Case Study Of OYO Business Model

Abstract

Oyo Rooms is currently the largest branded network of properties in India, Malaysia, UAE, Nepal, China and Indonesia operating at a peak of 450,000 hotels in approximately 5,000 cities.

The company began its activities with its business based on the aggregator model and climbed on the ladders of success and fame.  

The business used to manage the hotel partner, lease those rooms and sell them under its name. Although the mechanism remains the same, the business model of Oyo has shifted its direction to a new franchising based structure.

However, the main emphasis remains on the quality of the service offered. Thus they allow the partners to provide services at certain default levels in order to preserve the brand identity, while making it more accessible to their customers.

Introduction

OYO is India’s largest hospitality company offering standardized rooms in different locations across India consisting mainly of budget hotels. It was founded by Ritesh Agarwal in 2013 and has expanded to over 4,50,000 hotels in 500 towns in India, Malaysia, the African Republic, Nepal, China and Indonesia since then.

Oravel Stays as it was previously known used to be a website designed for the listing and booking of budget accommodation, was launched by Ritesh Agarwal. To offer similar and non compromising experience to guests across cities, OYO partners with hotels. OYO Home, an Airbnb platform for short-term, controlled rental firms, was launched by the end of 2017.

OYO raised $1 billion in September 2018. Softbank’s Dream Fund, with the participation of Light speed, Sequoia and Green oaks Capital, contributed to the vast majority of funding — $800 million, to be real.

Ritesh Agarwal

Ritesh Agarwal was born in Bissam Cuttack, in Odisha state, India and brought up in Titilagarh. At the age of 13, he started selling SIM cards. Agarwal graduated from St. Johns Senior Secondary School and moved to Delhi in 2011 for college. He dropped out of college, and was selected for the Peter Thiel Fellowship in 2013. Agarwal started a budget accommodation portal, Oravel Stays, for booking budget hotels. It was accepted into the accelerator program by Venture Nursery in September 2012, and later was one of the winners of the 2013 Thiel Fellowship program, receiving a grant of $100,000. The company was launched as OYO Rooms in May 2013.

By September 2018, the company raised $1 billion. In July 2019 it was reported that Agarwal purchased $2 billion in shares in the company, tripling his stake. His net worth in 2020 was estimated to be approximately $1.1 billion (INR 7253 crore) according to Hurun Rich List 2020. He is also the youngest self-made billionaire after Kylie Jenner, in the world.

Oyo Rooms – A franchiser or an Aggregator?

The business model of OYO rooms used to be of a hotel aggregator. However, it was different from Airbnb’s business model as Oyo didn’t focus just on the discoverability of the partners among the users but also on the standardized quality of the services provided.

The customers used to buy brand Oyo room services and did not care about their partner. Like Uber, Oyo has provided standardized quality and price accommodations. This model was a mix of a business model aggregator and a business model for franchises. The company, however, developed its brand stock over time and the founders decided to shift their business model towards a profit centric franchise model as the sequel. Under the franchise model the company now earns 90 percent of its revenues.

Business Model of OYO Rooms

The business model of Oyo Rooms was similar to the usual aggregator ( for example, the UBER business model), but essentially it turned tides and  worked as a franchise model.  The company used to –

1. lease a part of the hotel inventory in advance.

2. Arrange those hotel rooms under its brand name – Oyo rooms

3. These partner hotels would provide standardized customer service, as decided by a contract with Oyo Bookings, using the website and mobile applications in Oyo rooms.

OYO Rooms is the hotel add-on and not a place on the market, as customers buy brand OYO Rooms services and don’t bother who they are.

Change in business Model

OYO Rooms  based on the support of  Soft Bank, changed its business model from aggregation to franchising or as we can say from managing hotel operations to come out as the brand OYO in May, 2017. The hotels in the group business model  became franchises. This transition was undertaken by OYO Rooms to improve serviceability and reduce operating costs. This change aimed at rationalizing the costs of the resources of partner hotels. The operating cost grew as OYO kept an OYO captain in hotels with about 5 to 15 rooms. However, OYO has increased its serviceability after this change in the business model as they use the same number of resources now but in fully-functioning hotels.

