TripAdvisor Business Model

TripAdvisor own and operate a portfolio of 20 travel and related platforms. Some key focus areas are:

  • Travel, travel reviews, flash sale sites and by vertical (e.g. cruise review&sales site)
  • Restaurant review and booking sites
  • Attractions

While TripAdvisor is considerably smaller by market capitalisation than Expedia and Booking.com’s parent Priceline, it has more traffic and reviews:

  • With over 570 million reviews
  • 7.3 million accommodations, airlines, attractions, and restaurants
  • A travel community of 455 million monthly users

TripAdvisor spans wide functionality. It is a

  • user-generated review page,
  • a meta search engine and
  • a direct booking page (i.e. online travel agency, OTA)
tripadvisor-end-to-end-UX
Customer end-to-end user experience from planning to in-location [source: Investor preso, Q1 ’17]

Value Proposition

TripAdvisor describes their value proposition to travellers as “help them decide where to stay, how to fly, what to do and where to eat” and to save money by comparing “prices from 200+ booking sites”.  And their value proposition to hotels, B&Bs, attractions and restaurants as getting listed “on the top travel sites,” “reach millions” and to “deliver your message at just the right time.”

Tripadvisor-value-proposition-IR-17-Q1
TripAdvisor shows their value proposition to the travellers (=users) and the travel service providers (=partners), i.e. hotels, restaurants, attractions, rentals [source: TripAdvisor, Q1 ’17 results, pdf]

Platform businesses have two or more sides/customers that they need to provide value to. For TripAdvisor, these are the travellers and the travel service providers, i.e. hotels, vacation rentals, attractions, restaurants. Users/travellers form the demand-side. Travel service providers, hotels, etc are the supply-side.

Value proposition to travellers

  1. Plan the best possible travel, hotels, flights, cruises
  2. “Find the lowest price on the right hotel for you” –> price comparison across many travel sites
  3. “Over 500 million candid traveller reviews” –> minimise risks
  4. In-location planning & booking, e.g. restaurants, attractions
  5. The mobile app as a travel companion
  6. Travel app & webpages with great user experience
  7. Over 7m reviewed/bookable places
  8. Travel guides, e.g. London here
  9. Participation in a travel community

Value proposition to hotels, restaurants, attractions

  1. Opportunity to increase revenues
  2. Getting bookings through (good) reviews
  3. Global reach: helps hotels to reach global markets
  4. Using TripAdvisor as an advertising channel
  5. Using TripAdvisor as another direct bookings channel (i.e. sales channel)
  6. Drive additional traffic to their own website
  7. Getting reviewed and learning from feedback
  8. Ability to respond to reviews and improve the impression
  9. Ability to list special deals, etc on their TripAdvisor hotel pages (paid feature)
  10. Using TripAdvisor as a reputation management channel
  11. Getting insights

TripAdvisor also has an affiliate program whereby brick-and-mortar (and online) travel agencies can access TripAdvisor’s inventory and tools. This is a third side of their platform business model and I am elaborating briefly on this below.


Key partners

TripAdvisor’s key partners are those that enable their different business models. For their advertising business model, all hotels and OTAs that take up the cost per click advertising are crucial. For their agency business model, hotels and OTAs that pay for direct bookings. For their restaurant business, subscription partners and food delivery platforms are important. And of course, general search engines are crucial to feed organic traffic.

