A key metric for online travel agencies (OTAs) is advertising efficiency, or ad expenditure divided by room nights booked.
On this score, the data for 2012 was impressive. Expedia Inc and Priceline Inc, in particular, are converting hotel shoppers’ clicks into overall revenue growth without sacrificing net margins.
That efficiency is important because the largest chunk of the OTAs’ ad spend is still variable marketing, primarily by buying links on Google search results, at the top and on the right-hand side of a results page.
It's also surprising because some critics would have expected a Cold War to break out among the OTAs to drive up advertising costs, Google to take advantage of its oligopolistic power, or increased difficulty in converting incremental customers who are not yet online shoppers.
Advertising spend per room night
Analysts Brian Nowak and Michael Costantini of SIG, a trading firm in Bala Cynwyd, PA, define advertising efficiency as the trailing six months of advertising expenditure divided by the trailing three months of room nights booked.
By that metric, Priceline Inc and Expedia Inc’s ad spend per room night became more efficient throughout 2012.
Priceline Inc spends about $11 in digital marketing for every person it successfully converts to a hotel night’s stay, a cost that has remained proportionally consistent in recent years to the amount of profit the company can make off of the average customer.
Expedia Inc spends $22 in advertising for every room per night it books. That figure is higher than Priceline’s, but it’s significantly better than what it used to be years ago. Expedia had double-digit percentage improvements in its ad efficiency in 2012. Analysts Nowak and Costantini forecast that Expedia could drive that number down another percentage point in 2014.
Promising long-term trend
The elegance of this metric from SIG is that it allows a consistent measure of performance that isn’t distorted by seasonal or exogenous factors that require one-time bursts of spending. For instance, the analysts have excluded from their calculations incremental offline TV branding spend by Priceline Inc (such as for Booking.com and Kayak) and by Expedia Inc (such as for its new purchase Trivago).
One caveat: The research isn’t saying that any individual campaign is particularly efficient as a way to convert consumers. Cause and effect is hard to establish for why users click on individual ads—or whether those ads generated sales that would not have otherwise happened without them.
News that's worth a toast
What the research does suggest is that the companies have their overall ad budgets in control and can continue to grow without spiraling costs.
This talk of efficiency is more "Math Men" than "Mad Men", and nothing Don Draper would get excited about. But for top executives at the world’s largest OTAs, the numbers are happy ones to tell investors.
NB: Promotional photo of Mad Men, broadcast in the US on AMC, by Michael Yarish.