Annex D. Overview of business models of the accommodation and transportation sectors
This Annex provides a description of the main business models of the (currently) two largest sectors of the sharing/gig economy: accommodation and transportation sectors. These two sectors serve as pilot cases for the relevant analysis in this report. This approach resonates with the assumption that these two sectors are likely to create the most urgent pressure on VAT/GST policy in jurisdictions worldwide and are thus likely to be the first to require policy and/or administrative action from a VAT/GST perspective.
In this context, this Annex presents an overview of the key features of the main business models operated in these two sectors that are likely to be relevant from a VAT/GST perspective. This includes a general description of each sector, main business models including payment modalities, platform governance and trust mechanisms, economic importance of each sector and available information elements.
These descriptions are based on the features of the major platforms that currently account for the majority of market share in these sectors. These are inevitably snapshots of the current state of play that is likely to change rapidly as the sharing/gig economy continues to evolve.
General description
In general, the accommodation sector can be broadly divided into different sub-sectors based on the accommodation types such as hotels & motels, serviced apartments and short-term (vacation) rentals, etc. In the sharing/gig economy context, it is often understood to mainly refer to short-term (vacation) rentals while the scope is expanding to comprise other accommodation types as well. For the purposes of the analysis in the report, the focus is on short-term rentals sector, which comprises a majority of the accommodation related sharing/gig economy activities.
In fact, the concept of short-term rental has been around for a long time similar to the hotel industry. However, this particular sector has seen major changes in the past decade with the advent of digital platforms – experienced approximately 167% market size growth from 2010 to 2018 (Skift research, 2019[1]). Typically, the platform connects potential guests with professional or non-professional hosts offering accommodation services. Furthermore, the platform may provide other services either on their own name or on behalf of other platforms and/or third parties (see below Business Models for more details).
The short-term rental sector ecosystem
While the underlying accommodation types may vary, the short-term rental is the prevalent type of the accommodation related sharing/gig economy activities. Notably, the digital platforms play a key role in this space and much of the focus has been on them as they have largely contributed to the rapid growth of the sector. However, it is also important to understand that there is an entire ecosystem of different players as shown in Figure A D.1. below. As technology has become more affordable and accessible, many different stakeholders are increasingly benefitting from the growth of the short-term rental sector.
For illustration purposes, Box A D.1. below briefly describes some of the main players in this ecosystem (see also Figure A D.1. for a graphic illustration of interactions of these actors).
The platforms and metasearch engines: although the market is predominantly driven by the major platforms that generally operate across multiple jurisdictions, there is a growing interest from metasearch engines to enter the market, adding short-term rental search functionality in partnership with some of the platforms or independent property managers. They act as an intermediary and redirect customers to the partnering booking sites, channel managers, etc.
Independent hosts: evidence suggests that approximately more than half of all short-term rental properties are those from individual hosts or small-time property managers with less than ten properties. Most of them operate through the platforms, benefitting from easy access to a wider group of potential customers, secure payment facilities and other support services offered by the platforms. Some of them also purchase services from B2B vendors such as key drop-off services and home cleaning. Additionally, there are individuals who turn to professional property managers to take care of the rentals on behalf of them (see below Professional Agents under Business Models).
Host service providers: host service providers refer to those providing management services such as listing, cleaning and pricing. They often operate ‘behind-the-scenes’ without guests knowing that the property is managed by a company rather than a homeowner itself. However, to strengthen and protect their brand identity, some of them recently choose to show that they are managing the properties on platforms by stating in the property description or showing their logo next to the property listing. They let the property owners pick and choose the services they want to outsource and charge commissions.
Traditional holiday home managers: holiday home managers who have appeared as owners of second homes in holiday destinations often live far away to manage the property themselves. In recent years, the technological developments have allowed these holiday home managers to move into the online space and expand their business. Today, some of them even manage hundreds and thousands of properties through their own branded platforms. Similar to the platforms, they operate both the commission-based model and subscription model while the latter is more popular.
Branded home managers: they provide an end-to-end service for both property owners and guests. As the brand is important, they only work with homes that meet their standards and they are likely to work with hotel companies as well as major platforms. Recently, investment has gone into the master-lease companies that focus on purpose-built or converted multi-unit buildings partially or wholly leased for short-term rental purposes. However, this development is currently more prevalent in the U.S.
B2B vendors: with the advancement of technology, the opportunities for the B2B vendors are fast growing in the short-term rental space. They provide different types of services such as property management software, marketing solutions, website/app building, revenue management, etc.
