Startup finds life in Russia after pivot to online packagesNewsBy Viewpoints | December 6, 2012Share This article was originally published on NB: This is a guest article by Alex Zaretsky, co-founder of Travelata.We started this business by investing our own money.You don’t need a lot of money to create a prototype online. If you have some operational experience and you know how to bring your idea to life, you can create one for $10,000-30,000, depending on the type of business.A simple iPhone app can be done for as low as $1000, a website with complex business processes with payment systems, integration with suppliers IT systems and so on is more expensive, but it doesn’t mean you have to raise funding right away.First, you have to test whether your initial most important hypothesis works, get your hands dirty with building relationships with suppliers and getting feedback from customers.My point is that one should not come to an investor with the raw idea: presentation and passion in the eyes but with the presentation, passion in the eyes and a real business that is already running albeit at some small scale. This proves the seriousness of the entrepreneur, that they believe in their business and are willing to risk their own money.The initial most important hypothesis of Travelata was that customers in Russia are willing to buy holiday packages online without ever showing up at the office. What might seem obvious for developed markets like Germany or UK is not trivial for Russia where cash on delivery is still the prevalent payment method in e-commerce.Finding the right nicheIn order to decide what to do we started with ourselves. For many years I have been involved with IT and high tech, Stanislav Satsuk (my co-founder) was an expert in building sales organisations. We decided that we complement each other and given that we are both pretty down-to-earth narrowed our search to e-commerce only. We looked at several markets and selected a business based on three main criteria: market attractiveness (size and growth)lack of established market leaderand, the last one that turned to be the most important – personal excitement We decided to go for online travel. The market is huge, growing rapidly and there are no clear-cut leaders in most segments. Then, we looked one step deeper. The whole online travel market can be split into three main areas: flight tickets, hotel booking and package tours.At the beginning of 2011 – there was a good number of well established players in air tickets on the Russian market and the margins are constantly eroding.Hotel booking is the second large segment in travel. Booking.com entered Russia several years ago and today its gross booking value is estimated to be about $2bn so there was an obvious leader. In addition, people in Russia traditionally like package tours and book hotels independently less often.It would take a lot of time to change this behavior and there’s no guarantee that it will ever change. There are well established markets like Germany or UK, where e-commerce is very advanced yet a significant share of the travel market still belongs to package tours. However, there is a shift in the method of purchase - 50% of tours in Germany are booked online.The package tours segment in Russia is huge, it is growing twice as fast as GDP and is extremely fragmented with hundreds of tour operators and tens of thousands of tour agencies.That pivotal moment - from weekend tours to popular destinationsMore than 50% of Russians, who travel abroad, choose Turkey or Egypt as their vacation destination, so it’s not rocket science to figure out what to sell if you want to build a mass market leader.However, as a small start-up how do you differentiate yourself from thousands of off-line travel agencies that all sell exactly the same tours from the same suppliers? Giving discounts is a dead end because it attracts the least loyal audience. Besides, running on even lower margin than that of the whole industry (10-15% commission from tour operators) makes profitability much more difficult to reach.We were looking for an overlooked niche, something to differentiate from competitors and decided to concentrate on weekend tours. At McKinsey, we often heard busy colleagues say they could not take normal vacations but would love to make more of weekends so decided to focus on this.The site was launched on November 25, 2011, and by February of 2012, we saw this kind of business would not fly. We learned the hard but fastest way - our clients told us.Our potential client, was too demanding. They wanted to fly away on Friday night and come back on Sunday night or Monday morning to catch the first meeting. These people are afraid of losing precious time on waiting. We had to offer them something more convenient, more interesting and cheaper than a trip they can organize independently by booking a hotel and a flight separately on tens of resources available both in Russian and English.These people are extremely experienced online. In addition, tour operators explained to us almost no such package tours existed – it was not mass market. Even if such a tour is found, they can never guarantee the departure time, because we are talking about charter flights. As soon as you choose a regular flight, the price goes up. In addition, the mass market isn’t looking for weekend tours as they cost as much as a standard seven to 10 days tour.Mass Market – here we come!From February 2012, we began to sell all tours – the most popular and most demanded by Russian tourists. One immediate problem was the site was not designed to sell mass-market tours.People don’t want a “Groupon” for tours, but an “Amazon” for tours. If a potential client comes to your site and sees only a few offerings for the destination of interest, he needs to be confident they are unique, otherwise there’s the perception he’s going to overpay. Now we’re working on a new website with a new architecture and a fundamentally different layout that will be launched soon.Online vs. offline Our main value proposition to customers is convenience of selecting and shopping tours online.We differ from offline tour agencies in that the client doesn’t need to pay via our office and then collect the travel documents. At the same time he gets the same level of service through our sales centre via phone. Everything can be done remotely (apart from visas) – the client pays and receives booking confirmation with all documents online.Currently, we work with only two payment methods - credit cards and cash in the office. More than 60% of sales are conducted via credit cards, with an average transaction of 50,000 rubles (about 1700 dollars).I think I understand why people in Russia are ready to pay for tours using bank cards but aren’t that eager to pay for physical goods with the card. Cash on delivery payment is considered standard in Russia.Customers have a choice to pay in advance and risk getting damaged shoes or not getting the shoes at all or wait till the product is delivered to their home, try on the shoes, see if they really like them or just simply defer the decision of “whether I’m really going to pay for those shoes”.With packages, customers are used to paying before the trip. And no matter how you pay – cash or credit card – a tour must be prepaid before departure. Moreover, many people are already used to paying online for air tickets.In Russia you have dozens of electronic payment systems or cash payments in large retail chains with thousands of outlets that offer cash payment options for websites. However, from time to time, a booking may not be confirmed by the tour operator and we would like to be able to return the client’s money instantly. Credit cards are the only instrument that allows such refunds now, others might take two-to three weeks. Since our focus is client service, we are not willing to take the risk of annoying even one client.Startup ambitions In our business we work with a big company mentality. We set up proper business processes from Day 1. Since August this year we are supported by a European fund which previously invested in Invia.cz, a leader in online package tours in Eastern Europe. Invia is now our partner and shares its know-how and technology with us. We have already adopted their CRM-system.The travel markets of Russia and Czech Republic are similar in many ways: tourists like package tours, both markets are fragmented with hundreds of tour operators and international players show weak presence. However, the Russian market is 10 times bigger.Russian package tours market is now estimated at $12 to $20bn a year and is growing at a rate of 8%, twice as fast as the GDP. Broadband unternet services become more and more widespread in different regions of Russia. Eventually, the most growth will come from the regions as there are still many people there travelling for the first time in their lives. They usually start with package tours to mass destinations.We are preparing a fast moving business vehicle, a platform, to capture this growing demand in the most efficient way and to become an online travel market leader in Russia.NB: This is a guest article by Alex Zaretsky, co-founder of Travelata. A version of the article originally appeared here.NB2: Hat-tip to Valentin Dombrovsky of Travelatus for his translation skills.