We've been skeptics of Hopper since Skift's launch. They've been proving us wrong lately, and that's OK.
Hopper CEO and co-founder Frederic Lalonde spoke with Skift Executive Editor Dennis Schaal at Skift Global Forum 2021. The two discussed the theme “The Future of SuperApps and Mobile.”
You can watch a full video of their discussion as well as read a transcript of it, below.
Dennis Schaal: Fred, thank you for being here. Really appreciate it. Please put some questions for Fred in the app. I’ll be your best friend if you do that. So Hopper is really leading the charge and doing some things that haven’t been tried before in online travel, so I want to hear all about that. And then you have some contrarian views about a few things that I would definitely like to hear about as well. So for people who don’t know, could you explain what Hopper is and how you make money?
Frederick Lalonde: Yeah, so we started a long time ago.
Lalonde: Yes, and we took a long time to launch. This was the days of the lean startup we were supposed to build in six days, and we took six years. We started aggregating GDS data to forecast the future, and we did a bunch of dumb things in between, and I remember some people writing about us, the first things we launched. But where we really got our traction is we were helping people figure out when to buy, and you would think that airfare completely consolidated, all of the problems were solved, but everybody that you know, if they know you work in [inaudible], is like, “When should I buy this ticket?” And Hopper basically solved that.
We launched as an app only, which was super weird in 2015, and as a consequence of that, we became the brand of choice of pretty much anybody under 40. Almost nobody under 40 knows who we are. So we’re the largest travel app. We get more downloads than Booking or Expedia. We have about 70 million users on this thing. And since that, we started becoming an OTA proper, so selling air, hotels, and mostly air. So it was a terrible business. We were just making no money. And so what we did pre-pandemic is we started looking at our long-term prospects, which were we were going to be the Duolingo of travel. So people using us, nobody buying when we got into the FinTech, and you can literally see on any of our charts, when we started offering what we call our financial services now, we became a viable business. So today, 70% of what we do in terms of our revenue is not selling travel. It’s these financial products.
Lalonde: Yeah, 7-0, and it’s growing faster than the travel component, even though the whole thing is growing. And the last thing I’m sure we’ll talk about is last year, and we really announced it this year, we launched Hopper Cloud, which most of you are wearing around your neck right now. So that’s why we’re sponsoring it, is so that you can read the cloud thing. And fundamentally, that is making our financial products available to third parties, other companies, Capital One was announced, one of the bigger deals. They were our anchor customers, but airlines, hotels, OTAs, just basically accelerating the adoption of FinTech in the entire travel category.
Schaal: So this would be like airlines making more on the bag fees than on the flights?
Lalonde: I mean, ancillaries are awesome. There’s one quote, I can’t remember who said it, which is, “There’s only two ways to make money in business, bundling and unbundling.”
Schaal: And rebundling.
Lalonde: Yes, and so what we did is we basically allowed customers to purchase new things, like a price freeze. It’s a real thing. We do it in air and hotel, and we make huge amounts of volumes on this. One out of four of every airline ticket that we sell on Hopper was previously frozen, and one out of four hotel room is frozen before it’s purchased. So we just made it possible for customers to buy new things in travel that didn’t exist last year or the year before.
Schaal: So when you say frozen, you charge customers like between 20 and 40 dollars to freeze the price. If it goes up beyond what you froze it for, you take the loss. I’ve heard you talk about it as a hedge fund.
Lalonde: Yeah. When you aggregate it, it comes as a hedge fund. And the way we came up with this is we were doing price forecasting, and we’re accurate to the day, a year in advance, 95% of the time, and that’s why people use us. But what about the five percent that we actually hose our customers and get it wrong and tell them to wait, and then the prices go up? So we were thinking about this and, well, that’s bad, but what if it’s a different five percent every month and it rotates across our entire user base?
So we started thinking of this idea of everybody pitch in five bucks, and if we get the forecast wrong for Dennis, we’ll pay the difference. That was the inception idea, a risk pool, right? Which people do this in insurance and in other categories. So we were thinking about that, and it turns out that for all sorts of different reasons, people want to be insulated from the yield management of the airlines and the hotels. But at the same time, this is very important to the airlines business.
