Inside Priceline Group’s Diss of Trivago — The Backstory

It’s a boom time for trying to fathom the bust-up of Trivago.

For several years, the Expedia-backed hotel-search company had been gaining share of the combined Priceline Group and Expedia Inc. advertising budgets.

In 2013, Priceline and Expedia spent only 3.4 percent of their ad budgets on Trivago, according to estimates by Cowen & Co., an investment bank. By 2016, they spent 9.5 percent.

The two giants liked how Trivago’s TV ad campaign gathered an audience primed to buy and how the website’s user experience did a cost-effective job of converting shoppers into buyers.

As is now relatively well-known, something went wrong for Trivago in 2017. It went from double-digit, year-on-year growth, to a likely bleak forecast for the first half of 2018.

We’ve noted that Priceline pulled back on its spending. The most popular explanation for this was that Trivago had changed its algorithm in a way Priceline didn’t like, prompting a retaliation.

Priceline is the winner in the dust-up because it is now spending less per referral it gets from Trivago than before. That’s because Expedia dialed back spending, too.

But Priceline probably pulled back for other reasons, too. Here are a few worth noting:

Booking.com’s Landing Page Issue

Priceline Group’s biggest brand Booking.com has wanted visitors referred from Trivago to land on one of its search result pages, not on a listing for an individual property.

Since last winter, Trivago has been pushing online travel agencies to use property-specific landing pages.

During Trivago’s second-quarter earnings call with investors, CEO Rolf Schromgens said its users get “disturbed” when they click a button about an individual listing on its website and end up on a site such as Booking.com that shows an array of new hotel choices.

Trivago penalized companies that did that by giving them a lower landing page score in its complex calculations for determining how it presents rates on its website.

Using Trivago for an Ottawa hotel search for late January, we found a hotel for sale via a few links. The Booking.com link took us to a search result landing page showing the hotel along with many other properties. The Expedia link took us to the individual property’s listing.

Perhaps not coincidentally, the first Booking.com offer appeared on the second page of search results, well past many Expedia and Hotels.com offers.

The big brands prefer to show visitors multiple hotels to try to push them into booking more expensive or otherwise more profitable options. Repeating the search on Kayak, both the Expedia and Priceline links went to search result pages, not individual hotel listings. Repeating the trick on TripAdvisor, Expedia and Priceline links also went to search result pages.

In short, Priceline does not want any company to penalize it for its choice of metasearch landing-page architecture.

The Momondo Factor

Priceline’s acquisition of Momondo may have affected its thinking about Trivago, too.

Earlier this year, Priceline acquired the travel metasearch company for $550 million.

While the deal closed in July, just as it accelerated its Trivago pullback, the prelude to the deal may have prompted a change in Priceline’s thinking.

First, while Momondo’s revenue still is heavily focused on airplane ticket sales, the brand needs to compete with Trivago in hotel reservations to become more profitable — given the typically greater commissions in hotels. The acquisition thus made it less sensible for Priceline to fund a competitor indirectly by buying ad space on Trivago.

Second, Momondo, like Kayak did years ago, found traction with brand advertising campaigns.

In a Skift Research report earlier this year on Priceline’s Competitive Position in 2017, Momondo’s managing director Pia Vemmelund talked about how Momdondo had created a formula of successfully entering a market with a TV blitz and being successful as they followed up with digital marketing that became cheaper thanks to the brand awareness.

So the Momondo purchase may have indirectly prompted Priceline to choose to shift a few percentage points of budgets out of vertical travel metasearch and into brand TV advertising.

Priceline may be putting Booking.com on TV in 30 countries more aggressively because Momondo’s approach reminded them of a lesson about effective marketing. Trivago faces a double whammy: It is losing many Priceline dollars to TV, and the TV spending will, in turn, diminish the effectiveness of its own TV spending.

Another factor: Priceline may have been concerned that Ctrip’s acquisition of Skyscanner last winter might mean more aggressive competition in metasearch.

Trivago’s Hotelier Services Push

This year, Trivago began in earnest to woo hotels to use it to reach consumers instead of using the online travel agencies.