Key partners

  1. Content creators: Users that write reviews and upload pictures are essential to TripAdvisor’s success. For Expedia and Booking.com, reviews are important too, but for TripAdvisor, they are at the core of their value proposition.
  2. The supply side: travel services providers (Q3 2017, pdf):
    • Hotels: 1.1m
    • Attractions: 875,000
    • Restaurants: 4.4m
    • Vacation rentals: 870,000
    • Total: 7.2m listings
  3. Online Travel Agencies (OTAs):
    • While competitors on the one side, Expedia and Booking.com are the biggest advertisers on TripAdvisor
  4. Hotels that have signed up to the instant booking feature:
    • Many of the major hotel chains have done so, here InterContinental® Hotels Group a recent example
    • The other Online Travel Agencies are also collaborating on this feature
    • These partners are important for TripAdvisor’s Agency business model
  5. Travel agency affiliates earn commission (through their TripAdvisor Travel Affiliate Program)
    • Access to all 500+ million reviews and >500,000 city and hotel pages.
    • 50% Commission on any revenue generated on TripAdvisor’s advertising revenues (cost per click, CPC) or agency revenues (cost per acquisition, CPA)
  6. Food delivery platforms, TripAdvisor lists restaurants and features booking through the food delivery platforms and gets the details of these platforms added to their platforms, these are often many thousands new listings in one hit, partnerships include e.g.
  7. General search engines: Google and Bing are crucial to delivering the organic (free) traffic that is more important to TripAdvisor’s advertising business model than for Expedia and Booking.com. Sudden changes to their search algorithms or entering the travel meta search engine space (Google Hotel Ads) poses a significant risk to TripAdvisor.

Other partners

  1. Technology partners: Like most platforms, TripAdvisor has its own technology staff and they are a key resource. They have a number of external technology partners, such as connectivity partners. TripAdvisor relies on acquiring complementary businesses or investing in promising start-ups in the early funding rounds (example for testing the waters in the business travel market).
  2. Lawyers: While TripAdvisor had its own legal challenges (see below), they have been much less reliant on lobbyists or lawyers than most of the other platform businesses that I have previously described. Therefore, I am not listing lobbyists or lawyers as key partners, unlike in the case of Uber, Airbnb, Expedia/Booking.com.
  3. Various other: for example tourism bodiesmedia outletsairports, etc

Key activities

TripAdvisor’s key activities, like that of all platform businesses, is to enhance the platforms indirect network effects. Some of the most important levers are: (1) adding more valuable content & inventory (2) enhancing customer experience (3) enhancing the value proposition.

tripadvisor-network-effects
Network effects are at the centre of TripAdvisor’s business model [source: Investor preso, Q4’14, pdf]. There are direct network effects between content creators and other users but also powerful indirect network effects between users and hotels
  1. Enhance positive indirect network effects by increasing:
    • Fresh, candid reviews (check out what Yelp does to encourage reviews – though their content creation model is different in that they have elite reviewers)
    • The number of bookable accommodations at an increasing amount of locations
    • The types of bookable properties (variety)
  2. Enhance customer experience & value of the platform through technological innovation (few recent examples):
    • A key strategic priority is to further improve the mobile app, esp in the content and in-location functionality as to be there in the micro moments when the user looks for travel content
    • Another important frontier is to get more insights out of the reviews, e.g. for the creation of tags using artificial intelligence (AI) algorithms so the user can filter for location by amenities or other criteria
    • User-provided photos are a major asset but there are good and quite ordinary photos uploaded. AI can help display the right user-captured photos, e.g. the photo of a delicious meal instead of the restaurant’s bathroom
    • Use AI to spot fake reviews
  3. Value-adding complementary value propositions:
    • Develop, partner with or acquire platforms that have network effect enhancing value propositions  Here some examples that TripAdvisor has acquired and continues to develop:
    • When done right, these can bolster the depth of the relationship with the user, increase loyalty and customer lifetime value and thus the value of the network for the other side (i.e. hotels, restaurants, attractions)
  4. Enhance the value proposition, via niche specialisation or a different positioning
    1. Cruises (niche)
    2. Travel the hottest destinations (positioning: the “vogue of travel”)
  5. Generate demand through personalised promotions/notifications to subscribers
  6. Improve the websites and the app based on the captured data and evolving technology, trends and feedback
  7. Optimise conversion rates through experimentation
  8. Search engine visibility: Maintain top rankings on organic search rankings and get a good return on paid ads
  9. Observe industry landscape for new entrants as well as adjacent industries
  10. Observe the moves of the known direct competitors

Key resources

A key function of key resources and assets in the platform business model is to underpin the indirect network effects that are at the heart of this business model. For TripAdvisor, these are reviews (content) and their inventory (the stock of hotels, restaurants attractions reviewed & bookable). The other key resources (and assets), such as the webpages and the mobile app are there to provide customer experience which is all about reducing friction.

