Is Hostel Rocket Set to Take Off?

UPDATE: (2/18/2015)

HostelRocket has seemed to pivot and drop their HostelsClub inventories. I will have an update on this within the next week. For a snapshot of their product, please read below. There has been lots of chatter about HostelRocket in the sector. Clients of mine have been asking me about this solution, so I figured it is about time to let the world know what I think about HostelRocket. To illustrate my view, I will introduce some general hostel management, online travel agent, and digital advertising terms mixed in with some simple math. Hostel owners and operators can take from it what they want, and hopefully, it offers some good criticism to the HostelRocket team too.

HostelRocket’s launch comes at a time when hostel owners and managers are facing increasing costs of distribution. The largest booking channel, Hostelworld, acquired its largest competitor HostelBookers and then raised its commission rates in 2013. Now many hostels are bidding away their margins through the elevate program. Hostels are desperate for an alternative to being so reliant on any one distribution channel, especially when a majority of the bookings come from one company with a 12% commission. At an allegedly 0% commission, HostelRocket could be the holy grail hostel owners have been dreaming of, or it could just be that they are desperate and would sign up for any other option out there. Their claims are quite confusing as well. Are they an OTA? Hostel metasearch? Both? Neither?

HostelRocket claims to be an OTA, which it is not

First note that HostelRocket claims to be an OTA (online travel agent), which it is not. That would entail an entirely different business model, taking bookings, processing payments, having the hostels load their rates, etc. They are an affiliate advertising channel for what looks to be HostelsClub. I might add that they beautifully pull data and take bookings through HostelsClub flawlessly. What they present themselves as, to the hostels and their investors, is a niche metasearch company (see here), which they aren’t either, well not until they add another OTA as their customer. They make it seem like they are pulling data from the booking engines of Siteminder and Myallocator, which is a way more complicated process than the OTAs. HostelRocket also claims to be the first hostel metasearch company; however, I met the founder of HostelZoo in 2012, and I was excited about his product then. Hostelz.com added meta-search functionality not too long after. HostelZoo and Hostelz have illustrated that a hostel-specific metasearch company faces nothing but an uphill battle. Metasearch relies on fierce competition between their customers. In hotel metasearch, Priceline (Booking, Priceline, Agoda) is competing heavily with Expedia (Expedia, Hotels.com, Travelocity, and now Orbitz) with a few other OTAs, wholesalers, and chain reservation systems in the mix. These companies either boast heavy user traffic, like TripAdvisor gets from its reviews, or strong advertising, both traditional and digital, like TripAdvisor, Trivago, and Kayak do (Room77 is unique because they thrive off of licensing their tech to Google). Now hotel metasearch companies can get away with adding a direct booking functionality akin to an OTA such as TripAdvisor's new direct tool, Kayak's that is powered through Priceline, and Room77 because their customers, the OTAs, still need to advertise with them. They still are pushing the boundaries of friend or foe. Hostels have trouble doing this because, as any hostel operator can tell you, Web Reservations International (Hostelworld and HostelBookers) has positioned itself as a monopoly in the space. They have no reason to give HostelRocket their API if HostelRocket's interests are not aligned.

Also, metasearch needs deep marketing budgets to survive. Not just social media, like HostelZoo used. They need top placement in search ads and even television ads to pull it off. This really dwindles the margins considering the top spots are pricey, with the OTAs taking up the space. Maybe HostelRocket is on to something, so let's investigate further. Allegedly, they have 86,000 hostels signed up (that's about the same number HostelsClub lists.... coincidence?). This shows it has some traction, but it also raises some flags. A global scale is a double-edged sword. On one side, it gives the company a high traction number, but on the other side, it raises questions about quantity over quality.

1,000 paying customers in locations with a high ABR (Average Bed Rate), high-value currency, and high occupancy rate should hold more value than 100,000 of any customer, anywhere. That’s why many successful OTAs in other industries curate their content to the right markets first, seeking the largest margins first to offset their anticipated smallest margins down the line. This is what has been happening in the activities sector right now.

Cost-wise, HostelRocket is charging a flat rate of $200 US per month for their service, which is strange because their site includes a 10% booking fee, like other OTAs. So they are double-dipping, getting affiliate revenue from HostelsClub (you can too) and charging their customers a flat rate on top. We don't mind the affiliate program; let HostelsClub pay them, but that $200 a month needs to be accounted for. A majority of our commissions are at 12%, which means we need an extra $1667 (=(100*200)/12) worth of revenue to justify the cost; otherwise, it is just easier to stick with Hostelworld. That's even more difficult if 10% is taken by HostelsClub. Again, this raises flags.

86,000 customers paying $200 a month means they must be pulling in $206.4M in annual revenue on top of HostelsClub affiliate fees. That is a squeeze from a market that is known to be tight. For comparison, Hostelworld's parent company was purchased by Hellman & Friedman Capital Partners for $200M in 2010, and they purchased HostelBookers for half that. So is it safe for us to assume that not all of those 86,000 customers are paying? Many could be on the free trial. Many could be on it and not even know it if they don't look at their analytics. Building a metasearch engine or affiliate model is one thing, but restricting its listings based on paying customers is another. I wonder how they plan on excluding non-paying customers. There are a few hostels I know that would like to remain anonymous, saying their inventories are listed on HostelRocket and they have never registered. They also confirmed that they haven't had any visitors from HostelRocket yet either.

