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Oyo Franchise Model

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Business Studies

Oyo Rooms is a billion-dollar startup that was founded by a college dropout

Oyo is India's biggest hospitality business, providing rooms in various locations all over India which comprise mainly of budget hotels. In 2013, Oyo was founded by Ritesh Agarwal and it has grown to almost 450, 000 hotels in 500 towns, not just in India itself but in China, Malaysia, Nepal and Indonesia.

Oyo was formerly known as Oravel Stays and used to be a website to book affordable accommodations. In order to provide an alike and comfortable experience for the guests in different cities, Oyo partnered with hotels. In 2018, Oyo raised around $ 1 billion, a sizable majority of funding was from Softbank's dream fund, Light Speed, Sequoia, and Green Oaks Capital.

After dropping out of college back in 2012, Ritesh Agarwal started Oravel Stays. Since Ritesh was a passionate traveller, he understood that the affordable accommodation sector had many deficiencies. Oravel Stays was his first startup, where he designed a platform for customers to easily enable them to list and book budget accommodation. Hence, in 2013, he renamed Oravel to Oyo Rooms with the main vision to offer budgeted and standardised accommodations.

OYO Business Model

Initially, Oyo Rooms implemented an aggregator model which included leasing some rooms from partner hotels and offering them under Oyo's own brand name. They used the model to implement similar standards and create a user-friendly atmosphere in the hotels, hence maintaining the quality standards, particularly for its customers. The partner hotels offered standardized services to guests in those rooms, as per their contract with Oyo Rooms. Also, the booking of these rooms was done with the Oyo Rooms website.

An aggregator model is a networking e-commerce business model in which a company (aggregator), gets together information and data in one place for a specific product/service that is offered by numerous competitors (Pereira, 2020).

With this approach, Oyo would get a substantial discount from the hotels as they would book the rooms in advance for the entire year. Hotels took the advantage of mass booking in advance and, on the other hand, customers got huge discounts.

However, since 2018 the business model has changed from an aggregator to a franchise model. Now, Oyo does not lease hotel rooms any longer, but the partner hotels are operating as franchises instead. They have made contacts with the hotels to operate under their name. With this change in model, Oyo now generates nearly 90% of its revenue from the franchise model.

Take a look at our explanation on Franchising to revise how this form of business operates.

Oyo Revenue Model

When Oyo operated with an aggregator business model it satisfied not only the customers but the hotel management as well. It made payments to hotels well in advance and was eventually offered huge discounts from the hotel. Let's see this with an example:

Let's assume that:

Cost of 1 room / night = 1900 Indian Rs

Oyo gets a discount of 50%

Total discount for Oyo = 1900 * 0.5 = 950 Indian Rs

Oyo resells the room at 1300 Indian Rs.

Therefore, the customer saves 600 Indian Rs.

Oyo's profit = 1300 - 950 = 350, so 350 Indian Rs / room

Having trouble understanding the calculations? Take a look at our explanation on Profit.

Now with the franchise model, Oyo Rooms charge a commission of 22% from its partners. Nonetheless, this commission may differ depending on the services offered by the brand. A commission of 10-20% is usually paid as a reservation fee by the customer when booking the hotel room. Customers can also buy a membership from Oyo which ranges from 500-to 3000 RS.

Oyo Business Strategy

In comparison with Oyo, all other hotel chains in India collectively do not have even half the number of rooms as Oyo. In a span of a few years, Oyo has grown as a hotel chain in more than 330 cities globally. It did not achieve this success overnight but had to work hard for where it is now.

Here is a list of some of the strategies used by Oyo:

Standardised Hospitality

One of the key aspects that differentiate Oyo from its rivals is standardized hospitality. This assists the company in enhancing customer service. The experience of customers differs from that of Airbnb. Airbnb connects the visitor and the host in a particular location. But with Oyo Rooms, the provider is completely responsible for delivering all the services assured to the customers.

Price Strategy

Oyo Room attracts customers by offering low prices relative to the original price offered by the hotel. The key aim is to provide a price that matches the budget of the customers.

Promotional Strategy

Oyo recognizes the reach and impact of social media and hence prefers to promote through various platforms such as Facebook, Twitter, etc. Oyo heavily utilizes these platforms to attract new customers with its distinctive services and affordable prices. In order to retain its customers' loyalty, it comes up with new discount offerings with even lower prices. Oyo has also used different celebrities in different campaigns to attract more customers.

Customer Relationships

Oyo stays in contact with its customers in different ways. This can be either via the hotel's employees or via Oyo's app. Customers can reach out for assistance 24 hours a day and 7 days a week. In addition, Oyo is very active on different social media platforms and therefore employs several marketing techniques for communicating with the public.

