Biz models compared: Booking.com, Expedia, TripAdvisor

The travel industry is an excellent example of how forcefully platform businesses can enter a fragmented supply side environment composed of thousands of hotels, airlines and distribution systems. The biggest players (by market capitalisation) within the $1.3 trillion industry were established companies, like the Marriotts, Hiltons, Delta Airlines.

Within a mere two decades the successful platforms – Booking and Expedia – have left these century-old giants behind. Compare the biggest players by market cap (and the comparison to Nov '21 and 2017):

  • Booking: $96b ($98b in 2017)

  • Expedia: $26b ($21b in 2017)

  • TripAdvisor $4b ($4b in 2017)

  • Marriott: $50b ($41b in 2017)

  • Hilton: $40b ($22b in 2017)

  • Delta Airlines: $25b ($35b in 2017)

  • Southwest: $27b ($33b in 2017)

Note that as of the Nov 2021 update, the travel industry was not through the pandemic. Forward expectations were already priced in. Interestingly, most of these players had a lower market cap in July 2022 because of the slow "restart" of tourism. However, for us, the above is only to show the relativities between the OTAs and the biggest traditional players. The most important takeaway is that Booking.com is larger than the largest traditional companies in the industry.

The market caps tell quite a story about the revenue generation capability of the respective business and revenue models. Note just how much larger Booking.com is compared to Tripadvisor.

Our focus is on the Online Travel Agencies (OTAs):

  • Booking.com,

  • Expedia and

  • TripAdvisor

The aim is to understand their business models and the differences among them in comparison. What drives the huge differences in revenue and valuation between these platforms.

Note that Booking.com is owned by Booking Holdings and in between, it was called Priceline (you may still find many articles that refer to Priceline).


Three business models

There are three predominant business models used by the Online Travel Agencies (OTAs), the advertising, the agency and the merchant business model.

These names are descriptive in that the agency model is focussed on being an agent / intermediary or broker.  The merchant model is indeed a merchant that buys inventory and sells it on. And the advertising model provides advertising services / leads. The names are well descriptive of the business model (i.e., value creation) more so than the revenue model (just the way we like it!).

Each of the three companies has their predominant revenue stream in one of those:

  1. Advertising business model: TripAdvisor

  2. Agency business model: Booking.com

  3. Merchant business model: Expedia`

The great news is that these business models can well be used by other, non-travel industry platform businesses.


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Revenue generation by business model

Here we see the revenue for our three players by business model for 2019. This was the last time where we could compare all three. In the chart following we can also see Booking.com's & Expedia's revenue by business model for 2021 (TripAdvisor has stopped reporting on this).

Within the article, we have also left the 2017 revenues there for comparison purposes. The 2017 & 2019 figures are slightly more useful for the purposes of this article due to the fact that all three platforms were competing on all three business models with each other.

The total revenue (in green) is on the right axis, all others on the left.


Business model TripAdvisor

The most common reason people use TripAdvisor is for decision making and planning of their vacation. An important part of this includes finding the right hotel which is generally the most expensive item of a vacation.

The advertising business model

(1) Click-Based advertising

  • Travellers first use TripAdvisor prior to booking their trip. TripAdvisor will display hotels that deem most suited to the user’s query in an overview list.

  • It gets more interesting after the user clicks to one of the hotel pages to research it in more detail, by reading what other travellers wrote about this hotel.

  • TripAdvisor will display clickable buttons that lead to a booking page for that hotel through the advertiser. These are cost-per-click (CPC) advertisements. The advertiser will pay only if the user clicks on the link which will lead them to the advertiser’s page away from TripAdvisor.

As users research hotels on TripAdvisor, they will see prices for this accommodation through various other platforms. Once they click "view deal" on one of those, TripAdvisor will receive a CPC fee and the user will be directed to the advertiser's page.

  • Tripadvisor will get paid for each click regardless if it leads to a booking or not. The recipient gets a lead. Such a click may cost more than a click directly from Google (and in some cases not). A higher fee would be warranted as the user is further advanced in their booking intent compared to a Google search. This is why you will find (in particular) Booking.com advertising heavily on TripAdvisor.

  • The cost of the click is determined in an auction system. But they would typically be in the sub-dollar to a few-dollar region. There will be very strong variations between bidding for say a 2-star hotel in a remote area and a luxury hotel in Manhattan.