While the effort is still too young to bear fruit, it could eventually cause headaches for Priceline Group’s online travel agency brands — whose commissions are generally higher than the effective cost of direct hotel distribution through Trivago.

Trivago created a subsidiary that focuses on the marketing, sales, and maintenance of its business software services and technologies that hotels use to improve their conversion on it. The company also rolled out updated functionality for its suite of tools for hoteliers to help them be savvier in making bids. Neither of the Priceline metasearch brands, Kayak or Momondo, made a comparable effort.

The company was looking to ramp up its “instant booking” product, called Trivago Express. It was looking to add custom retargeting of users by audience type. It was considering experimenting with hotel storefronts for chains, similar to the airline storefronts Skyscanner has been testing.

By undercutting Trivago now with a pullback in ad spending, Priceline may have slowed down Trivago’s ability to broaden its marketplace by populating real competition from hoteliers. This point relates to the next one.

The Breakdown in Hotel Rate Parity

Trivago’s potential to undermine the online travel agency model gained a tailwind as European countries changed regulations in the past few years. Watchdogs forced Priceline and Expedia to loosen their contract provisions and allow hotels to distribute different rates in various places.

So-called rate-parity provisions remain in place in the U.S., but in a parallel trend, the major U.S.-based hotel chains recently reworked their contracts with Priceline and Expedia to allow them to offer cheaper or more advantageous “loyalty rates” outside of the online travel agency websites and apps.

These trends mean that hotels now have more flexibility to compete with the online booking channels on Trivago as a way to boost direct bookings.

In practice, only a few hotel chains have made this leap, including, Melia, Pacifica, and SBE. But the more that hotels advertise better direct rates via Trivago and similar channels, the less competitive online travel agency offers become.

Hotels Haven’t Filled the Gap Left by Priceline

Priceline Group had made a bet it could partly withdraw from Trivago’s auctions without hotels rushing in and taking business it left behind.

So far, it bet right. According to the third quarter earnings call, hotels are still not rushing into Trivago.

Trivago has repeatedly explained away why hotels don’t rush in to participate by blaming them for having poor technology. The company recently took steps to offer new software to fix this technology gap.

But technology is likely but a small issue among many why hotels have been wary of metasearch.

A more central problem is that the online travel agencies appear to still punish hotels for not giving them their best rates.

Major online travel agencies hire Web scraping companies to scan rate changes for hotels worldwide, tracking when a hotel’s direct rates beat, match, or undercut the ones the agencies offer.

When a hotel undercuts it, the brand typically sends in its market managers to rap on the knuckles of hoteliers who asserted themselves. A brand may also punish the property by suppressing its listing in the sort order of its search results to lower the booking volume, though connecting the dots is hard to prove in any given case.

The online travel agencies may also use “steering” tactics as retaliation. One tactic is to bid on Google AdWords keywords that the hotel likes to use and then place ads in premier positions on Google’s search results page to point users to another similarly named property. But connecting the dots is hard to prove in any given case.

Hotel Cat and Mouse Game

Against this backdrop, there is a cat-and-mouse game being played out between the online travel agencies and hotels on Trivago.

Some hotels have taken a cautious approach of at least occasionally breaking with the rates they offer on third-party channel prices by specific room type for specific stay durations and lead times, such as by undercutting rates on third-party channels for last-minute reservations but not for ones a month out.

Our admittedly unscientific test searches suggest this happens most often in intensively competitive markets, such as Paris, Berlin, and Rome.

About 20 percent of hotels try this, according to a European Commission survey earlier this year. One Web-scraping service estimated anonymously that the figure might reach as high as 40 percent on any given day in popular markets like Rome and Paris.

The cat-and-mouse game has intensified because of the spread of affordable revenue management software and other tools.

In the past, hotels did a mediocre job with direct bookings. But today’s new tools are letting hoteliers be smarter. Companies like Sabre offer hotels more sophisticated booking engines that do a better job of converting customers who come direct.