Strategies to Overcome Corona Virus Impact

The pandemic severely affected the hospitality sector, Oyo attempted to make cancellations easier for its customers. They also gave travellers credits which the customers could use to rebook a stay later on. This helped maintain a positive relationship with customers even during difficult times.

Oyo Initial Public Offering

An initial public offering (IPO) includes listing the company on a public stock exchange for the very first time.

The Indian hotel chain Oyo Rooms plans to raise around Rs 84.3 billion (which is approximately $ 1.16 billion) in its initial public offering. Oyo plans on issuing new shares of up to Rs 70 billion while present shareholders can sell their shares worth Rs 14.3 billion.

As a reminder of the role of shareholders in a company, check out our explanation on shareholders.

The main investors of Oyo are SoftBank vision fund, Lightspeed venture partners, and Sequoia Capital India. The biggest shareholder of Oyo is SVF India Holdings Ltd, which is a subsidiary of SoftBank and owns a 46.62% share in the company. It will be selling shares worth around $ 175 million in the initial public offering. Oyo plans to use these proceeds for paying off prevailing obligations and for the growth of the company which may comprise mergers and acquisitions.

Criticism

On one hand, Oyo Rooms has become the biggest hotel chain in India in a short period of time. On the other hand, it has also been criticized for a number of reasons. Firstly, Oyo's move for creating and maintain a digital registry that will record the check-in and check-out details of its guests is controversial. Whilst Oyo is defending itself and declares that the data will be safe and secure and will only be given to any investigative agency if they provide a relevant order according to the law. However, those conflicting with this move state that due to the absence of clear privacy regulations in the country, such data sharing can not be regarded as safe.

Secondly, there is also an uproar from the hotels about additional fees and non-payment of bills. Oyo disagrees and says these are penalties charged if there is a failure to provide customer service. In addition, there were cases of fraud from employees who kept the guests checked in even after they left, cleaned the rooms and resold them for cash to other people, and kept the money for themselves.

Nonetheless, Oyo Rooms, despite a lot of criticism, is trying to overcome the challenges it faces. In a short span of time, it has increasingly grown not just in India but expanded in other parts of the world as well. Also, with its initial public offering, it will be able to sell its share to the public and use those proceeds to further the growth of the company.

Oyo Franchise Model - Key Takeaways

  • Oyo is India's biggest hospitality business providing standardized rooms in various locations all over India comprising majorly budget hotels.
  • Oyo was founded by a college dropout named Ritesh Agarwal. Ritesh's entrepreneurial journey began at the age of 17.
  • Oyo was formerly known as Oravel Stays and used to be a website to book affordable accommodations.
  • Oravel Stay was renamed Oyo Rooms with the main vision to offer budgeted and standardized accommodations.
  • Oyo raised around $ 1 billion. A sizable majority of funding was from Softbank's dream fund, Light Speed, Sequoia, and Green Oaks Capital.
  • Oyo has grown as a hotel chain in more than 330 cities globally in a short span of time.
  • Oyo's business model initially was to implement an aggregator model which included leasing some rooms from the partner hotels and offering them under its own brand name available for booking on its website. Oyo would get heavy discounts from hotels and therefore would offer lower prices to customers.
  • In 2018, Oyo changed its business model to a franchise model.
  • Oyo's business strategy is to provide standardized hospitality, lower prices due to discounts, heavily promote on different social media platforms, stay in constant contact with customers via employees and its app, and offer easy cancellation and credit to rebook during Covid-19.
  • Oyo is criticized for creating and maintaining a digital registry, for several hotels not having mandatory licenses, an uproar from hotels about additional fees and non-payment of bills, and employee fraud.

Sources:

Explified, https://explified.com/case-study-of-oyo-business-model/

LAPAAS, https://lapaas.com/oyo-business-model/

Fistpost, https://www.firstpost.com/tech/news-analysis/oyo-rooms-accused-of-questionable-practices-toxic-culture-and-fraud-by-former-employees-hotel-partners-7854821 .html

CNBC, https://www.cnbc.com/2021/10/01/softbank-backed-indian-start-up-oyo-files-for-1point2-billion-ipo.html#:~:text=Indian% 20hotel% 20chain% 20Oyo% 20is, sell% 20shares% 20worth% 20up% 20to14

Promote Digitally, https://promotedigitally.com/revenue-model-of-oyo/#Revenue_Model_of_Oyo

BusinessToday, https://www.businesstoday.in/latest/corporate/story/oyos-ipo-prospectus-all-you-must-know-about-company-financials-future-plans-308446-2021-10-04

The News Minute, https://www.thenewsminute.com/article/oyo-faces-criticism-over-plan-share-real-time-guest-data-government-95182

Business Model Analyst, https://businessmodelanalyst.com/aggregator-business-model/

Feedough, https://www.feedough.com/business-model-oyo-rooms/

Fortune India, https://www.fortuneindia.com/enterprise/a-host-of-troubles-for-oyo/104512

Oyo Franchise Model

Own your own rooms.

