Big travel sites like Expedia and Priceline have been around since the dawn of the Internet age, but a local startup with a lot of venture backing is offering something different.
HotelTonight allows users to snag unsold, discounted hotel rooms at the last minute, starting at 9 am the day they want to book. Instead of catering to people planning travel far in advance, the company is offering a handy, mobile solution for road-trippers who aren’t exactly sure where they want to stop for the night, or parents who got a last-minute babysitter and some freedom to head out of town.
The company doesn’t actually require hotels to discount their rooms, but users of the app only see the 10 best deals for them, so the higher the discount, the higher the visibility. “That ensures hotels are giving us best possible deals,” says co-founder and CEO Sam Shank.
The app is free for customers, and hotels pay a commission to the company in the 20 percent range, though it’s not a flat rate; it varies based on volume and partner, and the mechanics of it are proprietary.
HotelTonight isn’t Shank’s first travel startup. The first, TravelPost , a hotel review site, was acquired by a company called SideStep in October of 2006, and eventually became a part of Kayak.com. After he sold it, Shank still saw a lot of room for new products in the sector. “It was a very large market with very attractive margins,” he says. “I wasn’t seeing a lot of innovation and new ideas in travel versus other categories. I saw a very ripe area I could build companies in.”
But there were challenges to building a new travel company. Plane tickets and hotel rooms were some of the first things people felt comfortable buying online, and a lot of potential users already had allegiance to specific sites. Frequency of use is low—people tend to travel only a certain number of times per year—hotel prices are high, and there are “pretty high switching costs for customers,” Shank says. At the same time, HotelTonight could offer something new: an original model and a completely mobile experience. “That’s what excited me more than anything,” Shank says. “An opportunity to build something new that had never existed because the platform had never existed before.”
Once the app was on the market in January of 2011, it got good reviews and a fair amount of positive press. Some of the most iconic hotels in its first three cities—New York, Los Angeles and San Francisco—had signed up. But there was a problem. They didn’t have many users. “Forty percent of hotel rooms are empty on any given night,” Shank says. “Generating demand is really hard. We worked really hard on it, and took care of the few customers we had.” Word of mouth and positive reviews helped, and today HotelTonight has been downloaded around 10 million times.
The app has its fans, but some users wanted a better sense of how much they should expect to pay if they bought their hotel rooms the day of their stay. If a potential user wanted to book a room for Saturday night, for example, checking prices on Wednesday probably wouldn’t give an accurate estimate.
So last week, the San Francisco-based company introduced a new feature called Look Ahead, which allows users to see prices seven days in advance. Though they still book their rooms the day of their stay, they’ll have notice about how much they might pay, as well as see hotel availability and the events that are happening in a given city, like a huge convention or marathon. “The idea of planning to be spontaneous is really important for how people are using the app,” Shank says. “We see people looking every day in a row leading up to the date, but that’s not necessarily the best way to get information about what rates are going to be like.”
Planning to be spontaneous may sound silly, but to Shank it makes a lot of sense. If you know, for example, that you have to work late in the city on Wednesday, it’s good to know how much it would cost if you decide you’d rather shack up in town than rush to the last BART train. If you know you want to head into New York City for a weekend of shopping with friends, but the date doesn’t matter, you can check prices and mobilize when you find a cheaper day to go. “We ended up building these tools to predict supply and demand,” he says. “We got those tools in a place where we felt really good about accuracy.”
Look Ahead is also helpful for convincing potential users afraid of sticker shock that buying a hotel room last-minute really is cheaper. “We could tell people that until we were blue in the face,” Shank says. “Being able to show people data around it allowed us to put our money where our mouth is.” The feature is currently available in New York, Las Vegas, Los Angeles, Miami, Washington, DC, Chicago, San Francisco, San Diego, and Dallas.
HotelTonight does compete with standard travel booking sites, but their missions are very different. And though a few startups with the same model have popped up in Europe and Asia—Spanish startup Hot Hotels just raised $1 million—Shank says they haven’t really been able to scale up to lots of users.
In the meantime, HotelTonight now offers lodging in 300 destinations. The company has grown over the last four years from a small team to 110 employees and raised $80.35 million from backers including Accel Partners, First Round Capital and Battery Ventures; the company also secured a private investment from Starwood Founder Barry Sternlicht in January, but it declines to disclose the amount.
Though most of HotelTonight’s competitors—travel sites like Expedia, Kayak (part of Priceline.com), TripAdvisor, and others—offer flights, rental cars, cruises and more, Shank plans to stick solely to hotel rooms. “It’s the largest category in the industry,” he says. “There’s a lot more profit in it, a lot more margin in it. We’re just laser-focused on that.”
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