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The Business Model & Economics of OYO


Rooms
Written by: Kunal Pandya
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The business model of the over hyped budget hotel network OYO Rooms doesnt make sense to me for
many reasons. The next unicorn (a private company valued at over US$1 billion) in waiting appears to be
the next bye-bye story to me. In case you didnt know, we were the technology partners of OYO Rooms
(with the parent Oravel Stays) when it was into an Airbnb type of business before it pivoted to the current
business model. We at NCrypted have been partnering with startups and businesses into the vacation
rental and online accommodation business through our services and products like BistroStays. So, I know

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enough about this industry in order to be able to comment on how these businesses are run.

Is the startup publishing fake numbers to project growth?


Softbank, the lead investor in the over hyped budget hotel aggregator OYO Rooms, recently made two
announcements that included OYO Rooms growth story. If you compare that with the other numbers that
the startup publicly disclosed along with their financials available with the RoC, the story starts looking
fishy. The startup recently claimed 15x YoY growth and claimed to be profitable! Their claim to become
profitable is highly misleading. I did a very short analysis and found out that the next unicorn (a private
company valued at over US$1 billion) in waiting is poised to be the next bye-bye story unless some
miracle happens, forget about profitability. It appears that the startup desperately need to raise another
funding round or shut shop in a couple of months.

The Business Model of OYO Rooms


OYO Rooms claims to be a branded network of budget hotels and thus different from other hotel
aggregators and OTAs (Online Travel Agents) such as Goibibo, Makemytrip, Cleartrip, Yatra etc. The
business model of hotel aggregators is simple as they simply connect the guest (customer) with the hotel
by listing hotels on their website and take a commission as their revenue. Many a times they work out on
a deal with the hotels with a minimum order guarantee per month and hence are able to provide
discounted rates and deals on the room rates compared to the rates provided by the hotels directly to a
normal guest. This makes them lucrative for guests.

The way OYO Rooms operates is different from OTAs since they focus on co-branding. They are saying
that they partner with zero to 2 star hotels and even guest houses, standardize them and bring them
customers through their site and apps. Their initial marketing strategy was to list OYO properties on other
hotel aggregators but that trick got hit when sites like Makemytrip, Cleartrip and Goibibo blacklisted it.
This was funny because in many cases the hotel was having two listings on the same OTA, one directly by
itself and one through OYO although OYO would use its own branding there and thus not disclosing the
hotel name and address to anyone publicly until you book it. There are thousands of cases reported by
guests on Facebook and elsewhere wherein they were not able to locate the OYO property as they did not
disclose the hotel name and had half written address even after the booking was confirmed.

But, (bad) customer service is not where we want to focus on in this article. You might be asking, then
why are these hotels allowing OYO to use its branding with a signage outside and on top of the hotel
along with co-branding inside the room as well with its welcome kit? Especially since they dont own any
of these properties?

How is OYO Rooms able to use its own branding at these hotels if
they dont own any property?
You have to understand how these 0 to 2 star hotel owners operate. In most cases, they have other primary
businesses and the hotels are simply used as a tool to show losses. Many of them dont bother to see
regularly if their hotel is doing any business at all, lets forget about profitability. So, they are not
interested in any marketing or customer service themselves as much as it is generally required from a
hospitality business.

But, they wouldnt mind if some free money is going to come from somewhere if they dont have to move
a muscle to get that, would they?

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OYO Rooms is blocking rooms at these hotels by paying monthly


rent in advance at a discount
I stayed at several of OYO rooms and inquired at many to find out how they are working with OYO. At
one hotel that I stayed recently in Mumbai, I asked the manager how OYO Rooms is giving a room at a
much lower rate than they themselves are giving to their direct customers. He said the obvious that they
are blocking these rooms for the entire month by paying in advance. Now, we have a corporate discount
for our company at that hotel so the manager revealed the numbers to me. He said that despite this, OYO
is selling these rooms at much cheaper rates than the hotel is selling those to them. So, for example, the
hotel is selling a room to a normal guest at 2,250 Rs. per night and to a corporate guest at 2,000 Rs. per
night; their deal with OYO Rooms for several of rooms is coming to some 1,500 Rs. per night. OYO was
selling a room at 1,150 Rs. per night at that hotel. This simply means OYO Rooms is making a loss per
room per night there in order to buy customers.