  • In the snippet above we see Booking.com. Once the user clicks one of the links, they will end up on that OTA’s page. Some OTAs (e.g. Booking.com) will lead you to their hotel overview page for that city with the chosen hotel at the top and other hotels directly following. Other OTAs will lead you directly to the OTA’s booking page for that hotel. This says a lot about the OTA's chances to get conversions (i.e. sales on one or the other type of page). The choice is clearly the result of many experiments with significant sample sizes.

  • Popular hotels have over 10 advertisers listing their links. In some cases, the respective hotel bids themselves.

  • If you are not particularly familiar with this industry, you might find it “ironic” that hotel owners would need to join the auction to have a link to their hotel reservation pages listed in this list. And it is not even easy to do so, let alone to be listed up the top against the marketing giants - the OTAs.

Here you see a hotel advertising for their own rooms. And despite offering the lowest cost, they only rank 3rd.

(2) Transaction revenue (agency business model)

Note: I have left this section in the 2022 update for historical reasons. TripAdvisor is still making money through commissions but it has stayed behind their expectations (we believe this is a fair statement). In the OTA video in submodule 5.3 we will learn that TripAdvisor is managing bookings differently. They, however, had great hopes to grow this business model.

  • Transaction revenues are generated through direct bookings on the TripAdvisor pages / app. This type of revenue is more valuable for TripAdvisor as it gives them a 12%-15% commission on the booking price which far exceeds click-based revenue (but occurs less frequently). This will be typically in the few hundred dollar region, thus a probably >10x higher than a single CPC revenue.

TripAdvisor’s CPC and transaction revenue models are on the same page. TripAdvisor ranks the link to their own transaction revenue lower than other OTA’s links in order to provide the best price to their customers and to fulfil their contracts to list the combination of lowest price, highest auction bid and quality score at the top.

  • TripAdvisor has entered contracts with most of the leading global hotel chains for this purpose, such as Accor, Best Western, Hyatt, Marriott, Hilton, Wyndham and others. But also their competitors Expedia and Booking.com have entered such agreements. TripAdvisor had over 500k directly-bookable hotels in their inventory. (Again: this was in 2017)

Here we see only one link and that is to the hotel chain (Rydges). Once the user clicks there, they will end up on the booking page of the hotel and not on a booking page on TripAdvisor. Should the user book, then TripAdvisor will get a pre-agreed commission. This is how it looks in 2022.

The structure of the TripAdvisor hotel pages tells a clear story about the gradual shift of their business model:

  1. Above the fold (see the second last image), you will see pictures of the hotel and the CPC advertising buttons.

    1. Next, follows the hotel overview section with more details on the selected hotel and links to similar hotels.

    2. Third, comes the section where you can book a hotel directly through TripAdvisor, i.e. generating transaction revenues. This section only exists for the hotels that can be booked through TRIP (generating transaction revenues).

    3. The reviews section comes only in fourth place. This is TRIP’s core identity, the value proposition that made them what they are. But it is also the section that doesn’t generate a high amount of short-term economic benefits. It used to generate significant long-term cost benefits as it is the key contributor to ranking very high on Google’s organic search results (i.e. free traffic). But this channel is gradually changing and to some extent becoming less relevant.

(3) Display-based advertising

  • You can try to find fancy words for it, but basically these are the ugly, old banner ads. The pricing model is a cost-per-impression or more commonly called cost-per-mille (CPM), the cost per 1,000 impressions.

  • Advertisers are typically hotels, airlines, cruises, tourism organisations, suppliers, and so on.

  • Follow ads that follow users based on cookie data has given this form of ads a better use case than unsolicited, random displays.

(4) Subscription-based advertising

  • TripAdvisor will add as many hotels, restaurants, attractions, etc as possible to their databases. But the owner can only edit their profile, make special offers, list preferred contact methods, mail address, phone numbers, etc when they subscribe.

  • Subscription-based advertising is a contract for a period of time. For small Bed & Breakfasts this comes at a few hundred dollars per year.

  • If you find this sounds like what Yelp does, then you are not mistaken.

Tripadvisor’s annual report 2016 (and 2019) shows the composition of their revenues (they are reporting differently now):

  1. Click-based advertising (CPC) & transaction revenues: $750m / $1.2b = 63% (advertising total: 60% in 2019, agency model: 29% in 2019, no further updates on this split since 2019)

  2. Display-based advertising (CPM) & subscription: $282m / $1.2b = 23.7% 

  3. Other hotel revenues: $158m / $1.2b = 13.3% 


How to grow?

TripAdvisor will undoubtedly try to grow its transaction revenues. But that might morph them into a booking website and risk losing their identity of being a trusted adviser (the well-known principal-agent problem). The adviser business is less lucrative as it is too early in the decision/action process (intention generation) when the big revenues are in the booking decision (intention harvesting).

