Skift Take

HotelTonight's pivot into a 100-day booking window is a concession that the last-minute market was too small. Yet the company's swing to profitability is remarkable.

Beginning in October, mobile-only hotel booking site HotelTonight will expand from having a seven-day booking window to a 100-day booking window.

The move puts the San Francisco-based company in more direct competition with the brands owned by the large travel conglomerates that dominate online travel sales in many parts of the world: Expedia Inc., Priceline Group, and Ctrip.

HotelTonight has raised $115 million in funding. This spring, it had a Series E round of $37 million, led by venture capital firm Accel Partners.

In 2015, HotelTonight was losing about $2.5 million a month on revenue of about $33 million, as first reported by The Information.

Since then, the company has become profitable by the measure of earnings before interest, taxes, depreciation, and amortization —a standard industry figure that excludes such things as expenses related to hotel occupancy taxes.

A recurring critique of HotelTonight from scattered industry skeptics is how it can compete against the behemoths of travel. Investors like Coatue Management and Battery Ventures may expect a return on their investment that is a multiple of, say, two to four times their $115 million.

Yet HotelTonight may not be able to grow fast enough to achieve that in the face of competition. The company doesn’t disclose earnings but is estimated to have booked about $60 million in revenue last year, an approximate doubling from the previous year.

Sam Shank, HotelTonight’s chief executive and co-founder, spoke with Skift about some of the arguments from skeptics.

One question we had: How can HotelTonight compete as an online travel agency against the behemoths of the industry?

Shank said that when he and his co-founders were starting out seven years ago, they were told that the competition would crush them. Today they have 260 employees and are profitable and growing enough to impress venture capitalists at firms like Accel Partners earlier this year. That reality is a sign that there is a path forward, he said.

Skift wondered about a perceived inventory imbalance among the company’s competitors. HotelTonight has only about 25,000 hotels participating in only about 1,700 cities, while Priceline’s has 1.2 million hotels that are widely dispersed.

Shank countered that consumers shopping on mobile often prefer not to be overwhelmed by choice. On the small interface of a screen, they often prefer to have only about 15 well-curated options for any given night and destination. Repeat customers like how HotelTonight personalizes offers they can get, he said.

On the supplier side, Shank said that hotels like how HotelTonight has a rare set of tools for them for distributing. He said his company lets properties opt in and out flexibly, whereas larger competitors often have strict conditions on distributing inventory. For example, he noted that hoteliers do not have to offer inventory for 100 days out on HotelTonight if they only want to sell rooms in a tighter window, but many contracts at the big online travel agencies require rate parity or other onerous content agreements.

Shank said that his company’s ability to offer rates only to customers whose phones identify themselves as being in specific areas enables properties to activate incremental demand without starting price wars with neighboring properties.

Hotels also like how the company’s concierge program and loyalty program help draw more business out of high-spending customers, Shank said.

When Skift last looked in-depth at HotelTonight’s model by surveying hotel executives, we found that some hoteliers liked how the startup was pre-buying rooms during peak periods on a wholesale model. Shank declined to comment on whether his company is continuing with that practice or if it was one of the growth-seeking efforts — in a practice similar to one done by OYO Rooms in India — that has been stopped.

Skift also wondered about the digital marketing prowess of the behemoths and whether tiny HotelTonight is at a disadvantage in comparison to them.

Again, Shank said that the best proof is in what his company had accomplished recently, as opposed to any arguments that he might make. He said his company was able to grow profitably last year without having to spend enormously on marketing.

Looking ahead, HotelTonight plans to do more brand awareness marketing that’s different than what other travel companies typically spend on, such as outdoor advertisements on billboards in urban locations where incremental demand is the most likely. For example, the company recently ran an advertising campaign at Madison Square Garden in New York City.

Some critics have questioned the total addressable market for HotelTonight. The critique is that the company is focused on capturing travelers in limited use cases, such as those who otherwise would have gone home for the night during a spontaneous trip. Shank retorted that the new 100-day booking window would let many loyal fans of the app use it more regularly for booking trips instead of using competitors, making it more of a routine use case.

Shank noted that, a year ago, HotelTonight debuted on the mobile Web after years of being app-only. It is committed to being mobile-only overall, as that is where total travel bookings will be done by the majority of shoppers soon. And that is where his company has a competitive user experience edge over its larger rivals, he said.

Despite the bold talk, HotelTonight faces stiff competition. All of the major players implicitly offer last-minute hotels via their mobile apps and mobile web.

HotelTonight — while an elegant, slick product — faces obstacles such as a rising cost of customer acquisition. It remains unclear if it can scale at a pace that provides a meaningful return to investors.

On the other hand, there are more models of business success than rapidly scaling at the pace of an Airbnb or an Uber. Some online travel companies have grown to be solid businesses by presenting themselves as cost-effective alternative distribution channels for suppliers to the duopoly of Priceline and Expedia.

A case in point: HostelWorld, for one, had revenues of about $67 million a year when it was sold for about $250 million (€200 million) at the time, to an owner who soon after listed it on the public markets in a $230 million (€180 million) IPO. To be sure, HostelWorld didn’t have investors seeking a premium based on a $115 million investment, but it still shows a profitable, if ordinary and non-unicorn path.

We asked Shank about what companies have inspired him. He cited Zillow, an online real estate database company, which took on the incumbent He also name-checked Yelp, the reviews platform that took on and CitySearch, as success stories.

Critics might counter that if HotelTonight were as great as those companies, Priceline Group, Ctrip, or Expedia would have bought it by now — if for no other reason than to keep it out of the hands of their competitors.

Shank wouldn’t comment on those scenarios, saying that he has always hoped for an IPO.

“Overall, the growth rate is important, but there are other factors,” he said. “If you look at companies that are growing fast and executing well and are differentiated and have a massive addressable market, you’re looking at winners. We fit that description.”

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Tags: hoteltonight, mobile bookings

Photo credit: Hotel Tonight is advertising in places it hopes to find spontaneous travelers, such as New York City's Madison Square Garden. Skift

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