Companies like Duetto offer hoteliers insights into both repeat and new shoppers and help them customize merchandising content in their booking engines. In other words, hoteliers can increasingly adjust room type sort order, packages, and upsells along with pricing depending on who is shopping. That, in turn, makes their investment in direct booking campaigns more sustainable as a commercial strategy.

All of these efforts mean hotels are converting direct bookings better now than before. Hotels are looking to take the next step of exploiting customers’ varying intent and willingness to pay. That effort requires contact with the customer’s data.

If Trivago could help them get that data and direct bookings, they might flock to it.

Hotels still need data-based assurance that their efforts to drive business through Trivago and similar direct channels are worth the risk of retaliatory tactics by the Booking.com’s and Expedia’s of the world.

It’s not straightforward for the typical hotel to calculate if Trivago and similar channels ultimately drive more revenue and reduce customer acquisition costs than the online travel agencies. Those calculations require levels of technological and commercial savvy that most independent hotel operators still lack.

Trivago might tilt the balance toward hotels if it adjusted its model.

Yet not all are convinced. “The problem is that Trivago isn’t Google or TripAdvisor, and doesn’t enjoy a true upper funnel position,” said Oz Har Adir, CEO of FindHotel. “It has to ‘hard sell’ these sponsored positions to hotels and that’s an expensive effort that will take years to materialize, years Trivago doesn’t have.”

Paid Search Is Past Its Prime

The above explanations merely touch on a variety of factors that may explain why Priceline chose to toggle back on advertising on Trivago this year and what may come next between the companies.

The most important context in understanding Trivago’s potential to bounce back is that paid search is becoming less effective for many travel advertisers.

A few years ago, paid search was by far the most effective channel because buying brand keywords was relatively cheap and produced a lot of leads.

But that’s changing, partly as Google increases its rates by 5 to 7 percent a year, partly as consumers shift to mobile and respond better to native ads than text-based ones, and partly as AdWords bidding auctions have reached a saturation point.

In response, enterprise advertisers, such as hotel chains managing 500 or more properties, have a heartier appetite than ever for metasearch as an alternative.

Last month a survey of 120 enterprise advertisers by digital marketing agency Koddi found that, on average, metasearch was a more productive channel for them than paid search, retargeting, display, and email.

The survey was not scientific. But a majority of the respondents were not clients of the firm, which specializes in metasearch marketing. And the survey results dovetail with what Skift has heard from other industry consultants recently.

Increased spending on metasearch is a rising tide that could lift Trivago along with other players.

After all, Trivago remains brilliant at the acquisition of quality traffic.

Bloodied but Unbowed

Much depends on Trivago’s next move. Its investors will pressure it to do everything it can to get back into the good graces of Priceline, like an addict cut off from their opioid prescription.

Exhibit A: Booking.com is widely considered to be better at converting customers than most other online travel agencies. So Trivago will feel a gravitational pull to make sure Booking.com’s listings appear high in the sort order, to maximize its revenue.

If Trivago goes back for a Priceline Group fix, expect it to become rare to see hotels get the “best deal” slot or other premium placements in search results even when the direct hotel offer is significantly cheaper.

Suspicions that Trivago was tilting in that direction arose on October 27, when the UK’s Competition and Markets Authority said that it was investigating the manner in which Trivago displays information to customers, including how hotels appear in its search and how hotel discounts are applied.

Maybe the company will be bold and take the Priceline slap as an opportunity to break out of its dependence on the global duopoly for growth.

To simplify, hotels once sold all their comparable rooms at the same rate. By selling a commodity product, the Booking.com’s of the world won by outspending them on creating a simpler and better-marketed shopping experience for consumers.

Yet if hoteliers could differentiate their products better and display different offers in different channels to different shoppers, they could retake some control. Trivago could profit if it helped.

In the meantime, the search by analysts, journalists, and investors for the right mix of reasons why Trivago stumbled is reminiscent of Akira Kurosawa’s 1950 movie Rashomon, a look at the shifting nature of truth. Expect the debate to continue for some time.