TripAdvisor would lose significant economic benefits (to the users) by morphing into another booking site. They would start ranking lower in the organic search results on Google and other general search engines. This is a significant source of free traffic to TRIP pages. They may become a smaller version of Booking.com and thus start an uphill battle.

We have followed our selected OTA representatives for over 5 years through their annual reports and articles. In that time we have also seen TripAdvisor trying to build out their agency model. But as far back as 2017, we predicted that they would run into problems. Our strategic analysis was based on strategy concepts devised by prof Michael Porter (lesser-known but yet equally valuable concepts as his Five Forces). They have held true.


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Business model Booking.com

Booking.com is a different kettle of fish with a market cap is around $96b (Nov 2021 and $73b in July 2022) and annual revenues of ~$11b, some 10x larger than Tripadvisor.

The majority of Booking's revenues come from the agency business model. But this share has reduced quite a bit from 74% in 2017 to 61% in 2021. The merchant model grew considerably in this time. Whether this is a pandemic-specific shift (one could imagine that Booking.com is far more careful with the curation of hotels that they choose in terms of being covid-safe) or not will be answered in the coming years.

  1. Agency business model: $7.98b/$10.7b = 74% in 2017 (61% in 2021)

  2. Merchant business model: $2b/$10.7b  = 19% in 2017 (34% in 2021)

  3. Advertising and other revenues = 6.6%.

The agency business model

(1) Revenue model

  • The agency model uses the same revenue model as the good old brick-and-mortar travel agency: commissions.

  • Booking.com has contracts with the hotels that it lists and will take a commission on each booking through its site between 10%-30%. The commission depends on the size of the hotel and how well it wants to rank on the Bookings.com pages among other factors.

  • Booking.com will display hotels taking into account the best interest of:

    • the user,

    • the hotels it has contracts with and

    • itself.

  • This is a key difference between Booking.com and TripAdvisor. In Booking.com hotels pay for ranking higher with a higher commission. As mentioned above, these are much higher costs than CPC-ads. The difference to CPC ads is that the hotels pay only for successful bookings not for driving traffic to their page.

  • Joining the preferred program is an additional way to get more traffic again paid for with higher commissions.

  • Offering hotel rooms on a commission basis has the benefit of not owning the inventory (hotel rooms) and thus not having cash tied as well as not carrying the unsold inventory risk.

Learn more what’s new in Booking..com’s business model as of Q2 2023!

(2) Customer acquisition

  • $2.7 billion in performance advertising in 2015 (annual report, pg 51) for advertising on Google, other search engines, on travel sites like TripAdvisor and other digital advertising. An additional $273m for brand advertising, e.g. TV.  (They dont split this figure out, but their marketing expenses in 2021 were $3.8b most of which would have been performance advertising).

  • An inherent characteristic of the hotel industry is that most people use the same hotel either only once or only a few times in their life. This is particularly the case for independent hotels.

  • Online travel agencies (OTAs) don’t need to worry which of one of the hotels the user books. They make their commission either way. Thus, they can pay much more for their advertising on Google than any individual hotel or even large hotel chains can pay.

  • You can check this for yourself. Search on Google for a hotel in your preferred destination and see who ranks on top on the Google ads. Do the same on TripAdvisor and see who ranks on top of the respective hotel pages. You will in most cases see an OTA because they bid higher in the auctions. And the reason they can do this is because a click has higher average economic benefit for the OTA than for the hotel.

  • In essence, Booking.com has better economies of scale in their customer acquisition than hotels.

  • This is one of the key reasons why platforms have excellent chances to enter industries with highly fragmented supply sides – even if the supply side has some very large players in it.

(3) Customer value proposition

  • Cheapest prices: Booking.com has contracts in place with the hotels that it lists. One of the clauses, called rate parity, is that the hotels can’t offer the same (type of) room at a cheaper rate on the hotel’s web pages. And if they do so they have to match it on Booking.com. Without such a rule, users could choose a hotel on Booking.com but then complete the booking on the hotel’s pages. (Note that the rate parity clause has been found not legal in some jurisdictions but has been upheld in the US.)

  • Amount of choice: Booking.com has now over 1 million places to stay in their database and a large number of filtering options that make it easier for the user to find what they are after.

  • Useful and persuasive content: a vast amount of pictures and useful reviews created by other users.

  • Reduction of risk: the star rating and reviews generated by other users reduce the risk of being disappointed.

