Priceline.com Case Analysis

PRICELINE.COM CASE ANALYSIS

04.10.2010 Andrew Yakovlev Marketing 9703 Professor David Diamond

Priceline.com is the first and only Internet company to allow consumers to "advertise a unit of demand". Currently, this market technology breakthrough has stalled, and the original "Priceline for everything" vision is left unfulfilled. I propose two solutions. One expands the franchise, using a capacity-time-location target market selection framework. The other draws on current Web/IT trends to create a Priceline 2.0 with an R&D refocus on price discovery technologies.

FACTS OF THE CASE In 1998, Priceline.com innovated the online booking industry through its introduction of bidside plane ticket purchasing. The company used an effective advertising campaign, with William Shatner as spokesperson, to drive millions to their site and encouraging them to "name your own price". To lock in their bid consumers provided credit card billing information, committing to the deal. There was some control over the parameters of the bid such as departure city, date, time of day, amount of stops, and of course price. In turn, control in selecting the exact airport, time, and lack of stops had to be yielded. Priceline used a proprietary technology to search the unpublished price databases of partner airlines, on occasion subsidizing sales. Once a sale was made, Priceline charged a nominal ticket processing fee. The service was a hit. It appealed to the budget oriented traveler and effectively demonstrated that when it comes to airline service brands didn't matter. Furthermore, it's disintermediation strategy succeeded in disrupting the market. Having built a solid IP wall (tested by the likes of Microsoft and Expedia) and accomplishing

exemplary brand awareness, Priceline expanded into hotels, home financing and even new cars and groceries. The company was taken public in 1999 and the stock, driven by the belief in the company's fantastic growth potential, went parabolic. It was thought that the "name your own price" business model could be applied to virtually anything.

KEY ISSUES Personal fortunes rose along with Priceline's stock price and it is hard to fault the likes of founder Jay Walker and CEO Richard Braddock for "breathing their own exhaust". Priceline.com was an "Internet megabrand" and the the sky was the limit. Reality came crashing down with the bursting of the NASDAQ bubble and the company has come to embrace a humbler spot in the online booking ecosystem finding people preferred to use the site to find cheap listed prices for flights, hotels, rental cars, vacations, and cruises. The company has gone innovation dormant, leading me to believe that its leadership has retreated from the founding vision and is now coasting on the brand's great ROI, an unintended consequence of an aggressive advertising spend when the company was flush with capital. Consider this quote from Jay Walker, "When looking for what the next category would be for the horizontal Priceline 'name-your-own-price' model, we were told overwhelmingly by consumers that it should be groceries." This shows a leader challenged in understanding key questions like: • How does the model work and what does it work with? • How does Priceline leverage the brand and the IP wall? • How does Priceline extand the brand? • What tests need to be applied to markets, segments, and products? Priceline's forays into groceries and new cars also shows a lack of insight into the psychology of making an offer versus accepting one."Naming your own price" requires considerably more work. One needs to calculate, estimate, handicap, and weigh risk vs reward before making a

decision on the price. To a consumer used to either accepting or denying offers, making their own can be an anxious effort. And unlike gambling, which can be fun, here the reward is only known approximately. This grasp of consumer effort to reward process is also key to selecting appropriate price segmentation approaches.

RED HERRINGS The case includes some information that throws the subject off course. We are given a fake stock chart for PCLN and company financials for 1998 and 1999, as well as asides about stock swaps with airlines and ticket subsidies. Priceline is a marketing phenom that did, and still has the potential to further, revolutionize pricing, finance is not at the core of the issue here.

SUGGESTED COURSE OF ACTION I recommend two complimentary strategies for Priceline to pursue. The consumer based strategy will search out new types of offerings for the "name your own price" service. The B2B strategy will build on the company's technological cache to create a marketing research service.

Consumer - Extending the Franchise The Priceline model works best when considered in terms of capacity, time, and location (in that order of importance). Semiannual gym memberships selected by zipcode and radius are a good example. A gym has a certain numerical range of memberships that it needs to maintain, that's capacity. Time figures in the nature of memberships, most people pay for one, six or twelve month upfront. Lastly, gyms have a physical location and members live within vicinity. Brands do matter, but there is the phenomenon of brand to quality convergence. In the case of airlines, United, American, Jet Blue, all have deteriorated to the lowest common denominator, there is no fundamental difference in customer experience and their marketing has failed (blame it on jet fuel). On the other hand, gyms have pulled themselves up and all offer the standards we

have come to expect, some just throw in a little more and charge appropriately.

B2B - Innovation in Market Insight Pricing is critical to the success of a business. A statistically backed analysis, derived from real market interaction, and crossed with demographic information would be an invaluable market research tool. Right now, Priceline not only knows the exact mean for the prices bid on a hotel room in Las Vegas for next weekend, it can see the whole distribution. This data is raw and exclusive, coupled with algorithmic mining it could yield considerable insight into pricing, find trends, and even make predictions. This is a resurrection moment for the "any product" vision, the price insight know-how gains universal adaptability when coupled with the online sample sale retail model introduced by companies like the Gilt Groupe. When consumers are actually trying to purchase the product their offered prices will be genuine even in a promotional environment.

THE PLAN DEVELOPED Quality Ambassadors and Negotiator Badges Initially, we look at service businesses with fixed rates who have commodified by virtue of their pricing and branding. Gyms, certification and education programs, moving companies, restaurants, spas, barbershops and the likes may fit the bill. When marketing to these companies we work with them to standardize and minimize variables, there will always be a chance for more sales once the consumer is through the door. Standardization will come through "Quality Ambassadors", these secret shoppers will go to partner businesses and report back on their "Priceline Package" experience. This will minimize variables, prevent miscommunication in expectations, and serve as marketing research. The Tom Sawyer moment happens when people are allowed to bid on being a "Priceline Quality Ambassador" and a community is formed. The online points and badges trend (Farmville, Foursquare) shouldn't be ignored, "naming your own

price" can be game-like and the status and rewards that come with being a proven "Priceline Negotiator" is a valuable social incentive. Adding a mobile geospecific capability creates "Priceline Sheriffs" (organized in an internal BBB) who are responsible for a specific territory.

Massive Amounts of Problems, Solutions and Data Bringing price insight innovation to the marketplace is not going to be easy. Priceline will need to look at its IP not as a wall but as a foundation. One from which solutions to next generation market problems will grow. Will Priceline create some sort of centralized exchange or clearing house? How will it have instant knowledge of capacities and what bids are acceptable? How will the sample sale silent auctions operate? How will Priceline make its solutions flexible and modular? How will it be user friendly and manageable? The benefits will need to be clearly communicated to consumers and businesses. And when things take off there will be so much data. Will it be shared, sold, licensed? Will Priceline develop it's own value add algorithmic strategy where it becomes the Google of price discovery, will it partner with someone, or will it make an open platform through an API? How will it virtualize, mediating a full transaction when the user doesn't need to leave the computer to experience what they bid on?

JUSTIFICATIONS FOR THE PLAN My proposed strategies are synergistic and present a dynamic solution to the problem of company growth. They take account of a Facebook consumer world on the one hand, and the BI needs of the new economy on the other. Priceline mediates, without bias, between consumers and businesses. My plan focuses on this connection bringing further benefit both parties. Consumers get novelty, choice and freedom, businesses get capacity and price management innovation, and Priceline benefits through value generation.