The initial business model was to lease rooms in hotels and offer them under the Oyo brand name. Since Oyo used to book rooms in advance for the whole year and would get heavy discounts from hotels it could offer lower prices to customers. Oyo implemented similar standards and created a user-friendly atmosphere in the hotels, hence maintaining the quality standards, particularly for its customers. This model was later changed to a franchise model in 2018.

Oyo Rooms had existing hotel partners with which it made franchising agreements whereby Oyo would receive a commission from them.

Oyo got investments of about $ 1 billion. A sizable majority of funding was from Softbank's dream fund, Light Speed, Sequoia, and Green Oaks Capital. This means there is some potential in the startup which is attracting heavy investments. 

Oyo Rooms charge a commission of 22% from its partners. Nonetheless, this commission may differ depending on the services offered by the brand. 

Final Oyo Franchise Model Quiz

Question

Who founded Oyo rooms?


Show answer

Answer

Ritesh Agarwal

Show question

Question

When was Oyo rooms founded?


Show answer

Answer

It was founded in 2013.

Show question

Question

In which countries is Oyo rooms operating?


Show answer

Answer

India, China, Malaysia, Nepal, Indonesia, and the African Republic.

Show question

Question

What was the original name for Oyo rooms?


Show answer

Answer

Oravel Stays Pvt.Ltd

Show question

Question

What was the purpose behind starting Oyo rooms?


Show answer

Answer

Since Ritesh was a passionate traveller, he early on understood that the affordable accommodation sector had many deficiencies. Oravel Stays was his first startup for which he designed a platform for customers that will easily enable them to list and book a budget accommodation.

Show question

Question

What was the initial strategy of Oyo rooms?


Show answer

Answer

Oyo Rooms implemented an aggregator model which was to lease some rooms from the partner hotels and offer them under its own brand name.

Show question

Question

According to the aggregator model, how did the hotels keep up the standards of the startup?


Show answer

Answer

The partner hotels used to implement similar standards of Oyo rooms and created a user-friendly atmosphere in the hotels, hence maintaining the quality standards particularly for its customers. The partner hotels offered standardised services to the guests in those rooms according to their contract with Oyo Rooms.

Show question

Question

How did Oyo rooms benefit from its business model?


Show answer

Answer

With this approach Oyo would get a substantial discount form the hotels because they used to book the rooms in advance for the entire year. Hotels took the advantage of mass booking in advance and on the other hand customers got huge discounts.

Show question

Question

What is the Oyo rooms franchise model?


Show answer

Answer

Since 2018, the business model has changed from aggregator to franchise model. Now, Oyo do not lease hotel rooms any longer, but the partner hotels are operating as franchises instead. They have made contracts with the hotels to operate under their name. With this change in model, Oyo now generates nearly 90% of its revenue from the franchise model.

Show question

Question

What is Oyo rooms promotional strategy?


Show answer

Answer

Oyo recognized the reach and impact of social media and hence prefers to promote with different platforms such as Facebook, Twitter, etc. Oyo heavily utilizes these platforms for attracting new customers with its distinctive services and affordable prices. It also provides discounts to its customers and used celebrities for its promotional campaigns.

Show question

Question

How is Oyo able to improve customer relations?


Show answer

Answer

Oyo stay in contact with its customers in different ways. This can be either with the hotel’s employees or via Oyo’s app. Customers can reach out for assistance 24 hours a day and 7 days a week.

Show question

Question

How is Oyo rooms differentiating from its rivals?


Show answer

Answer

One of the key aspects that differentiate Oyo from its rivals is standardized hospitality. This assists the company to enhance customer service. The experience of customers differs from that of Airbnb. Airbnb connects the visitor and the host in a particular location. But with Oyo Rooms, the provider is completely responsible to deliver all the services assured to the customers.

Show question

Question

What is Oyo rooms strategy for further growth?


Show answer

Answer

It has planned to provide an initial public offering. The Indian hotel chain Oyo Rooms plans to raise around Rs 84.3 billion (which is approximately $1.16 billion) in its initial public offering. Oyo plans on issuing new shares of up to Rs 70 billion whilst present shareholders could sell their shares worth Rs 14.3 billion. 

Show question

Question

What is Oyo rooms strategy to overcome the impact of the Corona Virus?


Show answer

Answer

The pandemic severely affected the hospitality sector, Oyo attempted to make cancellations easier for its customers. They also gave traveller’s credits which the customers could use to rebook later on.

Show question

Question

What is the criticism faced by Oyo rooms?


Show answer

Answer

Oyo’s move for creating and maintaining a digital registry that will record the check-in and check-out details of its guests has been criticized. Also, several hotels did not have mandatory licenses which leave them vulnerable to random raid from the governments.

Show question

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