Expedia’s fast-growing hotel search site Trivago may see its pace of growth stall as both Expedia and rival The Priceline Group have pulled back on spending per acquired customer. This is extraordinary given the fact that Trivago was one of Expedia's growth engines and there was seemingly no end in sight.
Talk about a bump in the road.
Last year, the Priceline Group and Expedia Inc. accounted for about 80 percent of hotel-search site Trivago‘s revenue. But this year those companies pulled back on their digital advertising with Trivago.
In the third quarter, Trivago’s revenue increased to 17 percent year-over-year to $339 million (€287.9 million). Trivago’s net loss for the third quarter was $10 million, compared with basically a break-even third quarter of 2016.
On a call with investors Wednesday, Trivago executives said they were treating the reduced spending per qualified customer acquired by its two largest advertisers “as a given” through 2018. They said it was too early to project total company revenue growth in the first half of 2018. But they said it is possible that growth may be flat or possibly negative, as year-over-year comparisons.
“It will be challenging to show positive growth,” said managing director and chief executive officer Rolf Schrömgens when speaking with investment analysts.
Trivago did not disclose specifics on the spending per qualified customer by its largest customers, or why. One of its two largest advertisers, Expedia, controls Trivago.
Trivago said that for the three months ended September 30, 2017, the Priceline Group and its affiliated brands accounted for 45 percent of its total revenue. Expedia, which is a majority investor in Trivago, accounted for 34 percent of its total revenue.
When the time window is expanded out to the nine months ended September 30, Priceline accounted for 47 percent of Trivago’s total revenue. So Priceline’s share of the pie has dipped only slightly when comparing the first nine months of the year to the third quarter. We don’t know what Priceline’s spend was in the third quarter of 2016.
With only two companies dominating its advertising auctions, when one downshifts its ad spending, the other doesn’t need to bid as high either — giving Trivago lower revenue and profit per customer referral. Advertisers submit cost-per-click bids in its auctions for each user click on an advertised rate for a hotel.
The company has been slow to bring smaller online travel agencies, independent hotels, and hotel chains into its market, which it partly blames on the clunky technology used by those smaller players.
Axel Hefer, managing director and CFO at Trivago, said that the important thing to note is that 2016 had been a year of extraordinary growth for the company, and so the comparisons are tough to beat.
Hefer said in an interview: “When you manage marketplace businesses, you need to look through that and focus on having an attractive value proposition, meaning in our case, being more efficient as a marketing channel than other options and being a more efficient search interface for consumers.”
Will Trivago reduce TV advertising?
To get the nuance of what’s gone awry, it’s worth reviewing Trivago’s marketplace model.
On its consumer-facing side, it attempts to draw users by presenting an easy search interface with a comprehensive inventory. It has relied heavily on TV ad spending. Executives on the call said they have not decided if they were going to shift in 2018 away from TV spending to digital performance marketing, such as spending on ads on Google and Facebook.
Executives said there is “partial evidence” that brand TV advertising saw declining effectiveness during this past peak summer season, but they said there is not enough data yet to know if it should reduce that spending.
On its industry-facing side, it pits advertisers — online travel companies and hoteliers — against each other in auctions to get premium search placement and be more likely to receive bookings.
Trivago’s software aggregates and evaluates quotes on hotel room prices from its advertisers. Last winter, it changed the formula by which it determines the prominence given to offers and their placement in its search results in ways that may have upset advertisers.
On the auction front, Trivago aims to do more to get hoteliers and online travel agencies using its marketplace to reduce its dependency on the giant conglomerates for growth. Its relatively new “express booking” and new suite of business tools aim to do help with that.
An expansion into vacation rental listings seems logical, but the company had no comment on that prospect.
An irony of today’s news, which led to a 19 percent stock price drop in early trading, is that Trivago is sending more customers to online travel agencies and other advertisers than ever.
In the third quarter, the number of so-called qualified referrals increased 20 percent, as the company supplements declining margin with greater volume. The company defines a qualified referral as a unique visitor per day that generates at least one referral. For example, if a single visitor clicks on multiple hotel offers in its search results in a given day, they count as multiple referrals, but as only one qualified referral.
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Photo credit: The Expedia-backed hotel search site Trivago is headquartered in Düsseldorf, Germany, where it occupies two buildings. The company's growth trajectory has stalled out. Trivago