This is a topic that I love to talk about! First, I'm passionate about the business of hostelling, and as a self-professed “numbers guy,” I like to see those numbers grow and grow. Second, helping you build a profitable hostel business is part of our mission here at BananaDesk.
The first thing you need to do is write a short plan for your business (I don't mean a full blown business plan, that would take too long and have too many assumptions! But keep reading :) ). I don’t care whether you are buying an existing hostel from another operator, buying a building to convert into a hostel or building a new hostel from the ground up. In every case, you need to write a short plan and define your assumptions. And, I don’t care if you are funding the business yourself or if you need to attract investors. Even if no one else ever reads your plan, you still should write it.
So now you are motivated to write a business plan for your new hostel. But what does a business plan look like, or more specifically, what should a hostel business plan include?
Every business needs a plan where some assumptions are defined. As an entrepreneur, I’ve written many of these plans over the years, and as an investor, I’ve literally read thousands of them. Although there is a formula to follow, every business (and plan) is unique. If you are looking to raise capital from investors, you will likely craft your business plan into a PowerPoint presentation sales pitch with ten to fifteen slides. If you are writing a plan mostly for yourself and your staff, you may want to write most of it out in prose, and then summarize certain parts into lists, Gantt charts, and graphical slides for your team to reference.
In any case, there are many topics to cover. Personally, I tend to organize my thoughts into Powerpoint slides, so I’ll give you a sample of slide titles I would consider for a hostel business plan:
I like to start with a summary of key points of the business plan from the perspective of a financial, non-operating investor. Think of this as your elevator pitch.
No business is successful without a great founder and a motivated team. Why are you and your team the right folks for this business and this hostel?
This may seem like a silly exercise, but it’s not.
Provide as much detail as you can about your hostel: location, size, layout, types of rooms, pricing, common areas, services, operating policies, etc.
These are all assumptions that you will later be working to validate (i.e.: are you charging the prices you thought you could charge? How does that affect the feasability of the rest of your plan?). Think about how you will differentiate your hostel within your local market. This is key.
Market Feasibility / Opportunity / Competition
Have you studied your local market to understand supply versus demand of beds in your area? You should learn as much as you can about tourist traffic patterns and seasonality. You need to put together a competitive analysis of other lodging options in your area too (not just other hostels necessarily), including hotels, motels, bed & breakfasts, and even Airbnb. How much inventory (beds or rooms) is already available? How frequently are accommodations sold out? What does competitive pricing look like? You really can’t do too much homework here.
Where will your customers come from? Will you work with
- OTAs (Online Travel Agencies)
- other hostels in nearby towns and other local businesses for referrals,
- direct bookings directly through your website and social media channels,
- through email, and
- a toll-free number?
Pro tip: In the beginning, we very strongly suggest listing on OTAs for attracting your first customers - there are really very few things that you can do in the first few months that have will have such a big impact on your hostel. It may take some time to setup your hostel as an account on OTAs like Hostelworld and Booking, but with the right OTA strategy you will get your first customers much more quickly. And then expand into other more cost-effective channels (like referrals and direct bookings) that take more time to develop.
How will you attract customers? What is your plan for pre-launch, launch and ongoing promotions? Do you have a social media strategy? How will you handle search engine optimization and search engine marketing? Will you partner with other local businesses (maybe tour operators?) to co-market to your target customers? Are there print and online media you should consider advertising in, like travel guides and local newspapers. Any discussion of promotions should focus on how you will reach different customer segments, which you must define for yourself.
You must run the numbers. Seriously. This can be intimidating for many entrepreneurs, but it doesn’t need to be. If you need help with this step, find it. Talk to a friend that has experience working with financials in Excel. Send us a message. If you don’t understand it, learn it. No entrepreneur can be successful without understanding his or her financials.
The idea here is to model everything we've talked about above into an Excel sheet. This will allow you to play through different scenarios like:
- What happens to my business if my occupancy is 30% instead of 60% in the first 3 months?
- What happens if my ADR (average daily rate) for dorm beds ends up being $10 instead of $15?
Without a good financial model, you'll be dead in the water, and won't know what your options are.
The more work you do in planning, the more likely you are to be successful. It's by no means a guarantee, but it helps a lot. Of course, there will be a lot of decisions to make on-the-fly, and you can’t forecast and plan everything in advance. There will always be choices that require trial-and-error, and market conditions can change unexpectedly. However, I think Ben Franklin put it best when he said,
By failing to prepare, you are preparing to fail.
Well, I think that lays out a pretty clear roadmap for developing a hostel business plan, but this is only a starting point. I will try to dive into more detail over my next several blog posts. And, as always, any comments or feedback is welcomed.