This is not an unusual practice though as most of the e-commerce companies, especially in India, due to
big funding rounds, are doing the same. Acquiring customers by making losses on units. Either they dont
understand unit economics or think it will all work just fine in the end. What they fail to understand is that
a customer brought in from such a discount war is not a loyal customer. Indian consumer is a typical
money savvy one, they will stop coming to you and buying from you the day you stop giving those
discounts.

OYO is not the only one in hotel industry even though they claim that their model is innovative. A
customer doesnt care much as long as the inventory and availability is there.

Loyalty is not there with hotel partners as well. Several other hotels where I inquired I mentioned that I
found this hotel on OYO Rooms as well and they are offering a cheaper rate than the ones mentioned on
that hotels site or as conveyed on phone. They were spot on to the discount here and said we will give
you the room at the same price as which OYO is selling it to you.

And you might wonder why would they (want to) do that? The question is, why they wouldnt?
Remember, OYO Rooms has to buy out the rooms for the entire month in order to claim it as their
property and then standardize it with their kit, set up and then sell it under their brand name online. The
hotel is already happy as theyve got the money upfront irrespective of whether the inventory is utilized or
not. Whether OYO is able to resell those rooms or not is not the hotels problem since theyve got the
payment. They are worried about the unsold rooms with them now, so when a customer comes in directly,
it is a no brainer that many of these hotels try to sell their unsold rooms first to them even if they have to
match the dart cheap pricing provided by OYO. Because for a hotel with 20-25 rooms, if OYO is booking
10 of their rooms (as per their claim) for the entire month, the hotel is already hitting break even for the
given month and might already be profitable for the given month! So, they can afford to offer rooms at
such dart cheap rates now to such customers as anything is a bonus now. But, they wont do it right away
since they dont want to lose the easy money coming from OYO.

You might be thinking how I found out about that hotel from OYO Rooms since they dont reveal hotel
name and address! Well, I am not going to break any confidentiality of their site structure here. But, being
a normal customer or visitor you can find it out yourself as well. OYO brands these hotels with their
prime location and displays partial address/locality as well. For example, take this property named OYO
Rooms Vashi APMC Market. Now search on Google with its address and you will find Hotel Sarang
Heritage listed on JustDial with its contact number etc. Now, this is a random example Ive shown to you.
I havent spoken to this hotel but, as you can see in the photos as well, it is the same property that is listed
on OYO Rooms.

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Now, of course, as a normal guest you wouldnt want to do this because even if you call the hotel directly,
last thing they can do would be to match up with the OYO pricing which you are getting with OYO
anyway. Well, unless you dont trust OYO anymore due to a bad experience yourself or after reading
some horrible reviews online of customers being stranded on roads in nights despite booking in advance
with OYO Rooms.

But, like I said, I will not dig into (bad) customer service issues in this article as that is out of the scope of
my subject for this piece.

The bottom-line to understand their business model is simple OYO is a hotel room reseller. Instead of
taking a commission, they are buying out the rooms and then reselling them at their own rates. In order to
do this, they are spending money on standardizing these rooms and in co-branding as well, not to mention
many other costs attached which we will cover shortly. On paper the idea and model looks good, but, my
friend idea is cheap, implementation is everything. Lets take a look at how well they are at
implementing this now.

Talk is cheap, show me the numbers!


OYO Rooms revenues in FY 14-15 was 2.4 crores as per their filing with the RoC. Now, this turn over is
not their direct revenues earned as commission but rather the GMV (Gross Merchandise Value). GMV is
the total room selling price before discounts, cash backs and other such costs attached. Remember, if they
are selling a room at 1,500, for example, they are only making 10-20% (commission) margin from it
which is their actual revenue. But private companies take the liberty of showing GMV as their turn over
which represents a very fake number. OYO Rooms, as I mentioned above, on the other hand, is losing
money on almost many of these rooms by reselling them at bottom neck prices, way below than their
purchase price, just to get traction with the magic number of 999 per night! All of these to lure the next
round of investors by showing magnified numbers which are not existing. Even guest houses are not
available at that price in metros unless you are talking about a property right in the middle of a slum.

