Business Model Of OYO. How OYO Makes Money?

What comes to our mind when booking hotels? It’s obvious that OYO will definitely pop up in everyone’s mind. Yes, that’s because OYO has made tremendous changes in the hotel industry with its quality service and great user experience.

Founded in 2012 by Ritesh Agarwal, OYO has now become the second largest chain of hotels in the world.

In this blog post, lets looks to Business model of OYO, success story of Ritesh Agarwal, strategies used for their success, services offered, the main revenue streams of OYO and also a little comparison of OYO with Airbnb

Ritesh Agarwal Success Story

Ritesh at the age of just 19 started the company OYO Rooms. He was just 13 years old when he started travelling around the world.

Agarwal had very little interest in going to school and attending classes but he was greatly fascinated by the term entrepreneur and aspired to become one.

He took admission in a London university but still lacked interest in listening to the boring classes but wherever there is conference or classes that are happening with respect to entrepreneurship he would be the first to take a seat. And that is how much he admired entrepreneurship.

The thing about Ritesh Aggarwal is that he had great interest in travelling and not in the hotels. But he entered into the hotel business by realising there was a big problem in the hotel industry. 

He understood that the hotels that are inexpensive were very dirty with respect to washrooms, wash basins, bed, bedsheet, pillow etc everything were untidy and not upto the mark. 

So he started thinking and analysing these things and came to a decision to improve the standards of these hotel rooms.

And that’s when the idea to start the business came to his mind. 

Mission of OYO Hotels (Formerly Known As OYO Rooms)

Now you might be wondering how one can create great living spaces for a “common man” because a common man and great living doesnt come together as a common person cannot afford great living spaces. To bring them together was a difficult task for Ritesh Agarwal.

“Create Great Living Spaces For Common Man”

In 2012 he established a company named Oravel Stay. And then he went to several hotels where they weren’t having any business and the rooms were left empty. 

He discussed with several hotel owners that he will rent the rooms for them and asked them to give a percentage of commission to him. 

But unfortunately many hotel owners did not agree to his offer as they didn’t believe that would work out and moreover Ritesh was very young and rejected to partner with him.

Later Ritesh again approached the hotel owners and said if the business goes for a loss he will bear it and if profit happens then it will be shared. And this offer was accepted by hotel owners as there won’t be any loss to hotel owners.

Ritesh Aggarwal then invested a lot of money to improvise and better the experience of hotel rooms and made them look great. 

Then he realised to scale up the model, he needed a great technology so for that reason he established OYO.

With no time, the business saw great progress. Below are the Factors that improved immensely:

• Higher Revenue
• Repeated Customers
• Efficient Operation Of The Business
• Better Customer Relationship

The hotel owners got very impressed with these improvements and started doing the same with their other hotels as well. 

As the profit started to show up, Ritesh continued the business by connecting OYO with many other hotels.

Business Model Of OYO

Just like the business model of OLA, OYO also doesn’t have rooms of its own. OYO just provides an interface for the users who are looking for the hotels and to book with ease. 

At the beginning they followed the aggregator business model but recently they have shifted towards the franchise business model.

Aggregator Business Model (Old Business Model Of OYO)

This is just like the OLA business model. In this model, for example if a hotel has 50 rooms then OYO will buy lets say 20 rooms and sell it to the general public in the name of OYO brand.  

So Why Did OYO Change Their Business Model?

OYO used to sell the hotel rooms for a cheaper rate which were bought by them. So for instance, if the hotel owner gives 20 rooms to OYO at 1.5K per room, then OYO will apply some discount scheme and sell it for lets say 800. 

But the hotel owners took advantage of this and started malpracticing. The hotel owners themselves booked a few rooms which were bought by OYO for lets say 800 through OYO App and then sold it for 1.5K for their normal customers.

OYO got to know about this illegal activity and wanted to sought this out. That’s the reason now OYO is dealing with franchise business model.