So what we do is we sit in the middle and, to your point, if the price goes up, you’re paying what you froze. If it goes down, you pay the lowest. And if there’s a difference when you book, we pay out to Marriott and American Airlines, and so no effect on RM, which is why everybody likes this. So that’s interesting, but the reason it really works is if you book, we credit the price of the freeze to your booking, so it’s free. So this is just as much better way to buy stuff in travel is to put a deposit down. For us, it’s super cool because we can activate a new customer for 14 dollars instead of 470 or whatever the actual cost of the travel is. So it’s one of those rare win across the board, everybody wins.
Schaal: Right. A win-win.
Lalonde: Yes. The problem is you have to price it well, because we’re pricing the risk. When we launched this in error, first, we lost enormous amounts. It was ridiculous the amount of money we are losing on this, and the reason we can do it is the same reason that people were throwing rocks at me for our aggregating the data, is we understand future prices better than anybody else, so we can price the risk in a way that nobody else can do. Therefore, we can actually offer this product. Sometimes we get it right. Sometimes we get it wrong, but on aggregate, we do better.
Schaal: Right. So you mentioned that you were slow to get going, and so Hopper has raised $600 million, has a three and a half billion dollar valuation. Are these products that you’re doing, are they really FinTech or is this a buzzy way to up your valuation, et cetera?
Lalonde: That’s a good question. So the reason that we started calling them FinTech, we did this before it was cool. So I have that in my defense, but also it’s because we take the risk on our P&L. So one of the things that happened is we’re pretty reckless in terms of how we build product. It’s one of the reasons we’ve stayed private for so long, is so we can take risks. So what we do is we actually have that entire risk pool for price freeze, cancel for any reason, change, disruption, so we have all these products suites. These things sit on our P&L.
So we went from being an OTA with the financial P&L you would expect with that to becoming something that is getting most of its revenue from this, but also that has a stack of financial liabilities that doesn’t look anything like a software company or an OTA. It looks like a firm, in that sense of it. So I won’t say our auditors made me call it that, but when you really look at what we’re becoming as a company, especially with the cloud, where in some of these cases, we’re not even selling the travel, these are our orthogonal financial products.
One interesting point about price raise, so everybody’s losing their mind over buy now, pay later. And it’s about time because customers care about this, but about one out of three of our customers that freeze a price, when we survey them, “Why did you do that?” The answer is, “I don’t have the money in my bank account to book the whole thing. I’m waiting for my paycheck. I’m using this as a deposit,” and if you think of it, it’s actually a better version of buy now, pay later because what I’m actually doing is not making you buy, but I’m holding the price for you and you actually get to pay it later. So we actually discovered this accidentally as we got to market, that a lot of these things, even though they’re called differently on Hopper, they might actually end up being, time will tell, better version of some of the standard FinTech products that have come from outside of the travel industry, like a firm.
Schaal: Right. Do you see the endgame for Hopper as more of a B2B company or a consumer company? Because you just did this deal with Amadeus where they’re going to be distributing these sorts of products to airlines, OTAs, et cetera.
Schaal: Okay. Yes what?
Lalonde: Yes to all those things.
Lalonde: So a more interesting way to ask that question could have been, “Why are you stupid enough to take your financial products and give it to your competitors?” I’m surprised you didn’t ask it. But the fundamental reason that we’re doing the B2B thing is because we obsess about lowering the cost of travel to our customers, and I will use the ugly word. We’re here to steal share from Expedia and Booking all day.
I’m a private company. I can talk differently about these things, and so the way we do that is we drop the price of travel. So we do this through … We have a wallet, a digital wallet, and of course the unit is called a carrot, right? And so you can earn carrots. Some of you might have them if you have that right now. But the point is customers respond to a two dollar difference on airfare. They’ll decide where they’ll book on a $300 average order value. It’s primarily about price at the end of the day, in leisure.