So, even if we be generous and consider that they are making about 20% from each room sold, that would
make it a mere 48 lacs as their actual revenue in FY 14-15. By this they already had secured more than
$25 million (more than 160 crore Rs. at 65 Rs. a US dollar) from Lightspeed Venture Partners, Sequoia
Capital and others.

Check out the companys financials disclosed with the RoC for FY 14-15.

Check out Minimum Guarantee and Minimum Tariff Loss. OYO Rooms is not only providing a
minimum guarantee to hotel partners but also is making a big loss due to unoccupied rooms. No wonder
they always have some discount deals running as those deals are used as fillers simply to increase
bookings irrespective of revenues.

How is the OYO Rooms business doing in the current fiscal year?

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OYO Rooms declared in February 16 that it has hit 1 millionth night bookings. It has been in operation
for about 2 and a half years now and claims to have 4,500 hotels in their partner network with 45,000
sell-able rooms. Now, thats 10 rooms per hotel which I think is highly unlikely given the obvious reasons
and not forgetting the founders history of lying and faking numbers for the sake of publicity and
fundraising.

But, lets take their own revealed numbers and try to analyze the business economics. Lets consider their
per room purchase cost is 1,000 and they are selling it at 1,200, giving them a handsome about 20%
margin per room per night here; which again is way too higher than the industry average but lets assume
that everybody just loves OYO and customers want to pay that much premium for that awesome stay!
Now, although they got 1 million room nights booked in over 2 years, lets be generous and assume that
they got it all in the current year itself. This will make their current year GMV at 120 crore so far and
actual revenues at 24 crore with 20% margin. Now, thats 2 crore in actual revenues per month.

OYO Rooms Revenues

Room nights/year 1,000,000


GMV @ 1,200 Rs. per room per night 120 crore Rs. per year (10 crore per month)
Margin @ a handsome 20% 24 crore Rs. per year
Margin per month @ 20% 2 crore Rs. p.m.

Now, lets talk about expenses.

As per a recent claim by the founder, OYO Rooms boasts of having about 1,200 employees. At an
average of 25,000 Rs. per month per employee, that will make it about 3 crore per month, which is itself
more than they are making from the business! Not to forget that the average salary per head would be
higher than our assumption here since most of their employees are based in Gurgaon.

OYO is also spending huge amount of VC raised money on advertising (online, TV, Radio and other mass
media channels) and on other marketing campaigns as well. People close to the advertising industry are
telling me that their TV ads could cost anywhere between 30 lacs to 3 crore per ad creative to make and
the kind of slots they were running on prime time, the total ad run budget could have been anywhere
between 20 to 100 crore. Not to mention the radio, print media and online advertising budget. OYO is
spending big bucks on online advertising especially on Google as well, estimated around 1-2 crore per
month. But, due to non availability of reliable public sources here, let us not count marketing budget for
the sake of convenience.

And, thats not where the majority of the money is going. The main expense is the inventory. Remember
they have to buy out the rooms in order to block them for their customers only. OYO is claiming to have
4,500 hotels and 45,000 rooms which seems to be an exaggeration again. But, lets be generous and
assume they at least have half of that, 22,500, rooms under their belly. As mentioned above, assuming
their buy out cost per room is 1,000 Rs., total inventory cost per month would be 67.5 crores and thus
bringing the total expenses, excluding marketing and other operating costs, to 70.5 crore per month.

OYO Rooms Expenses

Employees 1,200
Salaries @ 25,000 per employee per month 3 crore per month
Hotels 4,500
Rooms (considering an average of 5 per hotel, half of OYOs claim) 22,500
Inventory Cost 67.5 crore per month
Total Expense 70.5 crore per month (excluding advertising, marketing and other OPEX)

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It is a no brainer that with the given statistics, the business is operating at a loss of 60.5 crores per
month. This still does not include the big bucks spent on advertising, marketing and other operating costs
otherwise the number will shoot up like a rocket.