Franchise Business Model (New Business Model Of OYO)

In this business model OYO rooms will take all the rooms in the hotel under their control. 

For example if a hotel has 50 rooms then all 50 rooms will be operated by OYO itself. This business model OYO is similar to McDonalds, Dominos, pizza hut etc. 

With this, OYO took full control of the hotel from managing staff, rooms, facilities, Kitchen etc for providing a great consumer experience. 

The hotel owner is absolutely free from maintaining the hotel but has to pay commission to OLA of around 20 to 25%.

By implementing this new business model, OYO now earns 90% of its revenue through this.

Under franchise business OYO charges around 22% monthly commission from the hotel owners whereas from their old business model they were charging 18% as commission.  

OYO Rooms Success Story

Below are the success strategy implemented by OYO:

1. Asset Light Strategy

As the name suggests asset light i.e you don’t need much capital expenditure. So you can quickly start the business without any need for the assets. This strategy helps to move faster and also helps in long term sustainability.

Ritesh knew that there is a universe of unbranded hotels and wanted to bring these hotels into a branded ecosystem. Ritesh also knew that there were an enormous number of customers who can’t afford high end hotels. 

But still these customers needed great quality rooms with low prices along with nearby locations. Ritesh concentrated majorly on location. 

He targeted hotels to partner with OYO which are near malls, railways stations, airports or near corporate hubs because people generally book hotels at these places.

Ritesh also focused on hotels where there were less than 100 rooms and he also knew that there are at least 90% of the hotels where there are less than 100 rooms. 

Customers generally preferred good branded hotels and nobody wanted to get into those hotels which were unbranded and had less rooms. 

So Ritesh smartly made his move to concentrate on only those hotels where there was no business at all and made partnership with those hotels. 

So he partnered with 0 to 2 star hotels and small hotels under 100 rooms. Ritesh made sure that OYO provided delightful consumer experiences.

Asset light strategy is also known as aggregator business strategy. For example, here hotel owners rent their rooms under the OYO brand name.

2. End To End Responsibility For Customer Experience

This basically means a complete set of interactions that will take place with the customer and the service providing company till the customer is done availing the service.

Ritesh provided the following amazing customer experience:

• Easy To Search The Hotels
• Ease Of Bookings
• Easy Check-in And Check-out
• Top Class Experience

Now coming to the operation expenditure, Ritesh invested approximately 3 lakhs on every hotel to change the look and feel of the hotel rooms to attract the customers and give them a mind blowing experience.

3. Predictably Will Bring Repeatability

Predictably and repeatedly are must for the success of any business. Ritesh repeated the things that were doing great.

He conducted an audit mechanism and introduced a cluster manager for every 10 hotels. The cluster managers will visit the hotels and do a complete audit of the hotel rooms. 

They  will check if everything is working great, for example: AC, electricity, water supply, food, wifi speed, room cleanliness, room amenities etc

In small hotels the budget will be low so you need to make sure you provide common standards with common process and then repeat the process.

When the customer books a room through the OYO App, he must get a room as shown in the OYO App. If he gets that he will be very satisfied with the experience. 

So when the customer again books the room he will predict that he will have a great experience with OYO. So customers would love to repeat the process.

This was the master class strategy used by ritesh to make the rooms affordable, predictable as well as available in the convenient location.

4. Technology

Ritesh knew that to speed up the process technology plays a major role. He even created OYO mobile App in such a way that the room gets booked in 3 clicks within few seconds. 

Ritesh made the room booking funnel so simple and easy for the customers. 

He also created dedicated data science teams and hired top class IITians to work in the data science team and invested a lot of funds in innovation and R&D.

5. Focused Team For Acquisitions And Expansions

Ritesh created a separate functional team just for acquiring and expanding the business. This team has only one mission i.e to build new relationships with the property owners and to partner with them to expand the business.

You might be wondering how OYO was able to expand their business in such a rapid phase. It’s all because of technology. 