So that segment, our app is pretty good at, generationally. But if you think the whole TAM, the last Bain number I saw, travel is going to be two trillion dollars when it’s fully recovered. You can pick 22, 23, 24, whatever you want. The biggest segment you can get as an OTA is 400 billion. That’s where Glenn and Peter and I compete for the OTA market. But ultimately, that’s a big TAM, but Shopify is bigger, right? All comerce is bigger than that. So what we looked at and said, “Well, what if we actually made it cheaper, more convenient to book travel everywhere?” Because some people are always going to book on American Airlines, and that’s completely fine. As a customer, they’re allowed to do that. Why can’t they freeze the price?
So we use just very simple thinking around everything we do. Does a customer want it? Can we build it quickly and do something innovative? Can we make money? And when the answer is, yes, we do it. That’s the strategy. There’s nothing else. So I suspect that the app will continue to grow because we’re doing a lot of innovative things, and I suspect, or I know this, that the cloud product is going to get as large as the app or probably larger in the next 12 months.
Schaal: Right. I’ve asked several speakers about super apps. They’re super big in China, Southeast Asia, and Dara, former Expedia CEO, Uber CEO now, he says, “No, they’re definitely not coming to the west. It’s an Asia thing.” I think you think a little differently about that.
Lalonde: I’m obsessed with this.
Lalonde: So our thesis at Hopper is that the east, China and Asia, is ahead of the west in terms of customer behavior. And so you’ve got to be careful looking at what old guys like you and me do. If you have kids or teenagers and you look at what they’re doing with their phones, it’s not an incremental change. It’s completely different behavior, and so the way that we use social media in the west, the way that we do commerce is totally different than China. True. But if you slice it generationally and you start to look at what in millennial 2000 and Gen Z, their behavior starts to look a lot more like what you see in Latin America and Asia, not just the mobile use, but how they use it.
And so here’s my thesis, right? On the web, so if you think the primary device is the desktop, and you use Google for almost everything because, as a customer, we are going to compare, on average, 34 websites before we book something, and 10 times that’s Trip Advisor because he’s really good at getting in Google, and Google is almost all of that. On a phone, switching between 34 apps that do the same thing is a mental illness. Nobody does that, right? That’s the strategy, right? On the phone, you pick one third-party app, and maybe a supplier app, and that’s what you’re using. And that’s the end of the day.
So when you look at the mobile share between third-party and supplier, like take OTA over here and direct over here, you actually see that both constituencies are growing equally, but, and this is hard to do, if you pull out app only, forget the mobile web that old guys like us do, but nobody under 35-
Schaal: Second reference to old guys.
Lalonde: Yeah. Glenn also did the same thing. So if you look at that on app, which is most of phone time, the aggregators are winning massive share because you launch an app. You don’t go Google, then Google get the app. And this is how, I have some proof of my theory here, we have gotten to 17 million users with our app, and I have functionally given Google zero money in eight years. They’re not part of that ecosystem, and so my thesis is that there will be a western global super app for travel. It may actually be owned by one of the e-commerce giants. So it might be Amazon. It might be Alibaba, Google, or Facebook, or one of these guys, but it will be app commerce and it will be super app, and we’re obsessed with this idea, and we’re trying to become that.
Schaal: Do you hear anybody clamoring to do everything on one app in the west? I mean, Google is under antitrust scrutiny for being a monopoly, controlling too much of the web. Do people really want to do all their travel using Facebook or Amazon? We saw an airline consolidation limiting choice. I just don’t see people clamoring for this kind of thing.
Lalonde: Because we’re doing it wrong.
Lalonde: Everything we’re doing in the west, for this thesis, is wrong. So I’ll take my favorite example, which we talked about, like Pinduoduo. Okay, so raise your hand in this room if you know what Pinduoduo is. For the record-
Schaal: Only because I talk to him.
Lalonde: Yeah. So Pinduoduo is actually the largest e-commerce app in China. It’s available in the west, it’s all in Chinese, but you can take a look at it. And it is this absurd mix of gamification, live streaming, and they actually have the largest, fastest ramp-up to five billion dollars of revenue, faster than Alibaba, faster than ByteDance. And they’re actually publicly traded at 100 billion now. And so what did these guys do? How did they do it? They literally don’t acquire customers, yet they have 750 million monthly active users, and yes, they sell travel. It’s actually the last tab.
Schaal: They just launched flights.