tripadvisor-key-resources-assets
Active users, rich content and differentiated inventory are among TripAdvisor’s key assets [source: Investor preso, Q1 ’17, pdf]
  1. A huge stock of recent, candid reviews (>570m total reviews as at Jan 2018)
  2. The webpages and the mobile apps (now more important than the pages)
  3. Number of hotels, restaurants, etc covered
  4. Number of locations covered
  5. Engaging content: high-quality, professional photos, good hotel descriptions incl all amenities&facilities
  6. The captured user data and proprietary (artificial intelligence) algorithms
  7. User experience (UX) of the website and app
  8. Skilled staff
  9. Technology platform & infrastructure
  10. The global network of TripAdvisor-owned platforms
  11. The various subsidiaries & brands
  12. Intellectual property, brands, registered trademarks, trade secrets, domains, etc

Customer Segments

TripAdvisor segments both sides of the platform, being hotels, restaurants, attractions as well as the travellers. Hotels, restaurants, attractions can be segmented in ways that relate to frequent search types, by location, start/user rating, amenities, etc. Travellers will be segments across the traditional dimensions, such as geo-demographic. Additionally, TripAdvisor perform micro-segmentation depending on the question they are trying to answer.

In my previous articles, I have covered the different aspects of customer segmentation that would be relevant for Online Travel Agencies and similar businesses before. Here a quick summary with direct links to the respective section in those articles:

  • TripAdvisor can segment their supply-side, i.e. hotels, restaurants, attraction, B&Bs much like Yelp by location, property type, rating, price category, vertical and so on in a way that aligns with the filters that the user can apply when detailing their search on the web pages or app.
  • They can segment their demand-side (travellers, users) similar to what I have described for Booking.com in the traditional macro segments, such as demographic, geographic, geo-demographic, behavioural and more
  • They can segment in a more transaction-centric way
  • And, most excitingly, they can micro segment as described in my Expedia article with the purpose of very targeted demand generation at scale

Advertisement targeting

Segmentation can be used for targeting TripAdvisor’s business customer’s advertisement to achieve higher rates of conversion, examples:


Customer Relationships

Being trusted is the most important element of TripAdvisor’s customer relationships. Without trust, the entire value proposition would crumble. This is particularly true for the relationship to the users/travellers.

There is a trend for review pages to be trusted more as the survey below shows.

survey-online-reviews-trust
“Do you trust online customer reviews as much as personal recommendations?” [source: Statistica, 1031 respondents, US, Oct 2017]

One of the most important elements is to make sure that reviews are authentic and useful. Here a few notes on this topic:

tripadvisor-customer-relations-flywheel
Trust and value-add/memorability propel the customer loyalty flywheel [source: Investor preso, Q1 ’17]

Channels

Expedia’s sales channels to travellers:

  • The TripAdvisor webpages (desktop or tablet)
  • The mobile-optimised webpages
  • The TripAdvisor app
  • The various TripAdvisor-owned webpages, 20 sites in 48 markets and 28 languages
  • Through their sales teams to other businesses (B2B), i.e. hotels, online travel agencies, restaurants, etc (see revenue models below)

Ad channels:

  • General search engines, Google, Bing:
    • organic search ranking through useful content
    • paid advertising, CPC
  • Traditional brand advertising channels, like TV, radio, magazines, etc
  • By having their brand assets displayed by hotels
  • Other

Communication, content and other channels:


Cost Structure

TripAdvisor’s annual report (FY16) shows their largest operational expense (page 43-) are sales and marketing consuming 51% (or $756m) of their revenue. Technology and content comes second at 16% of revenues (or $243m). This is a similar pattern to Expedia’s and Booking.com’s cost structures show the same pattern with marketing and sales as the biggest operational expense.