The expansion team gets the things done just with the help of mobile App. They will send their app to the hotel owners and sign the contract with them and get it done within a few days. This has led to their flying expansion.

6. Feedback To Feedforward

Before OYO, when customers used to go to small hotels but if they suffered with any problems nobody would listen to them. 

The hotel staff used to behave rudely with customers without providing a good service. But now OYO will listen to all your problems. 

The customers can call OYO managers to talk about the problems they are facing and OYO will take strict action against the hotel and those hotels can even get delisted who don’t behave according to the standards.

7. Continuous Training 

OYO keeps on training their teams and they even have 25 training institutes for their employees. Their training is so powerful that 11 CXO’s who have joined OYO are still working for OYO.

If OYO comes to know that any employee in the hotel isn’t performing upto the mark, then OYO will take the employee to their training centre and upgrade them by providing them with excellent training. 

The company will not fire them, rather they will provide the training and improvise them and this has been the main reason for the lowest employee attrition rate for OYO.

Oyo Product Lines Or Services Offered By OYO

OYO Hotels

These are the basic hotel rooms which are budget friendly with pleasing design.

OYO Townhouse

These are mainly targeted for the millennial travellers who travel regularly and are looking for premium accommodation.

Capital B

Capital B is targeting  small scale business travelers, independent corporate travelers providing GST ready invoices for business stays.

OYO Home

OYO Homes are completely private homes and everything is serviced by the OYO team.

Silver Key

It’s another great service especially for corporate executives so that they can get a homely comfort.

Palette Resorts

The OYO has partnered with various resorts to provide premium accommodations for a wonderful vacation experience. It is located in the tourist destinations.

OYO Life

This service of OYO is targeted for young professionals who are in search of fully managed independent residential units on long term rentals.

OYO Banquet

This is another great service by OYO which allows people for easy booking of their wedding venues. They have partnered with Weddingz and several other banquet halls.

There are many other services offered by OYO which you can checkout in OYO Platform.

Revenue Streams Of OYO

Commissions

Earning from commissions from hotel owners is their main revenue stream. Commission may vary from 20 to 25%. 

Membership Fee

OYO has introduced a membership program for their users known as OYO wizard. 

The members can avail 5% instant discount as well some rewards in the form of OYO money. For people who regularly book through OYO can be benefited from this membership program.

Advertisements

OYO does advertisements for other businesses through their platform which is also a revenue stream for OYO.

Airbnb vs OYO

Airbnb’s business model is completely different to that of OYO. Airbnb is like a marketplace where anyone can list their homes on the Airbnb platform. 

If you want to list your property on Airbnb then just sign up through their platform and list your property, it’s as simple as that. If anyone books your property for accommodation, Airbnb will charge you around 10 to 15% commission.

Key Comparisons Of OYO & Airbnb

Through Airbnb customers will stay in someone’s private home or apartment whereas in OYO customers stay in the hotels.

With Airbnb you might face issues of last day cancellation but in OYO you won’t face any such problems because it’s a hotel!

The photos of the room shown in airbnb may not be as it is but in OYO you can expect that the rooms shown in the OYO App looks as it is when you enter the room.

There might be security issues with Airbnb as there won’t be any proper background check but with OYO there will be complete verification. 

Ending Thoughts

OYO has completed 16 funding rounds with a total funding amount of $3.2B. As many as 22 investors have invested in OYO including Ritesh, Softbank & Airbnb. Also they have made 7 acquisitions as of now including Leisure Group and Weddingz.

OYO has grown rapidly in India and their business has grown all around the world. At present OYO has 10 lakh+ rooms operating in 80+ countries. Their mission is to add 50K+ rooms to their inventory every month and by the end of 2023 their target is to have 25 lakh rooms. 

People aspiring to become entrepreneurs should understand that every overnight success has a minimum struggle of  5 years. OYO is the first mover in their business success. After the success of OYO, now all around there are a minimum of 50 OYO copycats!