OYO Rooms: India’s largest budget hotel brand built in less than 3 years!
Learn how OYO is disrupting India's budget hotel industry and growing at breakneck speed!
Overview:
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.
Business Model:
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.
Operating model:
Asset light:
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.
Standardization:
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.
Network effects:
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.
Direct Bookings through mobile app:
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.
Value-added Services:
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.
Wow – this is great information to know before I head to India for FIELD 2! It seems that OYO is taking aggressive steps to expand their market base and provide consumers with a seamless digital experience. However, I am concerned with how lasting the competitive advantage of a firm like OYO is if at the end of the day it is a relationships-based business (e.g. OYO’s crucial first step is getting hoteliers to share inventory). What steps is it taking to distance itself from competition? Is this a model that could work equally as well in rural areas? Could its share of the market be lost if a new entrant offers hotel owners a different fee structure?
I look forward to seeing OYO first-hand in a few weeks!
Rex, those are all very relevant questions and I am sure company is thinking about them all. My take on them would be:
(a) OYO has a war chest of $125mn+ which would prevent competitors to start a price war against OYO.
(b) OYO’s is already 4x the nearest competitor, ZO Rooms, in terms of number of rooms and is scaling even faster.
(c) I believe, this industry has massive network effects and is a winner takes all kind of market. Customers would come to you if you have room inventory and hotels would sign up on your platform if you have more customers.
(d) Hotels can’t be on multiple platforms unlike taxi market as they put up signage and would have some backend integration including OYO branded toiletries etc. Thus, if you are able to capture a hotel, it is very difficult to replace you.
Thanks a lot for the article. I had heard already about OYO and I had been very fascinated by the concept. In addition the info above have shed more light on it.
I think the main point that OYO does is give trust to customers that the service they will receive is going to be at least acceptable .
My question for you is how good has OYO been to grow so much (from 13 hotels to 3000k in one year) and be able to double check the quality of all hotels?
I would also be interested to better understand (only if you know) how does OYO interact with the various hotels to be sure that they follow the standards set by OYO.
My fear is that with such a massive growth the quality can go much down (as for instance it has happened for lots of Uber drivers) and hence to have in place a good quality operational setting is going to be key for them.
Thanks again,
Marco
I agree with you Marco that growth is a double-edged sword – too fast a growth with little emphasis on quality would certainly set you up for failure. For OYO particularly, I think they invest a lot of resources on doing regular audits and keeping in touch with the partner hotels. If you look at their website, the majority of job openings are in either business development or in area managers.
Going forward, they will have to keep a sharp focus on maintaining this quality and keep their customers happy.
Cool thanks for the answer.
By the way I have another follow up question. What about Airbnb? I guess Airbnb would be a big competitor for OYO. As far as you know how strong is Airbnb in India and do they do any quality check considering the specific Indian context or do they behave in India in the same way as in other countries?
I don’t know the specifics for Airbnb but my guess is they have minimal on-ground personnel to do the quality checks etc. Airbnb would be a big competitor to the budget hotels and hence, it makes the case for OYO even stronger for these partner hotels to sign up with OYO. Standing alone they can’t fight with Airbnb, but joining forces with OYO and building a nation-wise brand certainly helps their cause. Also, I think India market is sufficiently large enough for both OYO & Airbnb to make a large business. (There are ~1mn budget hotels that OYO can partner with)
Airbnb’s model does not solve for the trust deficit in the Indian market. Also, their focus is on the host more than the accommodation – something that doesn’t work for Indian travelers at large. Their operating model is the same in India as in other countries.
How do they deal with hotels that are competitors in the local market? If a “Best Western” considers itself to be of better quality than a “Crown Plaza”, do they demand some sort of better rating within OYO or both will get branded at an equal level? If they are considered equal, isn’t there an eventual risk of losing the “Best Western” type hotels once they get enough foot-fall and popularity?
For the ‘better’ quality hotel on their platform, they brand them as “OYO Premium” and charge higher tariff/night from customers. Since, they are branded as premium, customer are also aware that these hotels will be better and pricier. Also, within OYO branded hotel, they charge differential pricing depending on competition, location, supply-demand etc.
The risk of losing hotel is minimal since the thesis of OYO is that customers are coming because of OYO platform. If the hotel is not listed as OYO, customers can’t book through their mobile app. Is is very similar to Uber – where a stand-alone driver can’t do much as customers won’t be able to reach the driver without Uber.
Hence, this model works best in the budget hotel category and not for premium hotels, as budget hotels lack the infrastructure to build their own brand to attract customers and drive utilization.
As an early employee of OYO, it’s exciting to see our business become a part of an HBS discussion.
Thanks for the detailed coverage Anish. Will keep my eyes on this thread to read more of what your classmates have to ask and say about OYO.
Good luck with the Boston winter!
Aniiiiiiiiiish!!!
Hey Anish, this post was really fun to read.
I wonder whether this business will shift toward ads-revenue model someday. Given the fact that it mainly covers low price hotels, 10-20% margin may be significant from participating hotels. It may be interesting to see at which point it makes sense to shift from margin model to ads revenue model.
Anish, great post and thanks for bringing OYO to my attention! I’ve always thought finding high-quality but affordable hotels in India was far more difficult and frustrating than it should be. Even well-rated hotels through sites like Tripadvisor can be hit-or-miss. I often find myself spending much more than I want to for brand-name hotels in order to be confident in their quality. I’m surprised that I had not come across OYO before.
In response to the comments on AirBnB above, I agree that OYO’s competitive advantage is certainly their quality guarantee. My initial thought from the comparison to Uber was the fact that there must be strong competition. However, like you pointed out Anish, being a first and fast mover with extensive funding is certainly tough to go up against. With the hotels themselves making the capital investments and without the expensive regulatory burdens seen often with Uber and Ola, I agree they have massive potential ahead.
Did you come across any plans for international expansion Anish? This certainly isn’t a problem unique to India and I’m sure small or budget hotels feeling the pain of AirBnB competition would be strongly compelled to join forces with OYO.
I think OYO is still focussed on India as the market is huge (~1mn potential hotels). Many have started copying the model in their respective country. I recently came across zenrooms.com, which is a Rocket Internet company, doing very similar for South-East Asia.
Anish, thank you for writing about OYO. I had never heard of the company, and it’s impressive how fast they grew. They really capitalized on the fragmented industry, and I agree with you that there were some strong first-mover advantages there.
I didn’t expect that they’d use their mobile app to create value beyond the transaction of booking a room. Letting customers order room service through the app feels like an effective way to link good service with their brand. I worry about the other feature of extending the services to the home. You said that this feature creates value for the hotels by giving them other sources of revenue. However, the feature feels very distracting and misaligned to their business model of being a hotel brand. Offering cleaning services and delivering food is another business.