Berlin goes after a $150 billion pot of gold

Last week, GetYourGuide announced an astronomical $484 million Series E round. A few weeks before that, Tourlane raised $47 million, and GoEuro revealed a complete rebrand (it’s now called Omnio) and expansion plans in Latin America and Asia.

What do these companies have in common? The three of them made the headlines in the past month, are headquartered in Berlin, and are taking on the gigantic (yet outdated) travel market.

A good friend of mine threw a hypothesis out there, and I think he is spot on: the reason why Berlin-based startups do so well in travel is because travel looks like ecommerce, and Berlin rocks at ecommerce.

Let's unpack that.

It all starts with Rocket Internet

In 2010, Marc, Oliver and Alexander Samwer launched CityDeals and sold it to Groupon for $170 million just five months after starting the company.

This was the second time the brothers used this tactic.

The first time was when they started an eBay clone and sold it back to eBay for $38 million within 100 days of launching the site.

That’s when Rocket Internet was born. Part startup factory, part venture capital firm, Rocket Internet funds clones of Silicon Valley startups then grows them at lightning speed in European, South American, and Asian markets.

Once Rocket Internet dominates a market, they sell the startup to the company they cloned it from.

Ruthless? Yes. Unethical? Maybe. Does it work? Also yes. The curious thing is to understand why it works.

The ecommerce formula

Ecommerce has a playbook. If you have enough money to follow it and iterate enough times over a long enough time scale, you’ll eventually win.

How? Well, let’s walk through some numbers.

If you want to grow your online store 100% YoY, your mind immediately gravitates towards selling 2x more product or acquiring 2x more customers.

Doable, but hard and expensive.

The problem is that customer acquisition is never linear. Acquiring 2x customers is more than 2x harder because as the market saturates and new competitors enter the field, you start seeing diminishing returns on your marketing spend.

Instead, you should think of ecommerce as a set of three interconnected levers you can pull to grow, a formula if you will: how many customers you get, how often they buy and how much they spend. # of Customers * Frequency * Average Order ValueIt’s a lot easier to grow 100% YoY if you acquire only 50% more customers, but increase the purchase frequency 50% and grow the AOV 50%.

It's funny, but you actually grow faster while acquiring fewer customers and reducing the marketing spend.

Once Rocket Internet understood that ecommerce companies follow a formula and therefore, were easy to clone, they became ruthless at executing that playbook.

“There are three levers we used to successfully clone a business and make it grow faster than the original: expand geography where the service or product is located, create a larger product offering, or lower the pricing to undercut the competitor. Most of the time is was by having more products and undercutting the competitor.” - Anonymous Rocket Internet employee

This unique expertise translated to dozens of successful ecommerce companies in Berlin. Zalando and Home24 are just a few examples.

How this translates to travel

Even though travel tech is a different industry, the ecommerce growth framework translates perfectly into it.

Let's look at GetYourGuide. This new unicorn can do multiple things to grow, including but not limited to expand the offering, and expand geographically.

You can acquire new customers via organic, paid advertising and lucrative partnership with other travel platforms, like Sifted reports.

"If you Google “walking tour in Prague”, a GetYourGuide ad will pop up straight away. If you buy a train ticket from Berlin to Amsterdam from fellow Berlin travel tech startup Omio, you’re prompted to “Turn your journey into an experience”, with GetYourGuide. Ditto booking a flight with EasyJet, Norwegian or British Airways." – Sifted

Once you acquire a customer, you can use a combination of brand loyalty, remarketing and email to increase that customer’s lifetime value. But that’s just the tip of the iceberg.

The play for GetYourGuide is expanding the offering by recruiting new tour operators in the existing areas, making the supply of activities more attractive.

Once you saturate an area, you can then expand geographically, thus increasing your real market size, expanding your potential customer base and giving new SKUs to buy to your existing customers.

All this generates more value to the consumer, increases the market sizes but most importantly, raises the lifetime value of a customer.

Raising your customer LTV means you can now spend more to acquire them in the first place than you did in the past. In other words, you can outbid your competition.

I might sound repetitive, but you should think about this as a growth loop:

1. GYG acquires new customers (by investing more, expanding the use cases)
2. More demand means supply is easier to attract in existing markets, which generate a bigger supply of activities.
3. Once you have critical mass in a market, you can expand to another one. Since customers never buy in their own market, expanding geographically unlocks new SKUs for existing customers.
4. Existing customers spend more because of more options, which drives up LTV.
5. A bigger LTV gives you more room to acquire a customer profitably, fueling growth and killing competition.
6. Go back to step 1.
7. Knowledge is evenly distributed, but playbooks aren’t. There’s a reason why companies gravitate to one place, in this case, Berlin. And it’s working out for them because there's a $150 billion pot at the other side of the "travel tech" rainbow.