India’s hotel industry is highly fragmented with very few brands catering to the budget travel segment and small/unorganised players accounting for lion’s share. Rising middle-class and increase in disposable income is pushing the budget travel segment to an all-time high, but the lack of reliable budget accommodation is still a major challenge for travellers. Travellers are often shocked with the lack of infrastructure available and the quality of service offered at most of these unbranded budget hotels. On the flip side, budget hotels are getting squeezed from the AirBnb’s of the world.
Looking at the size of the opportunity, OYO rooms set out to build a reliable, trust-worthy brand in the budget hotel segment ($15-$30/night) which would provide a consistent experience to the customers. On one hand, it works with hotels to sign-up on the platform and improve customer experience, and on the other hand, it attracts travellers by being the go-to-brand for the budget segment. Travellers are inclined to stay at OYO Rooms property rather than an unknown/unbranded hotels which in turn leads to increased utilization for the partner hotels on the OYO platform. OYO Room makes revenue by taking a percentage commission on the bookings made on their platform.
Instead of building hotels from ground-up, which would require huge investment and time, OYO works with existing hotel owners and bring them under their umbrella brand. This is a very efficient, asset-light model of expanding the brand across the country. The day-to-day management of the hotel is also left to the local entrepreneur who can run his business much better than OYO.
The needs of travellers in the budget segment are low price affordable rooms with basic amenities such as wifi, clean linens, breakfast, AC and hot showers. Oyo works with existing hotel owners to improve the infrastructure and provide these basic facilities to the travellers. Hotel owners are inclined to invest in these amenities to provide better service to their customers. Travellers get the promised experience across all OYO properties and this consistent and reliable experience leads to repeat purchase/word-of-mouth.
Marketing and brand building:
OYO’s promise to hotel owner is to increase their utilization and generate more revenue by driving customers to their property. To fulfill this promise, OYO invests in marketing and brand building exercise including national advertising on major media as well as SEO/SEM/internet advt. OYO currently has 3500+ properties across 150+ cities in India under its brand and this scale gives them the flexibility to spend on marketing. Each partner hotel enjoys the benefits from the nation-wide brand building, which they couldn’t have done by themselves.
With this large chain of 3500+ properties, OYO is able to capitalize on the network effect similar to Starbucks. Major cities like Bangalore have as many as 180+ OYO hotels spread across major areas making it very convenient for travellers to stay at OYO and stick to the brand. The more they expand on the hotels side, the more customers would stick to their platform resulting in more hotels willing to join their platform. OYO is using this network effect to their advantage and keeping the competition in check. They plan to sign-up 5000+ properties by the end of 2015/early 2016.
Hotels typically end up paying as much as 10-20% commission to OTAs for online bookings. As a single hotel owner, it is impossible to compete with OTAs but with a chain of hotels, OYO can drive bookings through their own mobile app and thus, save on hefty commissions. Travellers could even order room service through the app, which increases the incentive to download and use the app, leading to more repeat purchase through the app.
Given OYO’s scale and presence across all major Indian cities, it has also ventured into providing additional revenue generation opportunities to its partner hotel. Recently, it launched on-demand café, which could deliver food from its partner’s hotel to customers, and on-demand housekeeping, where partner hotels can provide housekeeping services at other customer’s home. These and other value-added services would help OYO to keep adding more partner hotels on its platform and reap the benefits of scale.
Business & Operating Model Alignment:
I believe OYO’s business & operating model is completely aligned. They understand that they are not a hotel management company and hence, stay away from managing hotel property. They are fully focused on getting more hotels to sign up on the platform, building the ‘OYO Rooms’ brand to attract more customers and investing behind technology to scale this solution and provide other revenue generation opportunities to their partner hotels. They have raised multiple rounds of funding ($125mn+) and are on the exponential growth path.