TripAdvisor business model matches the demand for people looking for a travel experience with supply from travel partners around the world providing travel accommodations and experiences. When this match is created TripAdvisor collects commission from partners on a CPC and CPM basis. The non-hotel revenue comprises experiences, restaurants, and rentals.
Pivoting and initial traction
Chris Dixon had what seemed to be a brilliant idea. He wanted to create a vertical search engine, covering the travel industry. That’s how TripAdvisor started, and how it built its business plan.
It could be summarized as a vertical search engine for the travel industry, selling users to larger customers, like Expedia, Travelocity, AOL, and Yahoo.
So when Chris Dixon built the business plan, he got funding for that idea. Fast forward, a year and a half later, TripAdvisor had no revenues and no clients. The first site was gaining some traction through PR, but there was no revenue model.
Therefore, they started to monetize the site via banner ads, which seemed a smart idea – on paper – at the time, as the founding team figured, if they were going to make a 3% click-through rate on those banners, the company would be highly profitable.
However, when they started to roll this out in the real world, things didn’t look right. As those banners had a 0.1% clicks barely, which meant the company would be profitable only with billion of pages views.
As the traditional CPM (cost per mille) model and the banner ads didn’t make much sense. Chris Dixon and the rest of the team stumbled upon a new monetization model, called CPC (cost per click). In other words, the site had hotel pages, on those pages, a simple call to action that said “book this hotel” would be paid on a click-through basis.
While this model is given for granted now, it was the early 2000s, when Google neither had figured that out. Indeed, there was only one player – GoTo.com later Overture – which made money by syndicating its links.
Thus, when TripAdvisor figured the CPC revenue model, they went from no revenue in November 2001, to break even in March 2002, with $70K per month in revenues, and the company became profitable ever since.
One other key element of TripAdvisor initial traction and success was the user-generated content. The site allowed users to write reviews – at the time something completely new, as most people relied on experts’ reviews – and to sell the leads generated by the site to travel agencies.
The turning point happened when TripAdvisor figured out that people were actually skipping experts’ reviews and they were going straight to the users’ reviews. Today this seems trivial and a proved concept, but at the time it was neither granted, nor supposed to work.
But when TripAdvisor understood that the user-generated content was so effective, and the CPC revenue model worked so well, that’s when they pushed on the gas pedal, to gain even more traction. Fast forward 2019, TripAdvisor gained a market cap of over six billion dollars!
TripAdvisor mission statement analyzed
our mission is to help people around the world to plan, book and experience the perfect trip.
TripAdvisor achieves its mission by providing consumers and travel partners several pieces to “experience the perfect trip:”
- A global platform
- The rich consumer-generated content
- A set of price comparison tools
- Online reservation
- Related services for destinations, accommodations, travel activities
- And restaurants
Breaking down TripAdvisor Two-Sided Business model
TripAdvisor business model matches the demand for people looking for a travel experience with supply from travel partners around the world providing travel accommodations and experiences.
Therefore the company has two key partners:
- Consumers looking for the perfect travel experience
- Travel partners willing to pay TripAdvisor to be discovered by their potential customers. Those travel partners include hotel chains, independent hoteliers, online travel agencies, or OTAs and more
TripAdvisor enables media advertising opportunities, and it facilitates transactions between consumers and travel partners by:
- Sending referrals to travel partners’ websites,
- Facilitating bookings on behalf of travel partners,
- Serving as the merchant of record (in particular for Experiences and Rentals offerings)
- And with advertising placements on its websites and mobile apps.
How does TripAdvisor make money?
TripAdvisor makes money with two segments:
- Hotel revenues
- And non-Hotel revenues (Experiences, Restaurants, and Rentals)
The Hotel segment explained
The Hotel segment accounted for 72%, 77%, and 80%, of TripAdvisor revenue in 2018, 2017 and 2016, coming from the following sources:
- TripAdvisor-branded Click-based and Transaction Revenue. Click-based advertising comprises of contextually-relevant links to travel partners’ sites. Click-based travel partners are primary OTAs and direct suppliers in the hotel category. The revenue model is on a cost-per-click, or “CPC” basis, with payments determined by the number of travelers who click on a link multiplied by the CPC rate for each specific click.
- TripAdvisor-branded Display-based Advertising and Subscription Revenue. Comprising display-based advertising placements on TripAdvisor websites. The display-based advertising clients are predominantly direct suppliers of hotels, air travel, and cruises, as well as destination marketing organizations. Display-based advertising is sold primarily on a cost per thousand impressions, or CPM, basis. TripAdvisor also offers subscription-based advertising to hoteliers, owners of B&Bs and other lodging properties. Subscription advertising services are predominantly sold for a flat fee for a contracted period of time of one year or less.
- Other Hotel Revenue. The other Hotel revenue includes revenue from non-TripAdvisor-branded websites, such as http://www.bookingbuddy.com, http://www.cruisecritic.com, http://www.onetime.com, and http://www.smartertravel.com, primarily including click-based advertising and display-based advertising revenue sources.
Within the Hotel Segment in 2018, 2017 and 2016 TripAdvisor two most significant travel partners were Expedia (and its subsidiaries) and Booking (and its subsidiaries) which combined accounted for approximately 37%, 43% and 46% of its revenues.
Non-Hotel offerings (Experiences, Restaurants, and Rentals)
Experiences, Restaurants, and Rentals accounted for 28%, 23%, and 20% of TripAdvisor revenue in 2018, 2017 and 2016, respectively. That revenue comes from:
- Experiences: in popular travel destinations both through Viator, a dedicated Experiences offering, and on TripAdvisor website and app. TripAdvisor connects with local tour or travel activities/experiences operators (on the supplying side) to provide consumers with access to tours, activities, and experiences by generating commissions for each booking transaction.
- Restaurants: Through the dedicated restaurant reservations offering, TheFork, an on TripAdvisor websites and mobile apps the company primarily generates transaction fees (or per seated diner fees) paid by restaurants for diners seated primarily from bookings through TheFork’s online reservation system.
- Rentals: It provides information and services for consumers to research and to book a vacation and short-term rental properties, including full home rentals, condominiums, villas, beach rentals, cabins, and cottages. And it generates revenue primarily by offering individual property owners and managers the ability to list their properties on TripAdvisor websites and mobile apps thereby connecting homeowners with travelers through a free-to-list, commission-based option.
Breaking down marketing and distribution channels
TripAdvisor generates demand by tapping mainly into three principal distribution channels:
- Search engine optimization, or SEO,
- Search engine marketing, or SEM,
- Retargeting and television, or brand advertising.
Indeed, if we look at the primary channels of the acquisition on TripAdvisor websites, search engines, paid advertising, and social media marketing represent the majority of its traffic:
Traffic from search engines, in particular (SEO) represents the majority of traffic for TripAdvisor.com.
We can also see the importance of both SEO and SEM on TripAdvisor top organic keywords and paid keywords:
And another good chunk of traffic and distribution happens via TripAdvisor’s mobile apps:
During 2018, TripAdvisor total advertising expense was approximately $544 million, primarily driven by online search engines, and to a lesser extent, investments in offline marketing channels (primarily television advertising).
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