Source: Skift research (2019), The Short-Term Rental Ecosystem and Vendor Deep Dive (Skift research, 2019[1])
Business models
In understanding different business models operating in the sector, it is important to highlight the essential role of digital platforms in bringing together different players in the ecosystem. Whether it is short-term rentals or other types of accommodation (e.g. serviced apartments), the platforms are at the centre of the scene in the sharing/gig economy space. Broadly, main business models involving these platforms can be categorised into four types depending on the nature of the underlying supply and the type of consideration involved (e.g. monetary or in-kind). Please note that the distinction between “pure” accommodation and ‘accommodation combined with other services’ may not be always clear-cut and the latter model is increasingly employed by large platforms in the sector.
“Pure” accommodation: the platform facilitates renting out whole or part of an individual’s primary or secondary residence to other individuals. However, the platform increasingly offers other types of accommodation such as serviced apartments.
Accommodation combined with other services: in addition to “pure” accommodation services (as described above), the platform may also provide other services such as vacation experiences (e.g. food tours, concerts), restaurant reservation services, car-hires, air travels, etc.
Exchange of houses: the platform brings together individuals (platform users) who agree to exchange houses (i.e. to travel and stay in each other’s primary or secondary residence). Usually, the users pay membership fees to subscribe to the platform and transact with each other.
Couchsurfing: the platform provides a place where individuals come together and agree to stay in each other’s house in return for non-monetary consideration (e.g. cook dinner as a token of gratitude).
Emerging trends in business models
The major trends in the development of business models in the accommodation sector include an expanding scope of the accommodation types used for short (and/or long) term rentals such as serviced apartments. Another important development relates to the involvement of different actors (e.g. other platforms and/or third parties) in the supply chain that would allow the platforms to further expand their service offerings including non-sharing/gig economy supplies such as air travels, car rentals, and insurance services.
Serviced apartments: also commonly known as “apart-hotels”, “condo hotels” or “extended-stay hotels”, it refers to a fully furnished apartment available for a short-term or long-term stay that comes with hotel-like amenities such as room cleaning services. Various terms are often used interchangeably and currently there is no official distinction between different concepts. Broadly, these models can be divided into two types: branded serviced apartments generally owned/managed by hotel brands and unbranded service apartments owned by different individuals but managed by an intermediary agent or property management company. For both cases, it may be possible that apartment units are listed/advertised on different platforms for which the platforms may not necessarily have direct visibility to individual owners of these apartment units (particularly for unbranded serviced apartments). Similar to the professional agents model (please see below), individual owners often do not know on which platforms their properties are listed but only receive rental fees net of management commissions.
“Platforms on platforms”: as an effort to diversify their offerings and thereby increase their customer base, (traditional) digital platforms such as online travel agency companies list properties originally offered by other platforms on their platforms. Once the customer identifies a property they would like to book, they are redirected to the original platform’s website to conclude the transaction. Similarly, the platforms may allow other platforms to make their (different) service offerings accessible on their platforms (e.g. car reservation website accessible through accommodation platforms). The hosting platform may receive commissions from other platforms based on the number of referrals made or do it for free as part of their marketing strategy. Where these multiple platforms are involved in the supply chain, the hosting platform may not always have direct visibility as to who the underlying supplier (i.e. property owner) is similar to the professional agents model described below. In addition, the platforms increasingly expand their services to include those of third party companies such as car rentals, air travel and insurance services, some of which may not necessarily fall within the scope of sharing/gig economy activities.
Professional agents: individuals may contract with professional property management agents/companies to list and/or advertise their properties on different accommodation platforms. These individuals often do not know on which platforms their properties are listed but only receive rental fees net of management commissions from the agents/companies.
Payment models
Payment facilities is an important feature of the platform services in the sharing/gig economy context, and the platforms may choose to operate different payment models for various economic, social and commercial reasons. Generally, the accommodation provider (i.e. hosts) charges a rental fee and the guest pays it either directly to the provider or through the platform. Additionally, the platform collects commission from either the provider, the guest or both. Variations of these payment models may include (see further below Graphic illustration of basic operation of these models):
Model 1: A platform may collect x% commission from providers and y% service fee from users. The user pays the entire amount (e.g. rental fee and service fee) up front to the platform; the platform then pays the provider net of commission and service fee.
