What Oyo Rooms (And Zo rooms and Value + from Makemytrip.com) has done to the small-time ‘Ram’ and ‘Shyam’ hotels is amazing and a lesson in brand aggregation.
Let me take a small example to understand the consumer facing aspect of the business model. Say, I am a value traveller and am travelling to Jaipur for a weekend stay. One of the many options for me is to book my hotel stay through popular travel website like Cleartrip.com. In the ‘before’ scenario (before Oyo Rooms came into being), my search for budget hotel rooms at less than Rs. 2000/ night would give out something like this –
None of these hotels are known to me. Presumably, I would make a choice based on consumer ratings and reviews.
Once aggregators like Oyo, Zo and Value+ come into being, it looks like this –
What has changed? A hotel which was probably called as ‘XYZ’ hotel – an unrecognizable brand name is now called ‘Oyo’ hotel. And there are tens of listings in the search results. (I counted at least 16 listings for Jaipur out of total 340 results) Even if I am not aware of the brand ‘OYO’, the moment I see a number of ‘OYO’ listings in my search results, I would become familiar with the brand. And the moment I see it again – if I am going on other vacation and am looking for hotels– I would probably end up trying it.
Let us understand what has happened here. Our pattern of booking a hotel room has changed. Something that used to happen on a phone or through agents is now happening on a search-results-page which is curated by experts and fellow travellers. An ‘XYZ’ hotel could earlier liaise with booking agents like Thomas Cook or Kuoni and pay them a commission to sell its inventory of rooms. These were familiar brand names and therefore it made sense for XYZ to liaise with them. However, as now this inventory is accessed directly on a search page, there is no familiar brand name that could be relied upon. Brand aggregation – soliciting multiple such hotels under a common name – increases familiarity and thus help sell inventory for these hotels.
Let us explore a few other dimensions of the business model which make the aggregation at the front-end possible. One is the pattern of search which we have talked about earlier which facilitates an aggregator brand having an edge over a ‘mom and pop’ brand. Second is the demand supply scenario – only if there is sufficient unsold inventory available – in this case unsold rooms which cannot be sold under the given brand (XYZ), then inventory can be aggregated under a bigger brand (OYO) and the demand which gets pooled is higher than the demand of the individual ‘mom and pop’ brand operators. Thirdly is the marginal cost of servicing this additional demand. That needs to be fairly low. An unsold room has little cost associated with its occupancy. Virtually all the revenue that comes in by occupying this perishable unit of inventory comes as profit. This, therefore, determines the operator behaviour – there is huge incentive to sell extra inventory even if it gets sold at huge discounts. And the final aspect is related to operational excellence – why would OYO or any other brand aggregator be a preferred destination for customers. Surely not just because it is more visible! That might drive trials but for long term loyalty, the brand aggregator needs to deliver more than just familiarity. The brand operator needs to standardize services, ensure a certain minimum quality and build a brand in the truest sense – through servicing customers and responding to their needs in the best possible way. This is not trivial. This not only takes time but requires superlative execution excellence.
I think brand aggregation is possible in a lot of industries which are currently fragmented. We have seen this happen in the taxi space (Uber, Ola). In some sense, marketplace models of Snapdeal and Amazon are also examples of such large aggregator brands. Medical testing labs are being aggregated as we speak. Labstreet, Medd, Labsadvisor are some of the companies that have raised funding in this space.
The key point in brand aggregation based business models is to build supporting back-end operations which delivers additional value and drive sustainability. Relying on just front-end aggregation would only deliver familiarity which would not stick. A lot of operationalwork is needed to make the businessmodel a success.
