’s Inventory-Accelerated Paid Marketing Growth Loop

On Wednesday the market capitalization of the Priceline group exceeded the $100 billion mark, making it over 4 times bigger than its next largest rival in the Online Travel Agent (OTA) space, Expedia. 

While Priceline might conjure up images of hokey William Shatner ads, in reality 85% of the Priceline group’s revenue is made from its subsidiary, the dominant hotel OTA in Europe. 

This week, we’ll explore how Priceline grew its $133 million acquisition into $8 billion in annual revenue.

How OTAs work

OTAs are an intermediary between consumers and travel providers in three main verticals: hotels, flights and car rentals. 

Because the number of airlines and car rental agencies is limited and almost all sites contain the same inventory, opportunities for margin are low. As a result, OTA has evolved into a category where flights and car rentals are used almost purely as leadgen tools for high margin hotel bookings, which make up 93% of the revenue in the OTA space., started in 1996 in the Netherlands as one of the first OTAs. After becoming the dominant European OTA, it was approached for acquisition in 2002 by Expedia but the deal fell through due to differences in the companies’ business models. operates under the Agency model, and Expedia operates primarily under the Merchant model (although they’re moving more and more towards Agency).

Initially, Expedia considered the Merchant model so superior that’s insistence on using the Agency model was a deal breaker for the acquisition.

Merchant Model vs Agency Model

Booking Table.png

With its combination of high margin, high upsell, negative working capital and low risk, Expedia initially chose the Merchant Model, and decided against acquiring a company wedded to the Agency Model. 

However, Expedia didn’t take into account the differences in market dynamics between the US and Europe, and so failed to achieve a strong fit in the US market. 

The US, has a “fat head” with a few large hotel chains with relatively sophisticated IT infrastructure and business units. By contrast, Europe has historically been more fragmented with a large bulk of “long tail” hotels, where a single operator only owns a few dozen rooms. 

Because of its low touch sales model, was able to scale its inventory acquisition faster and more broadly, fending off many competitors in the US before being finally acquired by Priceline in 2005. 

Related Lecture: Product Channel Model Fit 

How Grew to $9 Billion in Revenue

Paid search has always been the most natural acquisition channel for hotel bookings due to a combination of high transaction amounts and high intent. 

Online travel is the third highest revenue vertical for Google after insurance and retail, and is its largest ad spender in the travel vertical. The company spends around $3 billion per year on ads, or about 33% of its $9 billion in annual revenue. 

Because the advertising market is so competitive, growth is depends on being able to bid the highest while still remaining profitable. 

Under its Merchant Model, Expedia had complete pricing control. This meant the company could promote high margin transactions (bundles) as their primary strategic focus. 

Meanwhile,, under the agency model, was being paid the same margin for every transaction. That meant that the company’s the main lever to grow revenue -- in large part to maintain a competitive CAC -- was its traffic conversion rate.’s design has long been recognized as having a maniacal focus on conversion, but the other main influencer of conversion rates for any marketplace is available inventory.

To that end, focused relentlessly on adding more inventory. By contrast, Expedia was slowed by its reliance on third party services to manage inventory and by its need to preserve high margins.’s Paid Marketing Growth Loop

booking.comgrowth-Reforge.jpg’s emphasis on inventory, rather than on margin, gave its Growth Model a competitive advantage in the world of paid search. Its low-friction Agency Model allowed it to scale inventory quickly and broadly, and inventory growth accelerated all three steps of its core Paid Marketing Growth Loop.

Even as Expedia has gradually shifted more and more of its business away from the Merchant Model and towards the Agency Model, that company’s inability to disrupt the Growth Loop that established at its outset means that it struggles with persistently higher CAC and lower profits. 

Related Lecture: Determining What Your CAC Should Be

Expedia still maintains its dominance in the US, but both companies have expanded internationally -- where the hotel industry more closely resembles Europe’s ecosystem of mom-and-pop establishments with limited IT expertise. The growth of international markets has thus further entrenched’s lead.

Although the superior margins of the merchant model may seem more attractive at first glance, history has shown that ease of onboarding for the supply side of the marketplace carries still more impact. 

That’s because critical mass in inventory critical mass multiplies the power of the Paid Marketing Growth Loop at the core of the OTA business. 

This explains why Expedia, with 82% of the topline revenue of the Priceline Group but with high CAC and high-friction inventory onboarding, has a market cap of just 24% of that of its competitor.

Other Growth Reads

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How to Set Up, Staff and Scale a Growth Program by Anu Hariharan and Gustaf Alstromer

Minimum Viable Analytics by Andy Carvell