Model 2: A platform may charge x% transaction fee (commission) to the providers only; the users pay no fee. The user pays to the provider the amount agreed who subsequently remits the x% fee to the platform.
Model 3: A platform may charge x% transaction fee (commission) to the providers only; the users pay no fee. The user pays to the platform the amount agreed who subsequently pays the provider net of the x% fee.
Model 4: A platform does not charge any fees to the provider and the user. The platform provides a place where the provider and the user can contact each other, but the underlying transaction is carried out only between the provider and the user without involvement of the platform. The platform’s revenue comes from advertisements displayed on the platform.
Cash transactions: it is rare in the accommodation sector but possible in Model 2 where the user may pay cash directly to the provider. The platform would subsequently receive its commission from the provider either by adding it to the provider’s periodic subscription fees to the platform or by asking the provider to remit it to the platform periodically.
New payment modalities: mobile payment solutions such as mobile wallets are increasingly used in developing economies where a large portion of the population have limited access to formal financial services. Other technology-enabled payment solutions are emerging as well, including the use of digital assets (e.g. some platforms in the accommodation sector are considering accepting a specific type of digital asset (bitcoin) in certain regions of the world) that may become more popular in the coming years.
Graphic illustration of basic operation of the models
Source: OECD analysis
Source: OECD analysis
Source: OECD analysis
Platform governance and trust
Effective platform governance that enables safe exchanges between strangers and thereby cultivates trust is critical for a platform’s success (Hagiu and Rothman, 2016[2]). In order to foster trust, a platform usually operates various institutional and legal governance mechanisms that may include: pre-screening procedure (including some physical in-site visits to the buildings), cross-review system, secure payment processing services, formulation of rules and standards regarding service levels and provision of civil liability insurance and guarantees to protect assets and users (Akbar and Tracogna, 2018[3]). Furthermore, the platform may offer other ancillary services such as photography services and a template to help hosts to post their offers in an effort to further streamline the service offering and improve user experience.
Pre-screening procedure: the platform may limit access to the platform to only specific assets and resources that meet predefined quality standards (Wirtz et al., 2019[4]). The platform may also perform some in-site visits to the property to verify that the property exists and meets necessary security standards. Similarly, the platform may require users to go through identification verification process (e.g. matching of a photo in a government issued ID with another photo of an individual) to be able to access the platform service.
Reviews/ratings: hosts and guests can evaluate each other. In certain cases, the platform may cancel a reservation or suspend the listing of a particular host where the host’s performance rating shows a trend of unusually low scores and negative comments. In extreme cases where a bad review is the result of serious safety related issues (e.g. crimes), the platform may automatically remove or deactivate the user’s account.
Pricing: the platform may provide recommended prices (i.e. price range) for hosts calculated by internal pricing algorithm based on multiple factors such as demand, season and local events.
Payment processing services: the platform operates a system where the payment made by a guest is released after the guest checks in to ensure that the property exists.
Customer support: In addition to an online help centre that allows hosts and guests to get answers about frequently asked questions in an automated way, the platform may provide further assistance in resolving disputes between a host and a guest.
Insurance/guarantees: the platform offers a guarantee to the hosts for the damages incurred in their property while providing accommodation services. If a guest insists that the damage was already there before the guest used the property, the platform may decide to compensate the host for the damage.
Other services: the platform may provide tutorial materials (e.g. online guidelines) or links to the relevant government agency’s website to educate their users to comply with regulatory obligations (e.g. tax). In addition, the platform may voluntarily provide a periodic summary of the transactions to the providers in an effort to help them comply with their tax obligations, if any.
