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  C. Business Model

"What’s your business model?" is another way of saying “How do you plan to make money?” Attached above is the business model for a new hostel in the hospitality industry. This is when you take the time to ask yourself some fundamental questions and do some Google research to ensure that you understand all possible aspects of the business you are about to launch. A few questions you should be able to answer include

  • Who’s your target customer?
  • What customer problem or challenge do you solve?
  • What value do you deliver?
  • How will you reach, acquire, and keep customers?
  • How will you define and differentiate your offering?
  • How will you generate revenue?
  • What’s your cost structure?
  • What’s your profit margin?

Channels

Since this is a vital part of you understanding the business, I have decided to go into details of how your sales channels work. The good news is there are tons of websites out there to instantaneously connect you to the world of backpackers. The bad news is that they will ask for a get a pound of flesh. Gone are the days where backpackers would rock up armed with only a lonely planet and make their way to the recommended hostel. The lonely planet is dead. Long live the internet.

  • Hostelworld - get listed and be quick about it. They take ages to list so you should ideally take 6 pictures while you’re setting up your hostel and start the listing process a week before you’re ready to open. This is the best sales channel out there. Backpackers trust hostelworld and you’ve got to jump onto that boat. There is no other option. However be prepared to fork out 15% of your revenue to Hostelworld and 20% if you’re in a city.
  • Booking.com - the new kid on the block (with money). They’re growing fast and are more than willing to get their hands dirty. With secret deals, they hope to undercut hostelworld’s prices with discounts that come out of your pockets. However, these discounts improve your search ranking so its effectively higher volume at a lower rate or lower volume at a higher rate - you have to find the balance.To begin with, Booking.com is pretty useful for selling private rooms to budget couple travellers.
  • Hostelbookers.com - Hostelworld bought hostelbookers and despite several anti-trust lawsuits managed to sucessfuly complete the acquisition and kill hostelbookers. No hope here.
  • Tripadvisor - After years of being a silent spectator, the giant has stirred and is attempting to capitalize on the market (read - trying to collect some commissions off you). However, you must list on tripadvisor although beware of fake reviews by people who have not stayed at your place. Tripadvisor will not bother to remove these reviews. Tripadvisor takes a while with everything, so always factor that in and always be on your best behaviour.
  • Airbnb - Although airbnb is the hipster thing to do, it’s pretty useless for hostels with quite a large number of enquiries coming through but few enquiries turning into bookings. To begin with - list on airbnb to increase your visibility to the customers but as you move forward you might consider delisting if the revenue does not justify the effort.
  • Homepage - most hostels deprioritize this because it will probably only account for 5% of your bookings when you begin. However, are time passes and you build your brand, this becomes a critical way to save the 10-15% commission that you have to pay the other channels. Don’t be lazy and use a booking.com / HW booking widget on your website (refer to the technology chapter on how to save commission).

So overall for a new hostel you’re looking at 30% from Hostelworld, 30% from booking.com, maybe 20% going through tripadvisor and eventually booking with HW or Booking.com (tripadvisor is linked to these sites), 10% through your own website and 10% as walk-in customers. Depending on your location (if you’re next to a train station for instance) or as your popularity grows your walk-ins and homepage bookings will increase which should be your goal to maximize revenue. However, for the first year, ignore the commission and list of as many sites as you can until you figure out what works best for you.


Revenue Stream

The revenue stream of your business can be broadly divided into 4 segments

  • Bed revenue - This includes all the revenue from selling dorm and private rooms. When you first start your hostel, you should focus exclusively on this segment until you are happy with the results. Once you have started generating revenue from bed sales, you can work on a few strategies to cross sell a few other products and services to your customers.
  • F&B - Food and beverage sales require a license and for this reason it should be lower on your priority list. Opening a restaurant or a coffee shop will definitely help grow your business but is out of the scope of this course. We currently run 3 coffee shops at our hostels and if you are interested in getting more information on this, sign up for updates.
  • Services - Guests have a lot of demands while they’re on vacation. A few of them include - transportation, spa services, activities, tours, etc. In order to prevent yourself from losing focus on your main business - selling beds, I would initially recommend outsourcing these services to a local provider that you can build a relationship with. You might or might not charge these providers a commission for recommending their services.
  • Retail - Backpackers always buy stuff while they’re on vacation - from souvenirs to toiletry kits to clothing to packaged food and drinks. If you have the space for it, you could setup a small convenience store that meets this demand.

Please remember that the image of your hostel (and hence your bed revenue) is at stake the moment you venture into any non-core business, so tread with care. Do not kill the golden goose.


Cost Structure

Rent and salaries will be your major operating expenses. Other than these two, Utilities and Taxes will also factor into your monthly costs. We will delve deep into the subject of costs in SECTION 2: Evaluating the Opportunity.


Additional Resources

There's no need to reinvent the wheel. Business models have been around for decades and there's a great deal of free quality information and tools out there to help you get started on yours. The following are the resources that I have used in the past

Download

Creating your own business model is advisable to ensure that you understand the various aspects that you need to consider as part of your project. Feel free to share a link to your business model below for any feedback or comments from the community.

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