Trivago drives some investors crazy.

The German company exasperated some investors with a surprise last summer that led to a sharp drop in revenue since then.

Investors hate surprises. They had valued Trivago at as much as $23 a share last summer, but they have since fled the stock. On Wednesday shares sold for less than $6. Investors received another, though smaller, surprise on Wednesday, leading them to knock another 20 percent off the value of Trivago’s shares in early trading.

The minor surprise came on Wednesday morning during a call for its first quarter 2018 earnings. About 14 minutes into sharing Trivago’s first-quarter earnings report, chief financial officer Axel Hefer briefly said, “Some of our largest advertisers have increased their profitability targets.”

During question time, analysts probed that comment. They hunted like wolves in a pack to try to figure out what executives meant.

Over a series of answers, it became clear that Trivago’s prior forecast for the level at which its two largest advertisers — Expedia Group (which has a controlling stake in Trivago) and Booking Holdings — would pay to be on Trivago’s website and mobile apps has turned out more negative than they had hoped.

Booking.com May Not Be Alone in the Blame

Trivago’s business is simple at the core. Its mobile and online platform allow consumers to compare multiple hotel and alternative lodging booking options at the same time. The company draws customers to visit the site by spending almost every euro it earns TV ads and search engine marketing. Advertisers pay to participate. Two giant advertisers account for most of its spending.

Trivago adds complexity and secrecy to this model, though.

It takes a lot of steps to try to boost the number of people who both visit its platform and click through to book places to stay. Those steps, its opaque advertising auction market, and the hard-to-quantify effectiveness of its marketing, combine to make the business tricky for analysts to create reliable predictions about future performance.

A key metric that analysts watch is revenue per qualified referral — in effect, what Trivago makes from sending customers to primarily online travel agencies.

In the surprise on the call, this metric will be worse in the second quarter than it was in the first quarter.

Executives kept quiet about which of its two largest advertisers was not returning to its past levels of spending per customer.

An intriguing possibility — not mentioned by anyone on the call — is that Expedia Group has been leading in the ad spending pullback.

Perhaps Expedia Group, which has been under pressure from underperformance in its Orbitz division and other units, had to reduce its April advertising spend to reduce its costs to meet goals for its first-quarter earnings report. To do so, it would have to endure less profitability in its share of gains at Trivago, but that would probably have been less of a short-term hit.

One tantalizing clue: In the fourth quarter of 2017, Expedia accounted for 39 percent of Trivago’s advertiser revenue, while in the first quarter of this year, it only accounted for 38 percent.

The more likely theory to explain Trivago’s lowered revenue per customer, though, is that Booking Holdings has again toggled back from advertising on Trivago after a small increase around February.

Trivago alluded to its lack of visibility into entirely what was happening with Booking Holdings. One reason: Every move in an auction-style market has a counter move. A pullback in spending by one giant player allows other participants not to have to bid as aggressively to win.

All Trivago would say was this: In the first nine months of 2017, Booking Holdings account for 47 percent of the advertising dollars it received. In the fourth quarter, that share dropped to 33 percent. In the first quarter, it had climbed back some share overall to 38 percent.

Fogel’s Complaint

In an interview with Skift earlier this month, Booking Holdings CEO Fogel said: “If an advertising platform does a change that we believe is significantly detrimental to the customer experience, then we are not going to lean in,” Fogel said. “We are going to lean out.”

Booking Holdings took exception to several platform changes that Trivago made in 2017.

On the call today, analysts asked if one of the platform changes (which Booking Holdings apparently didn’t like) which was related to a new landing page for consumers had been successful. The company said they suspected that it had been, overall, beneficial in helping with conversions but for a variety of reasons could not quantify that.

In an interview Wednesday, we asked Trivago’s Hefer why a large advertiser might, in theory, dislike changes that it had made to its platform in the past year.

Hefer said that any complaints that its recent platform changes were bad for consumers are not correct. He cited several metrics from the first quarter and fourth quarter 2018 stating that Trivago has increased both the number of consumers that click on bookings, which means that advertisers make more money for every dollar they spend with Trivago and that the quality of these consumers is higher, meaning that they tend to complete bookings, including on higher-end properties, rather than merely browse.

Not referring to any advertiser by name, Hefer said, “The only thing an advertiser might dislike would be a change we made almost one-and-a-half years ago and that was introducing a relevance assessment. The relevance assessment is an optimization of the overall marketplace experience and dynamics across all the advertisers that can be negative for individual advertisers.”

Here’s a plain-English translation: In late 2016 Trivago rolled out so-called relevance assessments. These are surveys that ask users if they’re happy with the site they click off to after leaving the search engine. Trivago began requiring some advertisers that received poor ratings from users to place higher cost-per-click bids in the ad auctions.

It appears that consumers find it jarring to move from the user experience of Trivago to some differently designed websites run by other companies.

Hefer said the company found the assessments to overall have improved the customer experience. He said the company had some regrets in how the change was introduced, but not in making the change.

It seems odd that a widely renowned expert in converting internet browsers into buyers like, say, a Booking Holdings, would fault Trivago for trying to improve consumer conversion. Then again, some companies don’t like being told what to do.

Bringing More Players into the Marketplace

CEO and Founder Rolf Schrömgens said on the call he expected the marketplace to become more diversified away from just Booking Holdings and Expedia Group over time. He hinted that within two or three years new players, such as, presumably, Airbnb and Ctrip or another Chinese e-commerce company, could begin to compete seriously.

Schrömgens also said that he saw a significant opportunity in helping hotels use Trivago’s platform to drive more direct bookings. But he said that was a long game. It would likely take “two to three years” before such efforts reached a level that the largest advertisers would notice a shift in advertising auction dynamics or consumer behavior.

The CEO said that alternative accommodations are not as lucrative as hotels on a commission basis and so the company only wants to show its inventory of such properties, mostly sourced from Expedia Group’s HomeAway, to customers that its data suggests are inclined to book alternative accommodations instead of hotels. That way, it doesn’t cannibalize its more lucrative hotel bookings business.

Changed Approach to Hotels

To woo more hotels, Trivago has further developed its hotel services unit. Last October it formally created a subsidiary to offer a mix of free and subscription tools to hoteliers.

Schrömgens said, “We shifted a lot of resources in our Hotel Relations team from our paid-subscription product where we get monthly revenue to on-boarding hotels directly into our price-comparison.”

This move represents a change in strategy. Previously, Trivago had hoped to diversify its revenue streams away from advertising by creating subscription-based software services for hoteliers. But it now appears the company is moving away from that to encourage as many hotels as possible to use its system, in a model where it only earns a fee every time a traveler clicks on its website rate.

Hefer added in an interview that the unit has added staff through the first quarter though headcount across Trivago overall has been flat.

As for investors, Schrömgens insisted that the underlying performance of Trivago is strong but that the constant gains in efficiency are being disguised by the fact its performance in the first quarter is being compared with a historically spectacular revenue performance a year earlier.

Investors face the tough decision about whether Trivago’s demand generation model, which relies heavily on spending on TV advertising, will continue to be effective over time in comparison with other alternatives for price-comparison in the market, such as Google.

Photo Credit: Trivago moves this year into a new office in Düsseldorf. This is a view of its old office. The company reported non-miserable first-quarter 2018 earnings on Wednesday. Trivago