2025 (and currently they have negative margins because they’re in an early stage of high growth).
Theoretically though, in the long term, Sonder has the potential to become a bigger company than Airbnb because of their model.
Example:
- Airbnb’s take-home revenue for a $100 booking = $11.90 assuming today’s take-rate and margin ($100 booking * 17% take rate = $17 gross revenue * 70% margin = $11.90 net revenue)
- Sonder’s take-home revenue for a $100 booking = $32 assuming 32% property-level margin ($100 booking * 32% margin = $32 net revenue)
Airbnb would need more than 3 bookings to match Sonder’s 1 booking take-home revenue (assuming equal booking amount).
With more economies of scale, better brand recognition, and more direct bookings, it’s not a stretch to imagine Sonder’s property-level margins approaching 50% and Airbnb’s match ratio to become more like 5:1. If that became true, Sonder would need just 1/5th the number of Airbnb’s bookings to match them in net bookings revenue. This won’t happen anytime soon (given Airbnb booked a whopping 300M nights in 2021), but possibly in 10+ years.
Because of the compelling take-home revenue per booking, Airbnb might eventually be enticed to create their own supply. This is a strategic move many aggregators/marketplaces make. Think about Netflix creating their own movies, or Amazon with their AmazonBasics. So…
Why not compete, Airbnb?
Airbnb has dabbled in this area before: If you didn’t know, Airbnb actually led the $160M Series B round for Lyric, a direct Sonder competitor. But Lyric wasn’t able to make things work and shut down during the pandemic. It seems Airbnb’s experimental toe dip into this space fizzled out and it might be some time before Airbnb regains the appetite to test the waters again. Especially since they now know it would be a…
Long and laborious endeavor compared to other opportunities: The failure of Lyric demonstrates that scaling up a business like Sonder’s is a long, hard, capital-intensive slog. Very different from Airbnb’s marketplace model that has very compelling near-term benefits (capital-light, easy to scale, high margins). Because of this, it’s much easier for Airbnb to lean into the strengths of their marketplace model and go after opportunities that leverage that model like we see them doing with their adjacent Airbnb Experiences marketplace.
Host cannibalization: If Airbnb were to develop a massive amount of their own supply in the top markets, they would likely start competing against their own hosts, cannibalizing host revenue and potentially souring the individual host community. This is not something Airbnb would take lightly, especially given their…
Brand commitments: Airbnb has built a brand around connection/belonging and an emphasis on individual hosts. Read Airbnb CEO Brian Chesky’s S-1 IPO letter:
When the pandemic hit… we chose to focus on what is most unique about Airbnb — our core business of hosting. We got back to our roots and back to what is truly special about Airbnb — the everyday people who host their homes and offer experiences. We scaled back investments that did not directly support the core of our host community...
- We will focus on connection and belonging.
- We will prioritize the individual hosts who deliver it.
- We will invest in building our community.
This emphasis on individual hosts and connection doesn’t jive well with the Sonder model, which actually reduces connections with human “hosts” for the benefit of cost-efficiency. Airbnb’s brand priorities aren’t just fluffy words on paper but manifest in real investments from the company (as evidenced by their 2022 priorities mentioned earlier). Airbnb continues to invest a ton into a host-model that is counter to the Sonder model. Each investment into the host-model deepens their commitment to that approach, making it harder to adopt a model that would disrupt it all.
The Critical Element
All that said, if Sonder’s growth becomes hard to ignore, Airbnb will likely try to compete. But will Airbnb react in time? Is Sonder preemptively trying to build up defenses?
The critical element, in light of this potential competition, will be the level of strategic thinking in the leadership of both companies.
So, in a future post, we’ll do a deep dive into Sonder’s founder and CEO, Francis Davidson. Spoiler alert: be prepared to be impressed. Make sure to sign up for our email list below so you don't miss it. We also discuss these topics in deeper detail on our YouTube channel.
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