Size and growth of the sector
Evidence suggests that the accommodation sector is one of the two largest sectors in terms of value of transaction. In Europe, the sector comprises approximately 50% of the total market value1 and is projected to more than double its size by 2025 in Southeast Asia2 (European Commission and PwC UK, 2016[5]) (Google, Temasek and Bain & Company, 2019[6]). When it comes to the short-term rental market size, estimates provide that the global consumer market for short-term rentals has reached USD 107 billion in 2018 (see Figure A D.2 below for the global accommodation market composition – although overlaps between different accommodation types exist in the short-term rental sector, it shows that a majority of the market value comes from the sharing/gig economy related short-term rentals) (Skift research, 2019[1]). Moreover, as the market is further dominated by major players, top five players are estimated to account for approximately 73% of all gross bookings in the sector in 2019 compared to only 4% in 2010 (Skift research, 2019[1]).3
Source: Skift research (2019), The Short-Term Rental Ecosystem and Vendor Deep Dive (Skift research, 2019[1])
Convergence of business models
As the sector evolves, different segments are increasingly converging with one another and the line is blurring between different accommodation types and providers. In order to remain competitive, traditional accommodation providers such as hotels are entering the short-term rental market, and online travel agents have also started to expand their offerings to include apartment rentals and homestays. Respondents from incumbent players vary: adopting features of platforms by launching a booking app, launching competing platforms, and acquiring the platforms. Similarly, the platforms are expanding their services and becoming resembling their traditional counterparts establishing stronger brand identity (e.g. the platform moving towards owning and controlling its own room inventory). Furthermore, as the platform’s services expand, customer demand is pushing them towards hotels, with greater standardisation and more whole-unit rentals (as opposed to a room in one’s home). These trends lead to vertical market integration, diminishing the difference between the sharing/gig economy platforms and “traditional” economic operators.
Information elements
Through various governance and trust ensuring mechanisms as described above, the sharing/gig economy platforms operating in the accommodation sector typically collect the following information (please note that the below is not an exhaustive list. It is also acknowledged that, depending on a business model of the platform, a particular platform may not collect all of the information listed below):
The platforms generally have mechanisms in place to verify the accuracy of the information collected, which could include using technology-based solutions (e.g. artificial intelligence) to verify property listings.
General description
In the sharing/gig economy context, the transportation sector generally refers to a segment in which the platform connects drivers, which may include non-professionals in the sense that these drivers do not possess professional permits (e.g. taxi medallion) other than a legitimate driver’s license, with passengers, often private individuals, for either a short or long distance trip.
Business models
Main business models that currently operate in the sector may include:
Ride-sourcing: this generally refers to app-based ride-sourcing services (often short distance). The service focuses on providing taxi/car-like services but the platforms may provide different types of transportation means such as motorcycles, bikes, electronic scooters, boats and ferries. Cross-border trips are very rare, notably due to logistical and regulatory complications (e.g. high-risk liability insurance related coverage issues, time consuming/costly border procedures, etc.).
Ride-sharing/car-pooling: the platform matches drivers who have spare capacity in their cars and plan to drive particular (long distance) routes with passengers who want to travel on the same or similar routes including cross-border trips.
Driveway/parking sharing: the platform connects drivers with (more often) individuals who own unused parking spaces for a fee.
On-demand delivery: particularly in light of COVID-19 impact, as the demand for home delivery of essentials, goods and food is increasing, the platforms are further expanding their food (meal) delivery business model into the delivery of grocery and other products, either through acquisition of existing players in the market or through partnership (contractual arrangement) with these players. In these cases, the platform either utilise its existing network of drivers to facilitate the delivery services or provides customers access to the services offered by others while not being directly involved in the delivery. For example, in the food (meal) delivery context, the platform connects drivers, restaurant owners and customers for the delivery of a meal. The platform may either connect restaurants with drivers or connect customers with restaurants that have their own couriers through contractual arrangements. Similarly, in the grocery delivery case, the platform connects drivers, grocery stores (platforms) and customers either by connecting grocery stores with its drivers or by connecting customers with grocery stores that employ their own shoppers to prepare the order and fulfil the delivery service as well.
Payment models
Payment facilities is an important feature of the platform services in the sharing/gig economy context, and the platforms may choose to operate different payment models for various economic, social and commercial reasons. Generally, the provider (i.e. drivers) charges a fee and the user (i.e. passengers) pays it either directly to the provider or through the platform. Additionally, the platform collects commission from either the provider, the user or both. Typically, the major platforms in the transportation sector charge commission only to the providers. Variations of these payment models may include (see further below Graphic illustration of basic operation of the models):
Model 1: A platform may collect x% commission from providers and y% service fee from users. The user pays the entire amount (e.g. driving fee and service fee) to the platform; the platform then pays the provider net of commission and service fee.
Model 2: A platform may charge x% transaction fee to the providers only; the users pay no fee. The user pays to the provider the amount agreed who subsequently remits the x% fee to the platform.
Model 3: A platform may charge x% transaction fee to the providers only; the users pay no fee. The user pays to the platform the amount agreed who subsequently pays the provider net of the x% fee.
Cash transactions: cash is the preferred means of payment in certain countries, notably developing countries where people have limited access to the formal financial services. In Model 2, if the user pays cash directly to the provider, either the provider could later deposit x% fees to the platform’s account or the platform could take x% fees from the provider’s credit card portion of the transactions.