Services Provided by OYO Rooms

  • Hotel Rooms

The previous approach of Oyo was to book a portion of the hotel inventory, to keep it in compliance with quality standards and reserve it exclusively for Oyo clients. In other words, every month they rent rooms and make profits for their own customers.

The only change is that now the rooms are not rented but are now operated as a franchise of Oyo Rooms. As hotels and property owners act as franchisers, they are bound to operate according to the prescribed standards. Instead of the hotel workers or owners, the company offers plans to run the place.

  • OYO Flagship

The partners like to book their own hotels when they see fewer prices on the Oyo’s platform and this became beneficiary for the partners. To reduce this OYO Rooms has started leasing hotels and places where OYO has full control over all the day-to-day operations.

  • OYO Townhouse

Recently, the company launched the Oyo Townhouse in order to boost the value offering of structured accommodation and to stand out from the competition. Oyo Townhouse is focused on the thousand year old traveler’s needs. These hotels are planned and constructed to meet millennial requirements. They have smarter rooms, smarter office spaces and smarter menus to meet the standards of the modern day millennial.

  • Studio Stays

Oyo Rooms provides fully furnished rooms and apartments for long stays such as internships, corporate stays, etc., as well as hotel accommodation. Rooms / apartments can be leased both for single and twin occupancy (other restrictions apply). Rents are paid monthly and the Commission of the rooms is charged from the owners of the customer who comes through OYO rooms.

  • Events and other long stays

There are many family functions (weddings, parties) as well as corporate functions (seminars, meetings, parties) which involve hotel rooms for their guests to stay for long. This service is also provided by Oyo.

  • OYO Wizard

The company has also launched a subscription model where the subscribers get exclusive discounts, deals, and cashback offers.

Cost structure and Expenses of OYO

  • Platform (website and app) development and maintenance costs
  • Renovation and branding cost
  • IT infrastructure cost
  • Marketing and advertising costs
  • Employees salary costs
  • Hotel Partners’ commissions
  • Legal cost
  • Other operational and administrative cost

Operating expenses have jumped more than 390% to Rs 6,131.66 crore, while employee benefit expenses rose nearly six-fold to Rs 1538.85 crore in the recent financial year.

Revenue Stream of OYO

The Oyo top line grew by more than 350 percent for financial year 2018-19 to Rs 6,642,85 crores, with transaction revenues increasing over the 12-month period by Rs 6,456,91 crore.

  • Commissions

Oyo charges around 22% of commissions every month from hotels owners. Commissions may vary as per the services and features offered.

  • Room Reservation Fee

Customers pay a room reservation fee according to their services chosen. The room fee is charged with a few percentage margins of the hotels’ prices. For example, if a room is priced at Rs. 1,000 per night, Oyo makes only 10-20% commission from it, and that is their actual revenue.

  • Membership fees

Users who subscribe to Oyo Wizard memberships are charged with premium fees ranging from Rs 500 to Rs 3000.

  • Advertising

Oyo also charges different companies to place their ads on Oyo’s app and website generating sizable revenue for Oyo.

  • Sponsors and Partnerships

Oyo also charges some amount from its sponsors and key partners by promoting their brand name through advertising on their app.

  • Consulting Services

Oyo charges for its business consulting and data analysis services, it provides to its clients, including hotel, clubs, organizations, etc. It provides these services as it owns an extensive database of locations, hotels, event organizations, users, and their preferences.

Future Scope of OYO

OYO is growing rapidly and is often regarded as the budget hotel network of highest order and quality. OYO could be able to raise its prices, but since the new products have just been launched, it is likely that prices will stay as they now are. OYO is a business model that is technologically oriented. It is now inaugurated at Hyderabad and Telangana with the first technology development center in Gurgaon and plans to build many more. OYO has already created OYO Total Holidays and expects OYO Total Holidays to generate 10 percent of its overall sales. OYO Rooms is also piloting OYO Café, a website that aggregates food to be sold under the brand name OYO Cafe in its hotels. OYO Cafe can use an surplus stock of hotels and can also use a Zomato or Swiggy for food supplies. It also offers pilot housekeeping services on request for cleaning services.


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