I’m in love with Travelzoo’s business model. In short, Travelzoo takes paid advertisements, throws them up on their site (that looks like it was designed by an intern), sends a weekly note to their e-mail list and reels in nearly $80 million/year in revenue. In their words, Travelzoo is an online lead-generator and discount aggregator for the travel industry.

Travelzoo is operating a brilliant business model – they hold no inventory and provide no original content. They simply list links to travel deals. That’s it. Travelzoo doesn’t actively search for the best discounts, rather the travel providers pay to list on the site. If the Travelzoo team thinks it is a worthy listing they allow it, if Travelzoo doesn’t find it worthy they decline the listing.

The fact is, Travelzoo is providing a valuable advertising resource. They’ve built quite the empire, and smart marketers who are watching ROI choose to advertise with Travelzoo again and again. Viewers know Travelzoo has a deep inventory of great deals, and they keep coming back.

Reasons this is such an awesome business model:

• No inventory – Travelzoo is simply linking to the travel provider and the travel provider gets stuck with unsold inventory.
• Consumers don’t purchase through Travelzoo – Travelzoo never deals with the myriad customer service issues associated with selling to the customer. If the traveler doesn’t like something about their trip they call the travel provider, not Travelzoo.
• Low overhead – Travelzoo appears to be burning through a lot of cash, but what legitimate expenses do they even have? They need staff to parse through travel packages and they need account managers to maintain relationships with travel providers. They probably have a pretty large marketing department and a few web developers. Capital investment for this business model is minimal.
• Legitimate first mover advantage – In this business model advertisers beget viewers which beget more advertisers (see network effects). As the competitor in this space Travelzoo is the market leader. Beating Travelzoo without a differentiated product would be damn near impossible.

Challenges to this business model:

• Hard to sustain your competitive advantage when the only thing you offer to advertisers is a lot of viewers, and the only thing you offer viewers is a lot of advertisements.
• Technology will kill this model eventually. I promise. Something similar to Kayak will pull up customized travel deals and travel providers will have no incentive to pay Travelzoo.

Update: Click here for a related post about Travelzoo’s most recent earnings call.