The Secret of Priceline.com

Priceline (Quelle: priceline.com)

Quelle: priceline.com

Despite initially crash-landing, US company PriceLine.com is now doing very nicely indeed. It achieved this by breaking a key rule of buyer-seller relationships. Two people check in to the Park Hyatt in Chicago; one pays USD 480, and the other a third of that amount. If guest number one finds out, they’re unlikely to be very pleased, and it’s also a bad deal from a luxury hotel’s point of view – but in this industry, knockdown rates are a necessary evil when occupancy is low. Bargain-basement offers can also damage the reputation of a five-star business, so they need to be kept quiet. Regular customers paying rack rate detest seeing people walking in from the street and getting better deals. This catch-22 is one of the main reasons for the success of Priceline, the Connecticut company that auctions hotel rooms, flights, and car rentals online. Sales have been climbing steeply for years, growing from USD 35 million in 1998 to USD 4.4 billion in 2011. The only way of achieving growth like this is to offer a unique product.

Priceline’s Name Your Own Price system has been a big success. It breaks with the traditional rule of retailing whereby the seller sets the price and the buyer decides whether to pay it, turning the relationship on its head by charging a commission for acting as an agent for the seller – say a hotel operator. Instead of paying a fixed price, the customer makes an offer for the room, which the hotel is free to accept or reject.

Five-star hotels at two-star prices

This business model is different to that of a supplier offering discounts on hotels and charging a commission. At Priceline.com, customers specify where and when they’re traveling, which part of the city they want to stay in, how many stars the hotel should have, and the maximum price they’re willing to pay, which of course is way below the rack rate. Before the customer is told the name of the hotel, they enter their credit card details. If the hotel accepts the offer, this amount is immediately debited and they fi nd out where they’ll be staying. Customers in the United States seem unperturbed by the element of uncertainty: some hotels sell 40 percent of their rooms through Priceline.

Ayelet Gneezy, professor of marketing at the Rady School of Management in San Diego, is familiar with the Priceline business model. She says the company exploits the fact that the public views Name Your Own Price (NYOP) as synonymous with Pay What You Want (PWYW). Under the NYOP system, the customer makes an offer which the company can accept or reject. “In the PWYW model, it’s not possible to turn down a bid,” Gneezy says. “All the power is in the hands of the consumer, and they decide how much they ultimately pay.” She points out this works only if the product or service serves a charitable purpose or generates personal goodwill. In business-to-business transactions, being forced to charge low prices is disastrous. Potential buyers will go to endless lengths to get the best deal, using online forums to discuss what would be an appropriate bid, and anyone thinking of offering USD 20 for a night in a five-star hotel is quickly told that they have little chance of success. But it does happen sometimes, and the fortunate few who do find bargains boast of their achievements on sites like Biddingfortravel.com.

Captain Kirk to the rescue

Priceline.com was founded by Jay S. Walker, whose first major business venture was not a shining success. He wrote a book on strategies for winning Monopoly, but was sued by the game’s manufacturers, Parker Brothers, and the profits from the book were eaten up in legal fees. He then founded a thinktank, Walker Digital, in 1994, and the idea of NYOP came to him two years later. Walker realized this was the ideal pricing model for service providers seeking to avoid a reputation for bargain-basement discounts.

In 1997 Walker found out that thousands of half-full aircrafts were taking off in the United States each day, decided to test his system on airlines, and established Priceline. At first only two smaller players, TWA and America West, were interested in getting rid of empty seats and saving on marketing costs. But then Richard Braddock came on board as CEO in the following year. As the former president of Citicorp, he had excellent contacts with senior managers of major US airlines, and agreed a deal with Delta Airways by offering it the option of 12 percent of Priceline’s shares.

The real breakthrough with consumers came from the unlikely figure of William Shatner, better known as Star Trek’s Captain Kirk. The company began running self-mocking ads on TV and the Internet, and Shatner accepted payment in shares. It was a shrewd move on his part: Priceline was a penny stock in 2002, but is now trading at around USD 528. Shatner reportedly earned some USD 600 million from the shares, even though the company came close to collapse at the height of the dotcom bubble. An attempt to extend the pricing model to cellphone tariffs, cars, and secondhand goods failed miserably in 2002, so the site began concentrating on fl ights, hotels, and car rentals. This was its salvation – but it also proved that not every new sales technique works for every type of business.

Guido Walter

published in Think Act Issue 18, 2012