Nearly two years ago, when Booking Holdings appointed Glenn Fogel as its CEO, analysts would have never have expected the company to tilt toward brand marketing or make a big push toward the merchant hotel model.

That’s because Booking.com, the parent company’s biggest brand, grew up since its early days a decade-and-a-half ago on paid marketing through sites like Google, and scaled its business on the agency, or pay at the hotel, business model.

But there’s a dramatic shift underway. In its third quarter financial results announced Monday, Booking Holdings revealed that its merchant hotel revenue jumped 53.4% to nearly USD 1.05 billion while its agency revenue grew less than 1% to USD 3.54 billion.

If you looked at the numbers from the perspective of room nights booked, prepaid merchant room nights leaped 65.7% compared to the third quarter of 2017 while agency nights jumped a mere 2.3%.

Part of this growth in Booking Holdings prepaid hotel model is taking place in Asia, where it operates its Agoda brand, which traditionally has traditionally used the merchant model, and the much-larger Booking.com, which has relied on the agency model.

The spike in Booking Holdings merchant hotel bookings, which improves cash flow and brings it higher commissions from hotels, coincides with its rollout starting in the fourth quarter of 2017 of a new global payments platform. The new payments technology gives consumers and hoteliers more choice, enabling them to pay and take payments, respectively, through systems as diverse as credit cards, Alipay and GrabPay, for example.

Major benefits

Seth Borko, senior research analyst for Skift Research, said there are several implications for Booking Holdings putting new emphasis of merchant hotel bookings, which accounted for 21.6% of the company’s USD 4.85 billion in third quarter revenue.

“From a cash flow perspective, in a merchant transaction Booking Holdings collects the cash upfront at the time of the reservation and only remits cash to the hotel at the time of stay,” Borko said. “This means that Booking gets to hold onto the cash for several months, mostly for free, and can use it to invest in new projects. It also boosts Booking Holdings’ revenue as merchant transactions tend to have higher commissions associated with them.”

In fact, in the September quarter, Booking’s commissions from merchant hotel bookings were around 20% compared with 18.6% for the pay when you stay, or agency, transactions, Borko said.

Does that disparity in commission rates between the two models seem relatively ho-hum and minor? Not at all.

“These few percentage points may not seem like much, but on the tens of billions in gross bookings that Booking Holdings transacts, a simple 1% increase in take-rate would boost revenue by USD 900 million over the course of a year,” Borko said.

Marketing shift, too

The other major change that Booking Holdings has been making over the last year is to lean into brand marketing - some of it in the form of digital video, as well as TV - as it seeks to emphasize getting travelers to book directly on its sites.

In some respects, it resembles the campaign by some major hotel chains over the last couple of years to capture direct bookings although, unlike the hotels, Booking.com is not offering users lower rates when they book direct.

Booking Holdings grew its brand marketing spend 27% to USD 160.1 million in the third quarter, compared with the year-earlier period, while its performance marketing in search engines increased 7% to USD 1.3 billion.

Brand advertising is still relatively small for Booking Holdings compared with its spend in performance marketing, but the trajectory currently favors brand advertising. In the third quarter, Booking Holdings’ brand marketing as a percentage of revenue increased 50 basis points to 3.3%, while its paid spend in search engines dipped 70 basis points to 27.1% of revenue.

You can expect Booking Holdings to increase its spend on brand marketing, but it will be flexible depending on market conditions and the opportunities it sees, Fogel of Booking Holdings said.

“You saw some of the increase already, and we say we are going to spend more,” Fogel told financial analysts and investors during the company’s third quarter earnings call Monday. “And the reason is we believe in the long run, we want to try and drive as much traffic as we can directly and part of that is creating a brand awareness.”

Alternative accommodations

The increased spend on brand marketing to drive direct traffic appears to be benefiting Booking.com’s alternative accommodations business, which now counts 5.7 million listings, a 21% increase year-over year. Fogel said some consumers visiting Booking.com for the first time are doing so to search for stays in homes rather than hotels.

“That’s something we really like see growing because that is showing there is awareness of our Booking Home product beginning to grow,” Fogel said.

For the quarter, Booking Holdings saw its room nights booked jump 13.4% year-over year. For the first time in its history, the company booked more than 200 million room nights in a single quarter. The company expects that its room nights booked will climb 12% in the fourth quarter.

Direct channel, which remains the largest single source of new customers, continues to represent about half of our booked room nights and continued to grow faster than the overall growth rate.

In some ways, Booking Holdings is in investment mode. Officials said they are willing to tolerate a modest decrease in profit margins in 2019 to make investments in its platform and to spur growth.

In the third quarter, the company’s profits increased 3% to USD 1.8 billion on revenue of nearly USD 4.85 billion, a 9.3% jump year over year.

Expedia VS Booking Holdings 

For years, the rival Expedia Group relied on merchant hotel bookings, but lost ground to Booking Holdings, which scaled its business and overtook Expedia using the agency model. In recent years, Expedia copied Booking.com in several ways, including giving its customers the choice to pay at the hotel.

Now, Booking Holdings, which has always done merchant hotel bookings at its Priceline.com and Agoda brands, is emphasizing these prepay hotel bookings in a major way.

Still, Borko of Skift Research points out that there are still significant disparities in Expedia and Booking’s businesses.

Said Borko: “Expedia earns about 50% of its gross bookings from merchant transactions, while Booking Holdings only did 22% in this most recent quarter.”

Still, you can expect that gap to narrow.