New payment modalities: mobile payment solutions such as mobile wallets become increasingly popular and may replace cash transactions in developing countries. Other technology-enabled payment solutions are emerging as well, including the use of digital assets that may become popular in the coming years.
Graphic illustration of basic operation of the models
Source: OECD analysis
Note: it is clarified that this variation describes the case in which the platform may receive commission from passengers as well. Typically, the platform charges commission only to its drivers but it may be possible that it charges commission to both drivers and passengers.
Source: OECD analysis
Source: OECD analysis
Source: OECD analysis
Source: OECD analysis
Platform governance and trust
Effective platform governance that enables safe exchanges between strangers and thereby cultivates trust is critical for a platform’s success (Hagiu and Rothman, 2016[2]). In order to foster trust, a platform usually operates various institutional and legal governance mechanisms that may include: pre-screening procedure (including driver’s license verification), cross-review system, secure payment processing services, formulation of rules and standards regarding service levels and enhanced safety features (Akbar and Tracogna, 2018[3]).
Pre-screening procedure: the platform may limit access to the platform to only specific assets and resources that meet predefined quality standards (e.g. vehicle requirements). Similarly, the platform usually asks the drivers to provide their driver’s license or other equivalent certificate/license (certain jurisdictions may require professional license in order for an individual to engage in passenger transport services for profit) during the subscription process.
Reviews/ratings: drivers and passengers can evaluate each other. In extreme cases where a bad review is the result of serious safety related issues (e.g. crimes), the platform may automatically remove or deactivate the user’s account.
Pricing: the platform may provide a price quote calculated by its internal pricing algorithm based on changes in supply and demand, and the drivers may be asked to respect it. Depending on the business model, drivers may be allowed to set their own prices based on recommendation by the platform or the prices may be set on predefined categories rather than on dynamic adjustments. In the case of the ride-sharing/car-pooling business model, the platform may provide recommended prices based on fixed amount per distance. Drivers are free to choose their own but there is usually a price-cap rule to prevent drivers from making profits.
Payment processing services: the platform usually provides secure online payment processing services collecting driving fees from passengers and periodically remitting the fees minus commission to the drivers.
Safety features: in response to recent passenger safety related issues, the platform is moving towards enhancing safety features on the platform such as launching of a “panic button” which both passengers and drivers may press when they feel they are in danger and an alert would be sent to the platform and the police. The platform may also perform more thorough examination of drivers’ track records.
Other services: the platform may provide tutorial materials (e.g. online guidelines) or links to the relevant government agency’s website to educate their drivers to comply with regulatory obligations (e.g. tax). In addition, the platform may voluntarily provide a periodic summary of the transactions to the drivers in an effort to help them comply with their tax obligations. The platform may also provide invoicing services on behalf of their drivers.
Size and growth of the sector
Evidence suggests that the transport sector is one of the two largest sectors in terms of value of transaction and platform revenue. In Europe, the sector generates approximately 47% of the platforms revenue4 and is expected to reach USD 40 billion of market value by 2025 in Southeast Asia5 (European Commission and PwC UK, 2016[5]) (Google, Temasek and Bain & Company, 2019[6]).
Source: Mastercard & Kaiser Associates (2019), The Global Gig Economy: Capitalising on a ~$500B Opportunity (Mastercard and Kaiser Associates, 2019[7])
Information elements
Through various governance and trust ensuring mechanisms as described above, the sharing/gig economy platforms operating in the transport sector typically collect the following information (please note that the below is not an exhaustive list. It is also acknowledged that, depending on a business model of the platform, a particular platform may not collect all of the information listed below):
The platforms generally have mechanisms in place to verify the accuracy of the information collected. For example, platforms may ask the service providers to pre-fill an information form as part of the on-boarding process and compare it with the information contained in other documentation (e.g. match tax ID provided with the one shown in other certificates).
Notes
← 1. For the purposes of the study, the accommodation sector refers to ‘households sharing access to unused space in their home or renting out a holiday home to travellers’.
← 2. The reference in the report is on online vacation rentals.
← 3. The report’s estimate includes short-term rentals not only through the digital platforms but also via offline bookings, travel agents, and local connections.
← 4. For the purposes of the study, transportation sector refers to ‘individuals sharing a ride, car or parking space with others’.
← 5. The report includes ride-hailing and food delivery in measuring the market value.