Lalonde: They just did it, yeah. And they have hotels, actually. So what they did is they said, “People are willing to invest time doing various things, comparison shopping, comparing this, going here, to save money in commerce in general and in travel. We will put that in the app, but make it fun.” So you can literally, this is a true thing, water a tree, like a Tamagotchi, and at the end of a week, you get free fruit. This is actually one of the things that they do.
They have this other thing where if I invite you and we shake our phones together, at the same time, we will get booking credit. They have another thing where we can start what’s called a team where we decide that we’re going to Fort Lauderdale and we shop or book at the same time, and the more people I invite to my team or your team, if you start it, the more discount. The point is this app does one thing that I’ve never seen. If you engage with it, like with Duolingo, you get real money back. Facebook, Amazon, name all the western companies. We don’t-
Schaal: Just for using it?
Lalonde: Just for using it.
Lalonde: And so, typically, OTAs will spend 20, 40, 50 dollars a customer to acquire a customer, and we’re forking that out to Facebook and Snapchat and Google, which is okay, but why don’t I give this to you as the customer in the app? So today our spend budget, our digital marketing budget is way over 100 million a year. So we’re still, in order of magnitude, smaller than the big guys, but we’re up there. We almost give twice as much of that in app, and my goal is to have a marketing budget of zero, and we’re trying to figure that out. So I think you’re not seeing this pickup in the west because we are doing it wrong because we don’t understand how customers are going to behave in the future.
Schaal: Right. I’m going to get to the audience question, but first I want to ask you, you also believe that super apps, it’s a travel super app coming to the west. It might take 10 years for it to get traction and that it will make Google irrelevant and that Expedia and Booking.com can’t do it because it’s not in their game plan. So expound on that.
Lalonde: So Google as a company won’t be irrelevant. They own half the infrastructure to fiber, Android, all that. But I think searching, going to a keyword will lose share. And actually, there’s proof of this. This is almost five years ago, product searches on Amazon and just raw numbers of searches over to Google, not all searches, but the product searches on Google, and if you look at Amazon’s advertising business, it’s just phenomenal because they’re letting people bid for those commerce pages.
So I don’t think it’s in the DNA of Google to disrupt themselves completely. Although, they’re a very innovative company and I wouldn’t short them on anything, but also a lot of people are upset. How many people got on this stage and complained about something they’re doing, right? Part of it is it’s been around for a while. The Expedia and the Bookings, it’s because, look, they have a great gig. They put five billion into Google and they get nine billion back, when there’s not a pandemic. So come on, of course they’re going to keep doing that. And then they have to worry about all the other stuff that’s happening.
This is one of those things where you have to be built, your DNA has to be built from the ground up completely differently. How many hundreds of millions of dollars of revenue am I forfeiting by not being on the web? You can’t book air on the web, on Hopper. So it’s probably a lot. Is that going to make me more likely to come up with a super app model that works in the west? Yes. Will we succeed? Well, let’s talk in five years.
Schaal: Come back in five years for it. I do want to ask this audience question. Do you have any plans to start accepting virtual currency?
Lalonde: We’re very interested in all currency. So right now we give credit in the form of carrots, that being real money, being fungible to dollars, Bitcoin. So there’s one thing, and we always build from our customers. We don’t sit in a room and do a strategy thing. We ask our customers questions and when they need things, we try to make them. So there’s this one stat, which I believe is more universal than Hopper, 70% of our customers, and these are predominantly leisure customers, say that they have a separate saving account where they put money that is just for travel. So they’re saving up for their trips, right?
And so think of what Alibaba did with Ant. If you take a FinTech lens on making travel more affordable, to me, you have some Bitcoin and you want to use it to go to a Marriott, I should be enabling that. So my answer is yes. Is that top of our priority list? No. We’re much more interested in getting the wallet infrastructure right, which is something that western companies suck at. We’re terrible at the wallet. Even in India and in Southeast Asia, they’re better at it than us.
Schaal: Fred, we’re out of time, but, yes or no answers, SPAC or IPO in the next year?
Lalonde: No SPAC, no IPO in the next year.
Lalonde: Private rocks.
Schaal: All right. Thank you very much.
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