Everyone knows that India presents a large growth opportunity for travel businesses as its middle class widens and shifts to booking trips online.

But not everyone knows how to be profitable while building a business in India. The opportunity has sparked fierce competition, requiring local players to use discounts to build up their customer bases. That dynamic appears to have dampened profits for all players, domestic and foreign.

A case in point is India’s largest online travel agency, MakeMyTrip, with a market capitalization of $2.4 billion.

On Wednesday, MakeMyTrip reported a loss of $62 million for the quarter ended September 30, 2017. That was a 57 percent increase over the loss it had in the same period a year prior.

The news bothered investors. They shaved 9 percent off the company’s market value in trading by the market’s close.

The company noted the loss was about the same as the $68.2 million loss it reported in the prior quarter, and was mostly tied to merger-related expenses for its acquisition of rival Ibibo  earlier this year.

Yet growth at the Gurgaon, India-based company has been continuing. Its revenue rose to $152.9 million in the September quarter, up 79 percent over the same period a year earlier.

Many Rivals

MakeMyTrip, which offers flights, hotels, buses, and trains, faces competition on several fronts. For four-and-five star hotels, it saw more inventory gains and marketing-spend increases by Priceline Group-backed Booking.com this summer. On a call with investment analysts Wednesday, executives said in the quarter they saw “an increase in a gradual but measurable manner” of attention to the India market by Booking.com.

At the budget end of the lodging market, MakeMyTrip faces competition from branded booking networks such as Softbank-backed Oyo Rooms, which MakeMyTrip executives said has been “fairly aggressive this quarter” in pricing and marketing. MakeMyTrip has dropped Oyo from its search results in favor of its own branded-budget product GoStays, but Booking.com displays Oyo’s inventory.

On flights, MakeMyTrip faces Yatra as its largest homegrown competitor. Cleartrip is another player that adds to the discounting of travel products online.

Avoiding the Discounting Trap

Since last October, MakeMyTrip has taken a series of steps to try to escape from the rampant discounting in the sector that is driving margins down: consolidation, outside investment, a huge loyalty push, large technology investment, and adding products that its competitors lack.

In January, MakeMyTrip merged with Ibibo, India’s biggest hotel booking site that also sells flights, bus rides, and car sharing.

The deal enables more price discipline by uniting two large players. In the near-term, though, it has added to losses.

In the summer, MakeMyTrip raised $330 million. As a result of those transactions, South Africa-based Internet company Naspers and Chinese Internet giant Tencent are the largest shareholders in the company, owning 43 percent. The Chinese travel agent giant Ctrip owns an 11 percent stake, and has a commercial partnership.

MakeMyTrip’s next goal is to drive loyalty. To understand that push, one should note that India’s consumer travel market is far from homogenous. MakeMyTrip sees a chance to stand apart and — eventually — be profitable by targeting frequent travelers who are less price sensitive without abandoning its effort to appeal to all demographic segments.

In July, it replaced its old rewards program with a two-part new one. MMT Black Loyalty lets travelers earn vouchers redeemable for future MakeMyTrip bookings by reaching certain spending levels. More than 73,000 people have joined.

The company also debuted MMT Double Black, where consumers pay an amount — of about 1000 to 1,500 rupees (about $20 to $25) — to get access to members-only benefits, such as no fee for canceling trips under typical conditions. About 16,000 people have enrolled so far in the test program.

MakeMyTrip founder and chief executive Deep Kalra said, “We’re trying to meet a dual objective, which is to continue to keep growing across segments but also get more high-quality growth, if you will, in the premium sector…. It is not a change in strategy.”

On the product front, the company made it possible to book multiple room types within the same transaction— something that addresses the popularity of group and family travel in India.

It also added e-ticketing functionality for its three brands so that users can receive a boarding pass for flights via their mobile app.

MakeMyTrip said it is the first travel company in the world to make e-ticketing available via WhatsApp, a messaging app. WhatsApp now has about 200 million users in India and, combined with a recent increase in affordable Internet data usage via mobile devices, is becoming a cheaper channel to connect with customers than Google and Facebook.

On the technology investment, the company has invested in artificial intelligence to try to replace some of its routine call center questions with automated answers. It revamped the extranet that suppliers use to upload inventory to help hoteliers plan their distribution more strategically.

The company also installed a fresh technology platform to run its bus ticketing. Relatedly, a few months ago, it began adopting Travelport’s technology platform for certain processes.

MakeMyTrip also is trying to diversify its income stream to business travel, given that companies are more loyal and less price-sensitive than some leisure travelers. In the past few months, it debuted a tool to help companies book their travel through its platform, starting first with small and medium enterprises. It has 2,000 companies signed up, it said.

Bumpy Ride Ahead

Costs rose overall in the most recent quarter, but the company hopes to cut them long-term.

Marketing spending rose partly on offers to pay users to refer other people to download its app and book travel. But so did the efficiency of the marketing, executives claimed.

A bumpy ride is in store for MakeMyTrip. India’s income gaps are large and the pace of growth is lumpy as India has spurts of regulation and deregulation, investment and disinvestment, making consumer spending patterns tough to predict.

Activity by foreign investors also complicates matters. In the past year, majority-ownership of its rival Yatra was acquired by a special-purpose acquisition company, Terrapin 3, which in turn is backed by Australian investment bank Macquarie Group.

Expedia has yet to figure out its India strategy and is generally weak in the country while strong in Japan, Malaysia, and Singapore.

Priceline, via its Agoda brand, has traction in Vietnam, Thailand and other smaller markets in Southeast Asia. It also owns about 9 percent of Ctrip.

Ctrip has not yet expanded in a significant way its commercial partnership with MakeMyTrip. The relationship was not discussed on today’s earning’s call.

On the horizon, fast-growing, Expedia-backed Indonesian travel company Traveloka looms.

Photo Credit: Pondicherry or Puducherry literally means ‘new town.' It includes French Quarters with colonial villas and chic boutiques and a beautiful beach where one can catch a sunrise over the Bay of Bengal. MakeMyTrip