Running any business is all about obtaining your goals while managing your risk. For the more tangible destructive and debilitating aspects of the venture, you can actually take insurance to mitigate those acts of God. We’re talking about such fires, tornadoes, and freak accidents. But, what about aspects of the venture you cannot take out an insurance claims? Operations? Staffing? Marketing efficiency? Well, at least for marketing there is something you can do; you can manage your marketing efforts like a hedge fund.
Let’s say 65% of your bookings all come from the big, bad booking sites such as the Hostelworld, Booking.com, Expedia, and other OTAs. Now say that 15% are groups, and the rest are made directly on your own website or by phone. This means that you are heavily dependent on the commission heavy OTAs. So ask yourself what can you do to increase your share of direct bookings? Marketing, marketing and more marketing. In fact every mode of marketing falls here, and by improving your success in your marketing strategy overall, you are becoming less and less dependent on the OTAs.
This takes time, planning and execution. First you determine your target market, then break them down into personas, which you investigate the behaviors and habits of these personas to then formulate a strategy on how to reach them. This involves many little hypotheses and experiments, over and over again. You track each of these, find what is working, what is not, and continually adjust. In time you will have a strong understanding of what is working and what is not, what is safe and what is risky, and perhaps what’s really worth the risk. This is where the real fun begins.
With hedging, you are assigning a values to these marketing efforts, overvaluing some and undervaluing others. Here you seek the optimal performance with the optimal risk involved to maximize your return. This zone in which you narrow down your efforts is known as the efficient frontier. And all this only works if you diversify. Try anything and everything to figure out what works. Create campaigns across many channels, in a dynamic nature that can change over time too. You are constantly testing and exploration of new marketing distributions. Just like you should not be dependent on any one booking site, you should also not become dependent on any one marketing channel. This spreads the risk of total falure across all your efforts, giving you some protection against risk.
For example, Hostelworld could raise its rates, yes again, and if you receive 100% of your reservations from them, you’d have to deal with it. The same goes for your own marketing efforts. If you invested fully into a content marketing strategy, a safe and conservative bed, and then Google’s SEO Panda algorithm goes wild, drops you rank to a point your potential customers cannot find the content, you would have to deal with it at least until the algorithm corrects itself. The same goes for unexpected increases in paid search advertising caused by a bidding war, influencers getting too popular for you and demanding more money, the list can go on. Play the field, find what works, and never become too reliant on one.
Well, back to all that fancy numbers stuff. I can go into how you can calculate your expected return or variance, but I’m not a number crunching hedgefund guru, but Gaurav Agarwal is and luckily for us he gave a talk to the most recent class in the 500 Startups tech accelerator, who then posted a video of it, and the slides, and event the worksheet too.
Sure you’ll have to adjust the difference from marketing for a tech startup to marketing for a hostel, but it can’t be much more difficult that adjusting a risk portfolio from stock and bonds to marketing efforts. So watch his video if this is something that interests you, and you like numbers, give it a try, and let us know how it goes.