Trivago Wants to Find Profitability and Spend Big on Marketing, Too

Can a company that seemingly spends almost every euro it earns off customers on more TV and digital marketing find a path to profitability? That was the question on the minds of some analysts as Trivago, the digital hotel search company majority-owned by Expedia, released its first quarterly earnings report since it went public in December at a $4 billion valuation.

On a call Friday, the Düsseldorf-based company said its selling and marketing expense (including money for all of those Trivago Guy TV ads) increased by 70 percent, year-over-year, in 2016.

The path to making money is there, executives said. In some countries, the company has met its long-term profitability targets, though the executives wouldn't name the countries. Some of the near-profitable countries are likely European, though a few may not be. For the first time, the Düsseldorf-based business earns the majority of its revenue outside of its core European market.

Executives said their key measure of advertising efficiency shows that the company is getting better at generating more revenue for every advertising dollar spent. Last year "return on advertising spend" improved by seven percentage points, year-over-year. In the U.S., the company saw a steady increase in its baseline traffic and "an improvement" in its profitability.

LOYALTY RATE

Trivago has been eyeing what U.S.-based hotel chains like Hilton have been doing with "loyalty rates." These are rates only available by booking directly with the chain's website and that are the promised lowest public rates (though the discounts are sometimes only a dollar or two cheaper than those offered by third-party booking brands such as Expedia and Booking.com).

Last summer, Trivago's big uncle, Expedia, brought the loyalty rates of U.S. chain Red Lion onto its platform. It offered those loyalty rates to customers in exchange for helping to pass along guest email information to the chain to enable it to market directly to the customers.

Trivago is hoping hotels will also offer their loyalty rates in its metasearch results. Co-founder and chief executive Rolf Schrömgens told investment analysts that usually the reason the loyalty rates aren't displayed is because of weaknesses in the distribution technology that hotels use, not a failure by Trivago to negotiate deals. The company's product engineers are working on business-to-business services to try to help hotels address this problem.

AUCTION AD MODEL IS BECOMING EFFECTIVE

A big focus for Trivago is in improving how advertisers decide to spend money on its platform. The company has been inspired by TripAdvisor, which in 2013 debuted a self-service auction modeled after Google AdWords and Facebook.

Trivago similarly has a cost-per-click auction in which advertisers bid to participate in its hotel metasearch for individual hotel property listings. Unfortunately small and medium hotel chains and online travel agencies (OTAs) are at a disadvantage in the auctions compared to large hotel chains and OTAs because they lack the staff, knowledge, and, importantly, the data required to be sophisticated in their strategies.

Trivago's big move in 2017 is to try to level the playing field for smaller players. It is building tools for its advertisers so they can more effectively monitor their performance and bid more wisely. The company also wants to help smaller hotels and OTAs do more A/B testing to become more competent at building good booking funnels by offering simple software tools and educational materials online.

Under the old system, hotels would negotiate with Trivago, with typically one cost-per-click number for all of their properties. But that model is inefficient. A five-star property on average has, say a 1,000-euro-a-night rate and a three-star hotel has, maybe, a 60-euro-a-night rate. But if a hotel pays the same CPC for each, that's not a great deal as a percentage of the revenue the hotel makes.

Advertisers at smaller hotels and OTAs have been slow to adopt the auction model. To encourage them, Trivago points out that those listings will be more likely to be shown higher in its search results, which will improve the number of customers who will see and book.

Trivago's instant booking product, Express Booking, also helps. The product keeps users within the Trivago interface (with clear branding, so the user knows they're booking with the supplier or OTA and not Trivago). The company says that its express booking service increases the number of successful transactions.

In other words, that participating listings become more competitive in its cost-per-click marketplace, which means the actual value of the advertising is more accurately reflected in the bids accepted.

Express Booking has been rolled out to a dozen markets, including the United States, Germany, Italy, France, Spain, and Brazil, and the company has translated its content into six languages.

Early results say the efforts are paying off. Schrömgens said Trivago is "securing a fair share of the value we are generating."

NEW INITIATIVES

Separately, the company is deploying some new tools to boost its ability to persuade customers to book hotels on its site. It recently released "price drop" email alerts that let consumers track rate changes for individual hotels. It is also investing in machine learning to improve how it understands consumer behavior.

Marketing remains the top-most strategy, though. In the last few months of 2016, Trivago increased its TV ad expenditure above the high level that it had budgeted because it believed the ads were working especially well. The company is continuing to test new ads in its controversial Trivago Guy campaign, including some "Mr. & Mrs Trivago Guy" ads in 26 markets.