“TripAdvisor is to travel reviews what Kleenex is to tissues.”
By Henry Harteveldt
TripAdvisor may be one of the most fascinating companies I know and so I was excited to take a closer look at their business model. This is a company that took $4 million of invested capital to build a company now worth over $4 billion sounds very exciting. TripAdvisor is more of a classic consumer internet success story, but with even more powerful network effects and an amazing business model. Magical, really.
Founded in 2000 by Stephen Kaufer and Langley Steinert, Boston-based TripAdvisor is a travel website that provides reviews and other information for consumers about travel destinations around the world. The company now has 65 million unique visitors each month scouring the site for reviews of hotels, restaurants and sites around the globe.
Kaufer described to me with some hesitation what happened – after a year and a half into running his own IT business, he had no clients and no revenue and was running out of money. Then, 9/11 hit and the travel industry was decimated. Kaufer began to despair that his fledging start-up would go under. Fortunately, on the side, the company had built up TripAdvisor.com as a demo site to show the prospective clients what a vertical search engine could do. When he saw TripAdvisor.com start to pick up traffic, he decided to pursue an online advertising based business model with banner ads. “Going B2C was daunting and not in our core DNA,” Kaufer remarked, but testing hypotheses was very much in the company's DNA, as well as evaluating data to learn and adjust. TripAdvisor, in effect, was a model lean start-up with an engineering-driven, product-focused founder.
After a few weeks of waiting and pondering, Kaufer executed his second move: a cost per click model (now known as CPC). Every time a consumer clicked on a hotel to book a room, TripAdvisor would charge the hotel something. Suddenly, everything began to (literally) click. Three months into launching the new model, TripAdvisor was earning $70k per month and achieved breakeven. The company has grown profitably ever since. Kaufer originally hired editors to comb the Web for great travel articles and link to them, and then allowed users to post their own reviews on the site as a whim. When the company saw that user reviews were getting all the traffic, they adjusted to focus on user reviews, such that fresh, authentic content was always available and didn’t cost the company any money to produce Word of Mouth in action.
Lesson 1: Focus On Finding a Great Business Model
After some searching, TripAdvisor found a magical business model, representing social media and user-generated content at its best. Content is free and supplied by consumers who write reviews voluntarily. These consumers allow this content to be utilised without asking for anything in return. TripAdvisor is a classic example of a network effect business and a reminder of how financially attractive network effect businesses can become successful. There are three sides to the network: the consumer, the venue and the advertiser. The network becomes more valuable as it grows to each party – with more consumers providing more interesting content, more venues providing more access to vacation options, and more advertisers offering deals and convenient travel bookings. This virtuous cycle has fuelled its growth nicely and allowed the company to offer better value to its users.
Lesson 2: Maintain a Sense of Urgency
Kaufer’s description of the TripAdvisor culture and development process makes it clear that he has been able to maintain a strong sense of urgency, even at scale. “No matter how large we are, I always want to maintain a start-ups mentality,” said Kaufer. "We have a once a week meeting cycle that we have religiously maintained for years...even with hundreds of developers working on site. If my team tells me they want to launch a new feature in two months, I ask them what prevents them from doing it in two weeks. Culturally, I’m happy to play the ‘crazy CEO who doesn’t get how hard it is to build and release stuff’ in order to push.” I know many CEOs who don’t have the same comfort pushing their engineering teams. I wonder if Kaufer’s ability is here is in part grounded in the fact that he himself was a vice president of engineering and feels comfortable challenging his product team with authority.
Lesson 3: Maintain a Product Focused Culture
Kaufer described to me that, the company has always had a test and learn culture and a product-focused culture. “I enjoy focusing on building a great product,” he commented simply. “I can maintain that focus as we grow because I have a fantastic executive team who enjoys doing things that I don’t enjoy doing.” I thought particularly interesting: “We do not have web-designers at TripAdvisor, if you design something, your build it, and if you build it you test it. Engineers who do not like to go outside their comfort zone, or who feel certain work is "beneath" them will simply get in the way.” In other words, there is a certain style of product developer required to fit into the TripAdvisor culture - someone who is focused on building great products end-to-end, just like the CEO is.
TripAdvisor may have a magical business model, but consumer travel remains a very competitive market. Google’s $700M acquisition of Cambridge-based ITA and more recent acquisition of travel content leader, Frommer, is an indicator that others are in pursuit of TripAdvisor’s core business and juicy profit margins.
That said, whatever the future may bring, the lessons from TripAdvisor’s successful twelve year journey to scale are enduring.
A few issues to think about on our case final case study
Summary: This question belongs to marketing and discusses about services provided by TripAdvisor as an online business and key strategies adopted by TripAdvisor.
Total word count: 1420
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