Operating expenses

  1. Selling and marketing $756m = 51.1% of revenue
    • Direct costs $554m
      • online ads: traffic generation costs from search engines, social media and other online
      • offline ads: television, radio, print and PR
      • affiliate program commissions
      • public relations and other costs
    • Indirect costs $202m
      • salaries, commissions, benefits and other overhead and stock-based compensation costs for sales, sales support, customer support and marketing employees
  2. Technology and content $243m = 16.3% of revenue
    • Salaries for staff designing, developing website/app and content: $213m
  3. General and administrative $ 143 = 9.7% of revenue
  4. C0sts of revenue $71m = 4.8% of revenue
    • Credit card, transaction and other fees $51m
  5. Other
    • Depreciation: $69m = 4.7%
      • of which $12m are for amortisation of capitalised software/website development costs
    • Amortisation of intangible assets: $32m = 2.2%

As an innovator, it is important for you to know that the majority of the ongoing costs are in selling and marketing (i.e. customer acquisition cost, CAC). This is quite a typical pattern for many platforms and start-ups. When you are developing or presenting your innovation idea to anyone you need to be fully aware of this.

Capitalised costs

On page 60 of their annual report, you can read which costs are being capitalised. There are no surprises there:

  • Development of websites (development phase but not maintenance phase unless substantial upgrades)
  • Such costs are amortised on a straight-line amortisation over the estimated useful life (generally three years)
  • Capitalised cost in FY16 were $86m excluding amortisation for software and website development

Let’s look at their balance sheet (annual report, page 73) in relation to technology and intangible assets:

  • Property & equipment: $260m (includes total capitalised software/website development of $153m of with $111m is depreciated already)
  • Intangible assets: $167m (gross carrying amounts, e.g.: trade names & trademarks = $56m; customer lists = $84m; subscriber relationships = $33m)
  • Goodwill: $736m (32.8% of their total assets*)

(*a pretty high number that comes with the typical risks of impairments also reflected in their low return on asset figures)

TripAdvisor acquisitions

And while we are on the topic of acquisitions, let’s have a look at a few examples of TripAdvisor’s acquisitions. It is a very important way of growing:

  1. In the earlier days of their acquisition history 2007-2010 the focus has been on travel advise and travel media sites. But some of those sites are now closed or redirect to other. An example for one of the popular ones is SmarterTravel.com that was acquired in 2007
  2. From about 2008, they started acquiring vacation rental platforms
  3. From about 2014, they acquired a number of restaurant review and booking platforms
  4. Around the same time (2014), they acquired Viator to enter the attractions business

Here is a list of TripAdvisor’s acquisitions. A slide in their investor pack shows the three areas TripAdvisor has been focusing their acquisition resources (i.e.dollars) on.

tripadvisor-acquisitions
In the last few years, TripAdvisor has been focusing their acquisition resources on the three pillars attractions, restaurants and vacation rentals [source: TripAdvisor investor presentation, Q4 ’14, pdf]

Revenue model(s)

The online travel businesses are characterised by three dominant revenue models (1) agency model, (2) merchant model and (3) advertising model. The other revenue sources have only a minor contribution to the total revenues. TripAdvisor generates most of its revenues through the advertising model.

Check out the links below to directly jump to the description of the respective business/revenue model:

  1. Agency business model (CPA)
  2. Merchant business model
  3. Advertising business model (CPC and CPM)
  4. Subscription business model
  5. Other

Tripadvisor’s annual report 2016 (page 39) shows the composition of their revenues:

  1. Click-based advertising (CPC) & transaction revenues: $750m / $1.2b = 63%
  2. Display-based advertising (CPM) & subscription: $282m / $1.2b = 23.7%
  3. Other hotel revenues: $158m / $1.2b = 13.3%

As you can see, they have decided to slice and dice their revenues in a way that makes it difficult for us to make a direct link to the respective revenue model. This is not uncommon in financial reports, especially when companies introduce a new business model into the mix of existing business models. TripAdvisor has added direct bookings as a new revenue stream (starting about 3 years ago) and does not disclose how successful this decision was. (Though as it stands it is appearing not to have been an overly successful move which you can see reflected in the share price.)

tripadvisor-revenue-streams
The various revenue streams [source: Investor preso, Q1 ’17]

So, let’s make a link between the revenues as shown in the annual report and the predominant travel platform business model types:

  1. Advertising business model:
    • Click-based advertising (CPC) through the links from the hotel pages to the hotel website’s booking page
    • Display-based advertising (CPM) via banner ads
    • Ads in the various other TripAdvisor websites
  2. Transaction revenues:
    • Direct booking of hotels through the TripAdvisor hotel pages
    • Restaurants reservations through to the restaurant websites (thefork.com)
    • Attraction bookings through Viator.com
    • Cruise bookings
  3. Subscriptions:
    • For hotels/businesses to be able to have more control over their business’ page in TripAdvisor (see above, e.g. make special offers)
    • Analytic and data services for business owners
    • Vacation rentals are generally subscription-based. In case of the free-to-list model, transaction revenues are incurred per booking (which falls into 2)

As mentioned, these do not link directly to the way TripAdvisor reports but I believe categorising this way is more helpful for you as an innovator. You can get details on their business models in the annual report pages 2-5.


