TripAdvisor: It’s not about the destination – it’s about disrupting the travel guide industry on the journey.

How did TripAdvisor disrupt the travel planning industry – and win the dominant position in the market? The deep interconnection between value creation and value capture inherent in the business model makes TripAdvisor a hard one to beat.

Any frequent traveler knows – beyond the shadow of a doubt – that the market for travel guides has been dramatically eroded by TripAdvisor. Launched as a startup with $4.2m in VC capital in 2000, this champion of user-generated content has skyrocketed to a current market capitalization of $7.4b.[1] The travel guide industry, by contrast, has plummeted: after sustaining a 41% reduction in sales industry-wide[2], in 2013, BBC sold Lonely Planet for a $121m loss, while Google nixed Frommer’s hardcopies altogether [3].

How did TripAdvisor disrupt the travel planning industry – and win the dominant position in the market? The deep interconnection between value creation and value capture inherent in the business model makes TripAdvisor a hard one to beat.

Value Creation:

TripAdvisor is a unique company in that it has managed to create tremendous value for all of its constituents – with the exception of travel guide publishers.

First and foremost, TripAdvisor creates value for its readers because of its massive – and growing – accumulation of candid reviews of hotels, restaurants, activities, and sights around the world. Unlike a travel guide, which represents the opinion of very few reviewers, and provides very limited suggestions for dining and accommodations in key cities, TripAdvisor contains reviews for just about every restaurant, bar, food truck, café, hotel, hostel, and guesthouse in most cities around the world – 6.8 million, to be exact [4]. The sheer breadth of options, combined with reviews from ‘real people’ who can add real details about their experience (which dishes to order, how to eat cheaply at a fancy locale, which hotel room has the best view or the least noise), provides readers with a wealth of information far superior to that found in a guidebook. TripAdvisor’s relentless focus on product management and user experience continuously improves user retention and contribution,

TripAdvisor also creates value for its reader-travelers by empowering them to share their experiences with others. The platform gives them a way to share their favorite spots – and warn other travelers away from potential pitfalls. The value of having a voice cannot be underestimated.

Further, TripAdvisor creates value for the proprietors of restaurants, hotels, etc. by making them highly visible to potential customers. For example, new restaurants that would normally need time to acquire customers can immediately become visible on TripAdvisor, and rapidly acquire positive reviews if they perform well with their earliest visitors. Owners and managers can also use TripAdvisor as a valuable source of candid feedback – then marketing their best selling points actively, and (hopefully) fixing their weaker points. This feedback loop also improves the value proposition for travelers – as providers increasingly live-and-die by their TripAdvisor ratings, their service and quality is likely to improve.

Finally, TripAdvisor has scaled to 390 million average monthly visitors [4] – a windfall for advertisers. TripAdvisor is a locus for travel research, and since advertisers always want to advertise in the most visible spot, TripAdvisor presents a fantastic opportunity to capture customer clicks. Further, TripAdvisor’s data platforms enable advertisers to reach an ever-more-targeted customer base, and improve their yield. [5]

Value Capture:

TripAdvisor’s ability to capture value hinges on their ability to create value for all parties involved – and drive a network-effects business. By creating value for travelers and providers in tandem, TripAdvisor created the ideal advertising platform. Advertising revenue is TripAdvisor’s clear path to capturing value; websites with the highest traffic demand the highest advertising prices, as they provide the greatest value to advertisers [5]. Further, given that the sites with the most traffic will often be platforms driven by network effects, first-mover advantage is significant. TripAdvisor was the first user-generated content travel website to reach a tipping point in scale, making it increasingly difficult to overturn its industry lead.

Diving deeper, approximately 70% of TripAdvisor’s revenues come from click-based advertising, which includes traditional CPC as well as the sites Instant Booking feature [6]. Because TripAdvisor is a research-focused platform, site visitors are much more likely to click on links, ads, and book instantly than on other sites that hope to generate revenue through click-based advertising. The balance of TripAdvisor’s revenues are generated through display ads, subscriptions, and transaction fees – their fastest growing segments. [6] TripAdvisor’s significant focus in recent years on acquiring other attractive travel-focused websites (including booking sites) and potential competitors has only added to its bulk in terms of a formidable content and user base. As TripAdvisor’s properties, visitors, and listings continue to grow, it will only become more valuable to potential advertisers – and its ability to capture value will scale in parallel.

 

Sources:

[1] http://www.businessinsider.com/the-tripadvisor-ipo-2012-2

[2] http://www.publishingtrends.com/2015/06/technology-and-the-travel-guide/

[3] http://www.economist.com/blogs/gulliver/2013/04/guidebook-industry

[4] https://www.tripadvisor.com/PressCenter-c6-About_Us.html

[5] http://www.businessinsider.com/how-tripadvisors-business-works-2011-12

[6] http://marketrealist.com/2015/11/tripadvisors-revenue-streams-cost-per-click-model/

Image:

http://www.telegraph.co.uk/content/dam/Travel/leadAssets/32/11/tripadvisor_3211288a-large.jpg

Background Sources:

https://gigaom.com/2011/09/17/the-tripadvisor-effect-are-online-reviews-making-brands-irrelevant/

https://www.bostonglobe.com/lifestyle/travel/2015/05/30/are-travel-guidebooks-making-comeback/mKrCIPouyj1ktjnLmgRorO/story.html

https://techcrunch.com/2011/12/21/founder-stories-tripadvisors-kaufer-crucial-early-decisions-paved-the-way-for-an-ipo/

http://marketrealist.com/2015/11/tripadvisors-business-model-investors-need-know/

 

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2 thoughts on “TripAdvisor: It’s not about the destination – it’s about disrupting the travel guide industry on the journey.

  1. Great post Sonali!

    A few questions on TripAdvisor concerning threats as well as competitive response.

    1) How do you think TripAdvisor should react to the threat posed by Google (http://www.theverge.com/2016/9/19/12943054/google-trips-travel-app-android-ios). The app has some beautiful design and leverages google reviews (arguably not as strong as TripAdvisor) and google maps (likely stronger than TripAdvisor) to seamlessly create a personalized travel guide. What should TripAdvisor focus on to continue to stay ahead?

    2) I’ve never booked a hotel, flight, or experience through TripAdvisor. I generally reach out to hotels after researching them on TripAdvisor. I think investors have become concerned as to whether TripAdvisor can fully monetize their platform (share price down ~50% over the last 12 months) – what is TripAdvisor doing and what should TripAdvisor do to enhance their capability in this regard?

  2. Thanks for the post Sonali! Tripadvisor has been my best friend while travelling around the world and I can’t imagine what I’d have done without it.

    However, I do think the company is an interesting phase right now where Airbnb (if it survives the regulatory issues) is looking into booking entire travel packages for you. Tripadvisor may have a big database but it’s only a matter of time before Airbnb catches up. In that case, how do you think Tripadvisor will respond to this? Also, I see tons of opportunity to monetize Tripadvisor’s business model further. Curious to hear your thoughts on that as well.

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