How does HotelTonight make money?

The startup is thriving because it works--not just for consumers, but for hotels as well

For the first time last fall, I went on a vacation where I didn’t book any hotel rooms in advance. It was terrifying and gloriously liberating, and omg it worked. Of course, that’s because I happened to go in the off season—late October—and there were no major events going on at the time of my family’s arrival (in Portland). We hiked! We ate! We shopped! And then afterwards, we went to the nearest hotel and said “give us a room,” and they said “okee-dokee, how about one for 25% off?” You have to be firm with people in Portland.

Turns out, you can get a room cheaper that way, which is the whole point behind last-minute hotel booking app HotelTonight. Every day at noon, the app is updated with a fresh stock of available rooms at upscale hotels at steep discounts.

Founded in 2011, HotelTonight has raised more than $80 million from Battery Ventures, US Venture Partners, Accel Partners, First Round Capital, and others. Most recently, the company raised a $45 million Series D round in September. The company has partnered with over 10,000 hotels in 17 countries and 250 destinations. To date, the app has been downloaded over nine million times.

Last month, the founder and CEO of Starwood Capital Group, Barry Sternlicht, invested in HotelTonight and also joined the company as a strategic advisor.

The company also recently partnered with several major hotel chains, including InterContinental Hotels Group, Hyatt Hotels & Resorts, Best Western International, Kimpton Hotels & Restaurants, FRHI Hotels & Resorts (which includes the Fairmont, Raffles & Swissôtel brands), La Quinta Inn & Suites, Barcelo Hotels & Resorts and Steigenberger Hotel Group.

HotelTonight generates revenue by taking a cut of each transaction—about 20-30%. The company has said that revenue and the number of transactions both climbed 300% in 2013 over 2012—probably because HotelTonight works both for consumers and for hoteliers.

Groupon Getaways and LivingSocial Escapes have been problematic for hoteliers, mainly because it doesn’t always make sense to offer rooms at discounted prices. Inventory changes by the day, which is why it costs more to stay at a hotel on a Friday than it does on a Tuesday—or why it costs more to stay during a big seasonal event than during the off season.

HotelTonight helps hoteliers offload unsold inventory without cannibalizing their regular business, so it’s a relationship that’s likely to last for a while.

Groupon has taken notice. Last September, the company acquired Madrid-based last-minute hotel booking app Blink, which has partnerships with over 2,000 European hotels. Could it be because Groupon’s previous model wasn’t working? The company’s total profit from travel was $11.6 million in Q3 2013, which was just 3.2% of Groupon’s $359.6 million in profit.

HotelTonight’s model has proven so successful that like Groupon, it has spawned a number of clones, including the aforementioned Blink in Spain, Hot Hotels—also in Spain, and JustBook in Germany.

As the clones get snapped up by larger deals companies (because “circle of life”), it will be interesting to see how HotelTonight holds its own.