In order to send the $1667 worth of bookings, they need to attract many, many visitors to be of any value to their customer. Say a hostel had an ABR of $32 (common in Philadelphia), that means they would hope to get 52 (=$1667/$32) bookings a month to recover their cost. Now, here is the tricky part; their average conversion rate—that is when a visitor converts into a customer—is 2%. Hostels can find this if they use the right booking analytics tool, or they can get in the ballpark by asking an OTA account manager for a performance report. That means they should be sending me approximately 2600 (=(52*100)/2) visitors. Tracking conversion will be easy as an affiliate but difficult as a metasearch without the proper digital advertising contracts and functionality. Typically, a company has an agreement with the referral site and provides a conversion postback tracking ID, which is easy to find in the URL. It is basically just a guessing game without that.

Now back to the rate; 2% is the average conversion, and HostelRocket is special. Let’s half that and give the hostel a post-HostelRocket conversion rate of 4%, a rate any eCommerce site, travel or retail, can dream of (though they boast a "24% conversion rate from social media," of which I am unsure about the context, but a 24% conversion as an eCommerce rate is unheard of). Their true model, as a digital advertising company, should do just that (more than 2%). This still requires 1,300 visitors a month just for the hostel to break even. Now they also have their own internal conversion rate to consider as well, the rate at which they convert their visitors into leads for their customers. That rate is definitely lower than a typical conversion rate, but to be safe, let’s give it 2%. So in order to send the hostel those 1,300 visitors, they need to attract 65,000 (=(1300*100)/2) visitors a month for just this hostel.

65,000 visitors is a hefty challenge outside the major destinations of, say, London, Paris, New York, and Lisbon. That’s a difficult task even with the funding they raised. If your ABR, occupancy, or conversion rate is low, you’ll need even more visitors to break even on that flat fee. It is nearly extremely difficult to generate that kind of traffic, especially without expensive SEM campaigns. HostelRocket boasts over a million visitors, but this number worries me. That is 11.6 visitors per hostel or .97 visitors per hostel per month (=1M/86000/12). They would need many more visitors than that. If you look up their estimated traffic on Similarweb, their peak traffic was estimated at 55,000 per month in September, coinciding with that TechCrunch jolt. Even if they were able to keep it at that rate, it still amounts to 660,000 visitors a year.

There are too many factors to determine the ABR of the world, so modestly using the example above, they would need to attract 5.6B hits a month (many will be duplicates, of course). To give you some comparison, Skift mentions Booking.com as being the top trafficked travel site at 210M visits per month, with TripAdvisor following at 159.6M, and Expedia in third with 63.5M visitors a month in their State of Travel Report. Now to attract a volume on par with or higher than Booking, TripAdvisor, or Expedia, you must pay for the traffic acquisition costs to compete with them. This is where even Hostelworld struggles. Right now, HostelRocket is 100% organic, which will have to change.

Similarweb also shows they have strong direct traffic; however, their social media advertising is dwindling. Many "disruptive" hostel concepts come and go, and the reason is that they don’t offer any value to the user. The hostels will love a flat rate, if it is correctly priced, but what do the users get? Frankly, the users don't care to book direct. Hostelworld guarantees the booking, and they have the power to leave a review too. If there is an overbooking, Booking.com will find their customer another place at no cost to them. HostelRocket really needs to determine their value proposition for the user, to attract and retain them.

HostelRocket has the typical conundrum many digital advertising companies face. From the start, they need to attract both the users and the suppliers. Just like the timeless question, “What came first? The chicken or the egg?” the answer comes with logical and scientific thought. The egg came first, laid by a bird that was a genetic ancestor of the chicken (sorry if you do not believe in evolution). As for HostelRocket, the answer is even easier. Without any inventory, user adoption and retention will be impossible. That's why they are listing everyone from HostelsClub with no way of telling who is paying them and who is not.

HostelRocket is an affiliate advertising company that prices like a SaaS company on top of taking affiliate fees.

HostelRocket is an affiliate advertising company that prices like a SaaS (software as a service) company, on top of taking affiliate fees, and does not justify the cost. Plus, any hostel signing up on HostelsClub will most likely get listed regardless. Even if they chose to go the metasearch or direct booking inventories route, they should be pricing on a Cost per Click (CPC), Cost per Lead (CPL), or Cost per Action (CPA) basis over the flat rate fee. This is the heart of TripAdvisor, Hipmunk, Kayak, Room77, Trivago, and others' revenue model. This way, hostel owners, as customers, can check performance metrics and perhaps even bid for top placement. Hey, if hostel owners are willing to pay the fee in hopes for change, then great. The cause is just, and hostel owners everywhere honor you. It surely is a great cause.

However, they are charging a monthly fee while sending bookings through another OTA that is taking a commission too. Hostels are known to be tight on margins and will not stand for that. They will eventually learn to check analytics (and the number of HostelsClub bookings) to measure the impact of HostelRocket. Other than that, I am really impressed with the design they put into their product, and I do want to see them do well. Perhaps they can prove me wrong and reach success; however, misleading hostel owners about the product and the double-dipping model isn't promising and is too overburdening. Also, if you are a current customer or are considering opting in for the free trial, be sure to voice your concerns and give them great feedback. If they listen, then there is still hope that HostelRocket could take off, keeping their visitors, their customers, and even their investors happy too.