Guest Houses in India: business model, basics & more

Indian guest house & budget hotel industry – 2016

Guest houses in India have been synonymous with home stays, reasonably priced accommodation and a casual setup. Not any more – with hotel aggregators, OTA’s and even star hotels getting into the alternative stay market, the market is evolving fast. Customer expectations are higher than they have ever been and service standard are only on their way up. As per some estimates, Indian guest house / budget hotel space provides the best luxury for money in Asia after Vietnam.

Front view of an Indian guest house
Guest Houses are like small budget hotels

What really is a “Guest House” in Indian parlance?

Indian Budget hotels are feeling the heat of increased competition right now – as per some estimates, there could be consolidation in the industry soon. Guesthouses typically have been 20-30 rooms or suites on offer – they are generally privately owned and operated. However with many hotel chains looking at lower cost models, the lines between budget hotels and guesthouses have blurred.

  • Guests don’t view them as separate offering as the price points are similar. The essential difference now exists very much in name as guest houses improve quality offering and often surpass budget hotels chains in terms of customer satisfaction scores.
  • Their advantages lies in the fact that they are more nimble, don’t have many legacy issues and are well run establishments with low hierarchy.

But his was not always the case as guest houses in the past have been synonymous with non uniform practices. Guest houses are now being judged not by how homely a stay they provide, but how professional the staff is and whether they provide value for money to the economy traveler.

Marketing your Guest House online- Navigate the web.

For guest houses, the choices for online listing are many and varied. The questions that arise are

  • Should I bother about what customer write about me on Tripadvisor and many online channels to have? Should I have a basic website?
  • Do i need a channel manager for managing all the channels?
  • What about new peer to peer platforms like Airbnb and Stayzilla?

Funny guest house cartoon

Don’t over promise – Online reputations are critical!

As customers become more aware of the choices and the information on the internet – online reputations become critical. The average rate difference between virtually identical but different rated (3.5 star Vs 4.5 star) property on Tripadvisor was a whopping 20%!!

Reviews are important and now every site is collecting reviews – Makemytrip, Tripadvisor, Goibibo and Booking. These are genuine user reviews and hence have a lot of weight in the future travelers mind – learn to manage your online reputation with a software like Trust you or Customer Alliance – expensive though they may be, they are critical to long term sustainability.

Indian market – What value do OTA’s offer to guest houses?

The Indian travel market has evolved rapidly with OTA’s and aggregators looking for a slice of the economy traveler pie – a huge slice in a country like India (by some estimates about USD 55 Bn in revenues annually). But a single property guest houses always faces a dilemma of where to spend their marketing rupees. Marketing ROI typically falls rapidly as the number of OTA’s one is working with goes beyond 5. Hence the rules of thumb – 1:5 works well – one OTA for every 5 rooms to sell. Top 5 OTA’s in India

  • – Now covers almost every Indian city and claims to have 20,000 independent listings in India. Has a highly interactive back-end for hoteliers and highly trusted by International travelers – not one to miss out on
  • Expedia – One of the first OTA’s but not what it used to be as their back-end is antiquated and their on boarding team isn’t very nimble. The issues with the portal include the payment system which takes a much larger commission than others – but something they are now fixing.
  • Makemytrip – Claims to be India’s number 1 travel site, but has focused on hotel segment only lately. Their service may not be as nimble as the new age OTAs but legacy has its benefits, as they have a strong B2B presence.
  • – Has been around for a long time, focusing on just reviews. This behemoth is now getting into Direct Bookings and hence transforming into a OTA. With its massive database and user traction, this one is worth watching out for.
  • Goibibo – The latest and most aggressive player in the Indian OTA space. They have taken to aggressively promote their portal through discounts and a good user experience. Worth tying up with surely.

Independent guest houses have the ability to compete effectively on their reputation and reviews alone without having to rely on deep discounting. A single property owner can easily manage his inventory on 5 channels on a daily basis. Multi property hospitality companies unfortunately don’t have that luxury and hence rely on multiple channels, with a proper tech team.

Should you tie up with an aggregator like OYO or not?