So, whats the runway?


After the Softbank lead latest funding round in August, they should be having roughly more than 700
crore in bank, assuming they didnt burn all the money from the previous round already by then.

Lets be generous and assume that their revenues are coming from April but their expenses started only
after the Softbank round in August. Now, this is a stupid calculation in itself but lets not be evil. So from
August till February gives them 6 months and if they are operating at a burn rate of 60.5 cr per month,
they would have already burnt more than 363 crore by now from the operations itself in last 6 months.
Lets assume they were burning half of this in previous 5-6 months in current FY and you will have
around 181.5 crore to add up to losses (around 544.5 OPEX expected in current year at current rate). If
you want to add up even a minimum of 50-55 crore of advertising and marketing spent here, we can
conveniently assume that they have spent at least 600 crores by now. This gives them about 2 months of
runway before the remaining cash is all spent at their current burn rate.

Important Please dont forget that our calculation here is very generous. According to what Ive found
with many hotel partners of OYO Rooms, they are under selling rooms and hence making loss on per unit
basis just to acquire customers. So, with this they dont have a handsome 20% margin here. But, we
understand that startups initially think of discounting as the only strategy to lure and acquire customers,
so assuming that eventually even if they turn around and start doing business with industry leading 20%
margin, their business still wont make sense unless their room night bookings skyrocket which doesnt
seem likely.

Whats the way ahead for OYO?


The much hyped startup OYO desperately needs to raise another round in coming 2 to 3 months, mostly
by May or latest by July 2016 in order to stay in the game. No other big investor except Softbank is
currently bullish on the Indian startup scenario due to many down rounds worldwide and speculated
consolidation in the ecosystem. Tiger Global Management is no longer interested in the Indian super
heroes story. It is unlikely that Softbank will write another greenback cheque if no other big investor is
participating and leading the round. Softbank can only see value here if another investor is leading the
next round at a higher valuation than the previous one which Softbank lead. A down round wont be good
for Softbank and its investors or LPs.

It is quite clear that the revenues are not enough to keep the business self sustained. Even if OYO grows
at a rapid 5x rate now, due to some miracle, in coming few months, the revenues still will look tiny
compared to the heavy inventory, operating and other expenses they have to keep running such a business.
This is assuming that even if they have 1 million room nights booked every two months (instead of their
current lifetime number of over 2.5 years so far), their actual revenues will be 10 crores on a GMV of 50
crore at a handsome 20% margin which will still be dwarfed by even their existing monthly expenses.

But growth doesnt seem to be happening with OYO anytime sooner as their website traffic is
continuously declining ever since the Softbank round in August despite their on-going advertising and
marketing everywhere. According to Alexa, OYO Roomss global traffic rank is down to 9552 as of today
from around 5,700 in September and is declining ever since.

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The android app downloads are also not that impressive especially after the Softbank round. In May 2015,
there were about 50,000 to 60,000 app downloads on Google Play Store which shot up to more than 1
million downloads in September, thanks to the TV ad campaigns and increased online advertising, thanks
to the latest funding round of $100 million. But, surprisingly the downloads seem to have got stagnated
since September.

Also, given the founders prima facie focus on publicity stunts and the startups expansion into Malaysia,
OYO seems to be quickly heading straight into a one way with a dead end. Now, what are you planning to
do by running a pilot test in Malaysia? Going global, going places, hitting the hot spot, dreaming to
become Indiaa very own multi national celeb startup? Well, give me a break. You are supposed to be
running a business and not a mediocre reality show on who spends the $100 million fast and furiously.
Rahul Yadav of Housing fame would have spent it quickly than my friend Ritesh Agarwal in this case as
Rahul was also reportedly planning on going global. What these champs dont understand is that you have
got to validate your business in India first because when the investors will wake up from their sweet sleep,
you will only end up having all those public spat drama.