(4) Technological lead

  • Let’s be honest. Booking.com is a killer sales website providing a great user experience and teasing emotional reactions combined with a deep infrastructure linking to the vast array of hotel distribution systems. Every year, Booking.com spends upwards of $100m to further enhance their technology.

  • Look at the website elements below. Then choose your favourite hotel chain and go to their booking pages. You will note that the latter is almost just a transactions form than an actual sales page that is trying to persuade.

The Booking.com site is one of (if not the) best online sales web pages. It is full of persuasive elements to close the deal. It also is an object of study for web user experience (UX) designers. (Click the image for a larger version.)

This business model qualifies as a true platform business model as the platform (Booking.com) does not own (not even temporarily) the inventory (being hotel rooms or apartments). They are a marketplace that offers the participating hotels better sales opportunities than any other marketplace online. Note though that the merchant business model is different as we will see in a moment. And this revenue type has increased as a percentage of Booking.com's revenues.


A further 5 years down the track, we can just confirm the strength of their business and revenue model. Booking has weathered all the challenges from competitors and hotels alike (and a pandemic) to still remain at the top of the travel industry. But not unbruised: their revenue is lower than pre-pandemic and probably somewhat more concerning is that Expedia has reduced the revenue gap. Nevertheless, Booking (as well as Expedia) have shown considerable perseverance during the pandemic. Even Google's dreaded entry into meta OTAs has not shown signs of affecting Booking's dominance.



Business model Expedia

The last business model we are going to look at is the merchant business model. Expedia makes the majority of its revenues through this model.

Expedia’s revenue (2015 vs 2021) by business model:

  • Merchant: $4.2b / $6.7b = 63% (58% in 2021)

  • Agency: $1.9b / $6.7b = 28% (34% in 2021)

  • Advertising: $0.57b / $6.7b = 8% (8% in 2021)

Merchant business model

  • In this business model, the platform buys hotel rooms and then resells them to travellers. The merchant gets the rooms cheaper by buying the rooms very early as well as in bulk. Often, the merchant bundles them with airfares, rental cars and/or other things.

  • Here is an example from Investopedia: “Expedia wants to offer seven-night, all-inclusive vacations for two in Jamaica. The travel company contacts a hotel in Jamaica and asks to buy a block of 100 rooms at $50 a piece instead of their Best Available Rate (BAR) of $90. Expedia then contacts airlines and makes 200 seat reservations to Jamaica for $600 (with little or no discount). The package is offered to guests at a cost of $1,700 for two people. People booking on Expedia are happy; they have saved $130 off the list price just by booking with Expedia! Expedia shareholders are happy because they have only paid $1,550 for a package that they have sold to 100 couples for $1,700. Everyone wins.” (in reality, not everyone won – there was lots of industry pushback on Expedia.In recent years, package deals have reduced considerably in prominence on Expedia. But the idea of buying early at reduced rates remains in place.

  • Moreover, once in a dominant position, Expedia managed to include a return clause into many contracts that allowed them  to return unsold rooms to the hotel 24-hours prior to the due date.

  • Cash flow timings are different to the agency model. In the merchant model, the business has to fork out the cash upfront. Nominally, they sit on the risk of not being able to sell all their inventory. However, with their increasing power that Expedia have managed to negotiate that they can hand back the room to the hotel 24 hours prior if they cannot sell it. This has tilted the deal much in favour of Expedia (we doubt whether or not this clause applies to all room/hotels).

  • When it started, this model was cash flow advantageous. The OTA collected the payment from the customer at the time of the booking which may be well in advance of the actual travel. More recently, travellers can pay after their stay.

  • The merchant model also allows individual hotel bookings. But the package deals are more attractive to those who don’t want to research flights, accommodation and other things separately. As mentioned, with many people being more personalised, package deals have reduced somewhat. However, there are big industry efforts to offer very personlised packages through the use of collected user data and AI. This is still in the early days.

  • Initially, the merchant business model was considered superior but over the years Booking.com demonstrated faster growth.

  • Like Booking.com, Expedia invests heavily into their technology.

In a strict definition, I would argue that the business model is not a platform business model as the business buys the inventory. If, however, they have a right to return most rooms at the last minute (i.e. 24hours prior to expiry), then we could consider it more of a platform business model in that the inventory purchase is not really owned inventory. We don't know this ratio. But you see how we need to look into the details to make a good call. It is also no problem to call it a hybrid model.

The agency & merchant business models are the predominant models in the industry in terms of revenue generation. The Advertising model, however, may be the most used as it has lower barriers to entry (companies do not need to fight against the billion dollar ad spend of Booking.com and Expedia). Advertising can be used by online travel magazines and many others.



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