Booking Holdings(NASDAQ:BKNG) management is ambivalent about one of the most potent weapons in the company's earnings armory: its performance marketing expenditure.

A high yield in performance marketing helped catalyze the company's 13% year-over-year improvement in room nights booked during the third quarter. This marketing category focuses on funneling traffic to the company's travel properties through paid channels, including online search engines, travel research services, and affiliate marketing. Booking Holdings allocates more resources to performance marketing than any other expenditure on its ledger -- even compensation expense.

In fact, through the first nine months of 2018, performance marketing has equaled exactly 50% of the company's $7.12 billion in total operating expense.

Chart of the relative sizes of Booking Holding's operating expense categories.

Data source: Booking Holdings. Chart by author. All dollar amounts in thousands. G&A = General and administrative expenses. Dep. & Amort. = Depreciation and amortization. IT = Information technology.

Performance marketing drives the business forward and provides for Booking Holdings' ample profits and cash flow. And it offers flexibility as well: The organization can choose in any given quarter to prop up revenue growth with bulk marketing purchases, though this "volume" approach to revenue hurts operating margin.

In practice, the company maintains an opportunistic attitude toward this expense. During management's third-quarter earnings conference call, CFO David Goulden explained that Booking Holdings is always testing demand elasticity within paid channels in real time to understand where it can obtain a high return on investment (ROI). Both Goulden and CEO Glenn Fogel observed that at various points during the third quarter, opportunities arose to spend more in certain paid channels, resulting in the double-digit growth in room nights booked. 

The snag in this opportunistic, data-driven ROI methodology is the unpredictable nature of paid channels. It's hard to peg in advance at what point, for which reason, and through which venues the ROI from paid marketing will rise. Consumers' search habits change frequently, as do search engine algorithms, metasearch results, and the efficacy of affiliate websites. 

Booking's executives like to refer to paid channels as "dynamic," and I think this is a great way to describe the lucrative yet fleeting nature of the returns tied to performance-based spending.

Pool area of colorful tropical resort villa at dusk.

Image source: Getty Images.

For this reason, management is a bit wary of its greatest income generator. The company vows to continue to pour resources into performance marketing while attempting to optimize profitability; a sensible path given the spend's significant support of the top line. But management is also extremely attuned to driving a yield from Booking's second major marketing expenditure: brand marketing.

In contrast to performance spends, brand marketing totaled just $385.3 million during the last nine months, or roughly 5% of the company's operating costs. Brand marketing is the primary tool for creating direct business, i.e., business that doesn't come through a paid channel. 

As its name suggests, brand marketing fuels the company's brand recognition, resulting in direct visits to and bookings on the organization's online properties (versus bookings completed when visitors arrive via a performance channel ad on a third-party site). 

In the past few quarters, direct business has resulted in more than half of the company's new customer growth. While it's impossible to trace all of this to the brand marketing spend, improving the mindshare of Booking's major brands, including,, OpenTable, Kayak, and, has become a very evident priority for management.

Booking Holdings also wants to increase customer loyalty, as repeat users furnish a sustainable source of direct traffic. While a first-time customer may book a service as the result of either a performance or direct marketing effort, management has often emphasized ease and efficiency of the online experience to entice the customer to return. A hassle-free service that anticipates the traveler's requirements while offering value-added options is key to turning the trial user into a loyal customer who will arrive through direct channels on future visits.

Looking forward to next year, the organization is leaning toward increasing brand marketing in digital channels, which offers a more concrete way to measure results, versus, say, TV advertising. This appeals to the company's native data-oriented "A/B testing" approach to business decisions. Booking Holdings is also planning to allocate more brand marketing to mobile traffic, from which it derives more than 50% of its bookings.

A higher percentage of direct business will, of course, improve margins over time. As Fogel said at the end of the second quarter, "[O]ne can always buy more growth, and it depends on what cost." Shareholders interested in tracking Booking's shift to quality growth can monitor an expected increase in brand marketing as a percentage of total sales (relative to performance marketing) over the next several quarters.