On the other hand, Softbank could take a back seat and infuse another small round like they did for
Housing.com but that would mark the end of the super saga of the much hyped OYO Rooms.

Am I missing something? Is my data incorrect? Is my projection not having any merits? Please share your
thoughts via comments.

Disclaimer: The views are of the author and not of NCrypted. All the images used are of their respective
copyright owners.

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posted on : Friday March 4th, 2016 , Under: Industry Watch, Startups


Tags: business model for startup, economics of oyo rooms, entrepreneurship, internet business model,
oyorooms, startups

11 Responses

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1. Great math and bang on prediction there, Kunal.

I have stayed in OYO rooms but was always wondering how are they able to offer such cheap
prices. Your insights have made it clear. Sad but true that such models cant last longer.

But as a guest, I wouldnt mind!

posted by : Anirban Basu


Friday March 4th, 2016

2. Whoa! This is shocking man but your data seems to be correct!

@Softbank what is your take?

posted by : Dipen patel


Friday March 4th, 2016

3. So, oyo is going down too fast, too soon!

I guess investors wont let that happen and will fund another round to keep the party going. I dont
know why but I have the feeling.

posted by : Sakshi
Saturday March 5th, 2016

4. Seems completely out of sync with reality. Oyo stopped paying upfront ( pre purchasing) for
inventory sometime in Oct or Nov. They probably would be doing it with select hotels, but certainly
not with 22.5k hotel rooms. So, your calculations of 67.5 crore spend goes out of the window

posted by : Gopal
Wednesday March 30th, 2016

5. @Anirban Basu Thanks, and yes as a guest, enjoy the party!

@Dipen patel Thanks.

@Sakshi That is if the investors know the true burn rate or reads this article for some reason!

posted by : Kunal Pandya


Tuesday April 12th, 2016

6. @Gopal My calculation is based upon publicly available data. The numbers might not be accurate
because, as I have wrote, we have to rely on several assumptions. But the reality wouldnt be too far
from the calculation that I came up with.

However, on the other hand, you might be right as well that they are not pre purchasing all the
22.5k hotel rooms. Remember that they are claiming over 45k rooms and due to this reason only I
have counted only half of them here to consider pre purchasing. So, in a way, we have already
considered what you are saying. Still in case if you think the numbers are far away from the current
situation, kindly share reference, if you have any, wherein we have some reliable source to cite.

Or you have some insider info?

posted by : Kunal Pandya


Tuesday April 12th, 2016

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7. @Kunal Its an awesome info about an rising OYO rooms i never heard about thanks. Oyo is the
best provider for rooms. I and my friends stayed in the room lastly booked from oyo its really cool
stuff to search somewhat suits for us @ very cheap

posted by : Karthick
Saturday April 23rd, 2016

8. I am planning for a business like OYO Rooms, PayTM

Please help me get started

posted by : Anand Gupta


Thursday April 28th, 2016

9. [...] dedicada a la creacin de pginas web y que colabor en los inicios de la empresa de Agarwal,
ha puesto en duda el modelo de negocio de OYO Rooms. Para Pandya hay dos puntos flacos. El
primero es la http://www.revista80dias.es/2016/05/23/50590/oyo-rooms-pone-orden-en-la-
hoteleria-india/[...]

posted by : OYO Rooms pone orden en la hotelera india | Revista80dias: viajes, turismo,
cultura y guas
Monday May 23rd, 2016

10. You have taken inventory cost as Rs67.5 Crode but on revenue side you are taking only 3 Crores
pm (Which should be 67.50 +20%).

Am i wrong ?

posted by : Gulshan Kumar


Thursday July 7th, 2016

11. Hi Kunal,

Good article But a calculation mistake When you say 1 million rooms sale in next 2 months
The GMV comes to Rs 100 cr @ are 1000/- per room And this whole amount will cover
minimum guaranty whereas you have considered only 20% marginbecause minimum guaranty
will be covered from gross sale and not only margin

posted by : Chandan
Wednesday August 17th, 2016

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