TripAdvisor’s Business Model

Financially, TripAdvisor’s business model is characterised by the various revenue models and their respective cost structures. But more holistically, their business model relies on providing trustworthy information to travellers for decision making and planning of their vacation (and the most expensive item, hotels). Equally, for hotels, it offers the opportunity to get booked.

Underpinning this value proposition are trust, choice and economic value add. TripAdvisor must work hard to continuously ensure this as described in the key activities and customer relationship sections. Here is one statistic that shows the tangible returns of the trust.

statistica-travel-property-traffic-market-share-US-2017-Apr
Most popular travel properties in the United States as of April 2017, by monthly users (in millions) – note: includes App traffic [Source: Statistica]
statistica-travel-website-traffic-market-share-US-2016-Nov
Leading travel destination and accommodation websites in the United States in November 2016, based on market share of visits [source: Statistica]

Now, these are just a few snapshots but they indicate that TripAdvisor is very popular despite much smaller marketing/advertising budgets. E.g. Expedia and Booking.com spend about $3b per year – 5-6 times of TripAdvisor’s budget. This does demonstrate that adding value to the users has tangible returns, i.e. significantly lower unit advertising cost.

This is crucial for their business model as they also make less unit revenue per site/app visitor:

  • The advertising model where the majority of TripAdvisor’s revenues come from makes generally about $0.5 – $2 per click
  • Booking.com’s majority of revenues come from sales commissions. Say for a 5-day stay (assume $200 per night hotel room) booked through their pages, they make approx 20% x 5 days x $200 = $200 (make it 2-day weekend stay and its still $80)
  • CPC is higher in volume but it is probably 100x lower in revenues per those transactions

However, on the cost side, things are not so different. If TripAdvisor decides to bid for a Google search term, such as “hotel in xxx” they compete directly with Expedia and Booking.com to rank up the top. Now, it is not the highest bid that necessarily wins. The quality score plays also a role. But Expedia’s and Booking.com’s quality scores are also up there. So, essentially, while on average TripAdvisor earns much less revenue per click they would have to pay the same cost per click to acquire that traffic. They simply have to get more organic and direct traffic. This is also one of the reasons why TripAdvisor more recently has embarked on offline marketing, such as TV.

Competition

TripAdvisor’s business model is heavily dependent on direct and organic search traffic. Their attempts to get a larger share of direct hotel bookings that they embarked on 3-4 years seem to have not been successful as can be seen in the share price slumping back all the way to where it started just after their IPO.

On the organic side, they are facing competition from Google who have entered the travel meta search space. On the cost per acquisition side – as mentioned – they are the junior player that is dominated by the cashed-up players Expedia and Booking.com. And worse, they all have their meta search engines (Trivago and Kayak) that encroach on the price comparison proposition – but not yet there in terms of valuable content).

Prof Michael Porter (Mr Strategy) would probably say that TripAdvisor has attempted to straddle, i.e trying to have two strategies at the same time (which he states often fails). Being a trust-based review site and travel meta search engine may be two strategies that align well.

But they have also entered the OTA space through their direct bookings. It will be not easy to bridge a trust-based value proposition with what really is a hard-sell business (and the OTA business is really that). Add to that the fact, that the OTA space was already well inhabited by the two much bigger participants. And finally, these two players happen to be the biggest revenue sources for TripAdvisor’s CPC-business.

On the other hand, all the in-location value propositions, such as restaurants and attractions seem to be nice complementary propositions that can enhance the customer relationships. TripAdvisor is a great platform that ultimately can carve out a unique positioning giving them the success that they deserve.