A business model for budget hotels

Funded by Lightspeed Venture Partners, Sequoia Capital, Greenoaks Capital and DSG Consumer Partners, OYO rooms, a technology-enabled network of branded cost effective hotel rooms, aims to expand to 1,000 hotel rooms in 25 cities by the end of 2015

Availability of good quality hotels is a priority for travellers. Concerns about hygiene and cleanliness are uppermost on one’s mind. Since a certain standard can be expected only in star hotels, travellers end up spending more or, resign themselves to compromising due to budget constraints.

“During my student days, I travelled across the country and stayed at more than 100 budget hotels, which made me realise how difficult it was to get a pleasant and reliable ‘consumer experience’ in this segment,” Ritesh Agarwal, Founder CEO, Gurgaon-based OYO Rooms. He founded Oravel Stays in 2012, to help budget travellers find affordable bed-and-breakfast accommodation in major cities across India and was incubated at Mumbai-based Venture Nursery.

However, while this only made travellers know about budget hotels, there was no guarantee about the quality of the rooms – whether it would have a clean bed and linen, or hot water in the bathroom. “This was a huge contrast from the experience that expensive hotels provide – where guests always know that the basic amenities will be of a certain standard that they can rely on,” he points out. If the same standardised experience can be offered at a pocket-friendly price, travellers will never hesitate to book and stay in a budget room. And so, in 2013, he started Oyo Rooms, a technology-enabled network of branded hotels.

“If Oravel was all about simply connecting travellers to budget accommodation, Oyo Rooms is about creating a network of budget hotels with standardised rooms and amenities – so the travellers always know what they are going to get,” he explains the nuanced difference between his two ventures.

Starting Young

During his entrepreneurial journey, Agarwal was bestowed with the Thiel Fellowship, a two-year program started by Peter Thiel – a Silicon Valley investor and who was behind the success of companies such as Facebook, Tesla and others. The fellowship is bestowed upon 20 people each year. Each fellow receives a grant of US $100,000 and mentorship from the foundation’s network of technology entrepreneurs, investors and scientists.

“One of the biggest takeaways for me as a Thiel fellow was direct mentoring by Peter, who took a lot of interest in teaching us the value of solving a big customer problem creatively,” recalls Agarwal. This lesson played a big role in helping shape OYO Rooms –which aims to solve the problem of high-quality standardised rooms at budget prices. The company raised Rs. 150 crore from New Delhi based Lightspeed Venture Partners (LSVP), Bengaluru-based Sequoia Capital, San Francisco based Greenoaks Capital and DSG Consumer Partners. This has helped the company realise its ambition of becoming the largest technology-enabled network of hotels in the world.

From three people in 2013, OYO has 500 plus members today and employs people from several leading universities including Harvard, IIT, ISB and the IIMs. “We have talent from across sectors like e-commerce, technology, consulting, hospitality, travel etc. which are segregated in various department like marketing, supply, transformation, sales, HR, product, IT, reservation, operations, finance,” he adds.

Light on Feet

OYO rooms are priced up to 35 per cent lower than similarly-spaced rooms by other hotels. This, combined with the assurance of a comfortable and predictable stay managed by a fast-growing network of branded hotels, is its USP. “We believe there is no other competitor offering similar value proposition,” says Agarwal with confidence.

OYO has a strong referral network as well as high repeat customers. “We use various marketing channels online and offline both to promote our various product offerings,” says Agarwal.

OYO Rooms has developed an asset-light business model. It partners with hotel owners on a revenue-share basis. The biggest challenge initially was to get hotels onboard since hotel owners typically care about occupancy, pilferage and customer experience. “Once we were able to make them understand how Brand OYO caters to these needs, they came onboard,” he explains.

OYO’s effort has been to ensure access to standardised budget hotel that offer predictable and high-quality stay with standardised amenities. “We have built a very high quality, compatibility playbook wherein by entering information about the hotel, the owner’s background and other such details, we can check our compatibility with these hotels,” explains he. This process helps OYO select only those hotels that are perceived to be best for consumers in terms of location, customer experience, and infrastructure among others. Highly optimised processes allow the company to scale very fast – for example, their proprietary on-boarding process allows them to add new hotels within five to six days of signing the agreement.

All OYO hotels are equipped with a tablet, running a proprietary OYO ‘Property Manager’ app that ensures a superior, hassle-free experience for all guests. Using this app, a hotel manager can track the real time status of bookings and room availability, manage check-ins and checkouts etc. The app also helps a manager conveniently track payments as well as incidental expenses like F&B and laundry attributed to a guest.

“If you book a five star hotel, you always expect a predictable way of check-in, amenities in the room etc. We are bringing the same predictable experience to affordable price points,” points out Agarwal. OYO Rooms start at Rs. 999 and universally offer clean and comfortable bed, air-conditioning, a clean and attached bathroom, TV, WiFi, and a complimentary breakfast.

A major share of hotel control is left to the management, though OYO manages and controls a few critical touch-points for the consumer. The team carries out audits of properties on a regular basis, to check on the condition of rooms, status of basic amenities etc. And if there are more than three negative customer feedbacks (reliable ones) about a hotel, OYO ends the partnership.

Adding Rooms

OYO Rooms currently has 250 hotels in more than 13 cities today and is adding about 20-30 new hotels every month. The hotels register 80 per cent to 90 per cent occupancy levels and are currently booking 50,000 room nights every month. The long-term goal is to create the world’s largest network of branded hotels. “By the end of 2015, we are aiming to expand to 1,000 hotels in 25 cities. We are also looking to expand beyond the 13 cities we are in, and open new OYO Rooms in smaller cities and towns to truly revolutionize how Indians travel on budget,” Agarwal shares his vision.

The greatest growth driver is an enormous demand for branded, predictable hotel experiences in the budget hospitality category. “Our growth is simply a reflection of our vision to meet this demand, and we believe we have barely scratched the surface so far,” he adds.

The company is investing heavily in technology and people, and Agarwal realised that technology can play a transformational role even in a traditional brick and mortar industry like hospitality. “We have successfully used technology to create and provide a hassle-free and seamless experience to our customers. And we are going to continue using technology to reinvent the OYO customer experience,” says he.


Snapshot

Venture: Oyo Rooms

Started in: 2013

Started by: Ritesh Agarwal

Funded by: Thiel Fellowship, Lightspeed Venture Partners, Sequoia Capital, Greenoaks Capital and DSG Consumer Partners

Focus: Budget hotel rooms with standardised amenities

Meera Srikant has been working with publishers and publications since 1993, writing and editing articles, features and stories across topics. She also blogs and writes poems, novels and short stories during leisure. Writing for The Smart CEO since 2010, she is also a classical dancer.