This is a question a vast majority of guest houses are now asking themselves…to go or not to go? Aggregators offer a quick solution to the occupancy problem. Answer these questions for yourself

  • Are you confident that you can update your OTA inventory and prices in 5 portals regularly?
  • Are you capable of creating a simple website for information purposes?
  • Are you comfortable with basic technology like MS Office?
  • Are you facing occupancy issues for your guest house even in the high season?
  • Do you have a brand name that is locally relevant – i.e people recognize your guest house in the surrounding areas?

If most of the answers to the above are no, then go for OYO Rooms or other such aggregators. But would you be happy to come under the umbrella of a larger (not necessarily better) brand and forgo your independent identity?

What are the economics of the OTA industry? OTA Rankings are important, but direct bookings are the best!

The OTA industry follows a single yield curve for most hospitality companies. There is a break even point in terms of rooms sold Vs commission which is the indifference point. The indifference point is variable service cost (about 55%) + OTA commission (About 20%). Below this price point, a guest house should  not be selling its rooms – so any budget hotels offering a discount + commission more than 30% is losing money! Not only this, there are issues with selling heavily discounted rooms as the guest house cannot adequately service them, leading to further reputational damage and pressure on room rates – vicious cycle continues! High OTA Commissions driven by poor rankings can cut your profits in half! Direct bookings are the way to building a high profit business.

OTA economics for India guest house
OTA economics for Indian guest house

But, skimping on costs isn’t a great strategy!

Taking two examples of to illustrate the profitability difference between two hypothetical guest houses in India (even assuming similar occupancy rates)

“Well run” Indian guest house

Assumptions – Number of rooms = 30, Base price per room in city = INR 2000, Reputation / Premium discount = INR 500, Fixed service cost per room = INR 500, Variable cost per occupied room = INR 750

Gross Profit at 70% occupancy = INR (2000 + 500 – 750 – 500) * 30 * 30 * 70% ~ INR 750,000

“Poorly run” Indian guest house

Assumptions – Number of rooms = 30, Base price per room in city = INR 2000, Reputation / Premium discount = – INR 500, Fixed service cost per room = INR 500, Variable cost per occupied room = INR 300

Gross Profit at 70% occupancy = INR (2000 – 500 – 500 – 300) * 30 * 30 * 70% ~ INR 350,000

Even with very conservative assumptions, one sees that the profit difference between a good and a “budget/poorly run” Indian guest house can be 2.5X-3X.

How to differentiate in a crowded market? Don’t become a commodity!

Differentiation in a crowded Indian market where there are multiple aggregators claiming to sell “luxury rooms at budget prices” (however paradoxical that may sound) is to created a brand identify. A hospitality brand is different from a product brand as it encompasses an experience and not just a product – which is where the aggregators who claim to standardize things are probably not in sync with your owner’s priorities. It is not possible to standardize experience in differently built properties with different managements having different attitudes towards customer service. Instead of standardization, one should highlight unique things about each property through reviews and testimonials!

Indian guest house business (Delhi NCR)- The essential self check list

Good! Now that you have decided that you want to be independent, its best to run through the checklist you need for success. Want to run an independent guest house, you need these ingredients

  • The “service mindset” – This is by far is the most important ingredient to success as it can’t be bought, created or dramatically altered. It will determine your approach to the business as you will be faced with dilemmas about boosting profitability as the cost of guest satisfaction. There will be hard decisions related to staffing maintenance, operations, guest comfort which will test you on a near daily basis.
  • Comfort with Technology – Since roughly 60% of bookings are generated by OTA/Online channels your ability to independently manage all the channels will be a long term determinant of your success. It may not be financial feasible to hire a tech team if you have limited inventory. Anyone can make a website easily on Weebly.
  • F&B Skills Given that food is debatable the second most important factor for choosing a hotel (after location), this will be a make or break. Many complaints and poor online reviews relate to inadequate food service. If you are not a food expert, go out and hire one!
  • Organizational skills Many people start guesthouses underestimating the organizational skills required to run it. A hotel operation is a fairly complex one – with material flow, regular client interactions, accounting and branding. Of course you don’t need top end system used in star hotels, but basic book keeping and operations management is necessary. You don’t want the back generator to die on you at your big launch party!

One of the other options is of course tying up with a well known brand for franchise opportunities – similar to what Perch Arbor Suites provides – right from concept to operational details as well as management support. With these handy tips in mind, a bit of preparation and a good team, take the plunge headlong into the hurly burly world of Indian hospitality!