Need a Hotel, Tonight?
How a mobile app is revolutionizing the hotel industry
Ever needed to book a hotel room last-minute? I never expected to on my trip to Croatia this summer, until it dawned on me that I would spend the next week of my life on a cramped yacht with no AC. I decided last-minute to book one night at a hostel in Hvar, and that hostel felt like heaven compared to the yacht.
This made me think: there are plenty of circumstances when you might consider booking a hotel room last-minute. Let’s say you’ve driven far away for a daytrip, and you’d rather stay nearby than drive home. Or you’re having a wild night out, and you’re looking for a place to crash. About 15% of hotel reservations are same-day bookings [1], and this percentage will grow as more consumers make mobile bookings. This same-day market presents a ripe opportunity for HotelTonight.
How HotelTonight Works
HotelTonight is a mobile app that allows users to book hotel reservations last-minute, typically at upscale, trendy hotels. The user interface is visually appealing and easy to use (see below), distilling a wide range of hotel inventory down to the best deals to show consumers based on their location. Users can find exclusive, deeply discounted deals that are not offered by traditional online travel agencies (OTAs) like Expedia.
Since its founding in 2010, HotelTonight has aggressively expanded to new locations: through partnerships with boutiques and large hotel chains, the company now works with over 10,000 hotels in 500 cities across 28 countries [2]. New deals are added everyday at noon, and users have the option of booking same-day or up to seven days in advance.
How HotelTonight Creates Value for Hoteliers
It is clear that HotelTonight creates value for consumers by providing a quick and easy way for them to find and book last-minute deals. However, HotelTonight’s business model creates immense value for hoteliers as well, and these value-drivers will lead to a sustainable advantage over competitors:
- HotelTonight helps hotels advertise. HotelTonight’s salespeople work directly with hotel managers to understand their needs and form strategic partnerships. They then send their own photographers and reviewers to create new merchandising material for properties that are added.
- HotelTonight drives volume at a cheaper rate than OTAs. HotelTonight charges hotels the lowest commissions on bookings in the industry at 15% and less, while OTAs typically charge 15-30% [3,4]. Less expensive commission rates are particularly beneficial for independent boutique hotels that cannot negotiate advantageous deals with OTAs.
- HotelTonight customers are higher-value customers compared with bargain-hunter OTA customers. They spend more on ancillary revenue categories, such as food and beverage. They are also more likely to be influencers that tweet and Instagram the hotels they stay at, spreading positive word of mouth [1].
HotelTonight’s Unique Algorithms
HotelTonight uses unique algorithms to update the app in real-time, and these further address the individualized needs of hoteliers:
- Discounting on HotelNight helps hoteliers minimize cannibalization of existing customers. One of the most difficult challenges in the hotel industry is yield management. Hotels are rarely operating at 100% occupancy: despite the logic that offering steep discounts on unsold rooms makes sense, hotels rarely do this in practice because they are afraid of cannibalizing their most loyal customers that paid top dollar for similar rooms [2]. HotelTonight’s algorithms only display a limited number of hotels and rotate them frequently, creating variability in which hotels are shown. Customers do not predictably gain access to hotel deals, so it is a safer way for hotels to discount aggressively.
- HotelTonight’s algorithms offer flexibility. HotelTonight never forces hotel partners to discount or provide inventory. Hotels decide what inventory to offer and at what price, and they can continuously adjust their rates if necessary, preventing them from being locked into rates if market conditions change.
HotelTonight’s Operating Model
The sole focus of HotelTonight is on hotel reservations for mobile. In this way, they are differentiated from well-capitalized competitors who must invest in projects across a wide range of products and industries. Their well-defined operating scope is critical to their success, as the company focuses on serving customers and innovating products:
Serving customers: HotelTonight’s customers are tech-savvy, and they expect quick responses to problems. To address this business need, HotelTonight has invested in Salesforce technology that allows it to rapidly address customer feedback in real-time. The average response time to customer feedback is 10 minutes or less [5]. In addition, all employees are encouraged to experience the product as a customer. They are each given an annual travel stipend to be used on the app—this prompts employees to solve problems by thinking from the customer’s point of view [6].
Innovating products: In a competitive industry with relatively low barriers to entry, HotelTonight needs to continuously innovate its products. The office space and culture (see video below) both contribute to a collaborative culture that encourages team-based approaches to solving problems [7]. Employees sit close together physically, and an open office atmosphere provides areas for engineers to work together and generate ideas collectively.
One key product innovation was developing algorithms to automate which hotel deals to display to customers. In its early stages, HotelTonight’s sales managers engaged in stressful negotiations with hotels and manually turned on deals. This led to inefficient allocation of resources and major errors. For example, a sales manager accidentally shut off the entire Las Vegas market for a couple of hours when he tried to switch off a deal [8]. When algorithms were developed to automate deal displays, sales managers had time for more important responsibilities, like maintaining relationships and developing high-level strategy.
[1] http://venturebeat.com/2012/06/06/why-hoteltonight-is-a-deal-company-i-can-get-behind/
[4] http://vator.tv/news/2017-02-21-how-does-hoteltonight-make-money
[5] http://www.salesforce.com/customers/stories/hoteltonight.jsp
[6] http://techcrunch.com/video/tc-cribs-hotel-tonight/517690434/
[8] https://pando.com/2013/07/15/how-hoteltonight-killed-its-frenetic-vibe-and-figured-out-how-to-scale/
Great post Sijia I think it’s an interesting and effective business model for an increasingly crowded space. I think you got it just right when you brought up their need to constantly innovate in order to create a sustainable competitive advantage over their peers. Right now it seems as though one of their major levers in creating value to hotels vs OTAs is their ability to charge less in fees. From a competitive landscape perspective that makes me a bit nervous as the minimum barriers to entry could quickly lead to a race to the bottom as competition increases. It will be interesting to monitor how this business and operating model evolves as they continue to grow. Can they realistically compete with OTAs if they expand their offerings further beyond one-night bookings and what will the competitive response be if and when they pick up market share.
Really interesting post Sijia (I like how you led with a personal experience demonstrating the need). I had many of the same reactions as Tobi. While reading, I kept asking why the big OTAs were not simply adding same-day booking inventory, especially if it truly was 15% of the market (and growing quickly with a disproportionate amount of valuable customers). I think Hotel Tonight has survived so far by staying under the radar, but it doesn’t seem like they have any true barrier to entry that would keep the OTAs out in the long term. If the OTAs do choose to compete against Hotel Tonight, I imagine an advertising battle ensuing which Hotel Tonight would be unable to win given the massive advertising budgets of players like Expedia. I do really like the simplicity of the HT app and user experience though.