Priceline.com's Brave New World
You may have seen the ads in national publications such as The Wall Street Journal and USA Today. They look like typical airline ads -- the ones that list a bunch of cities and super-low round-trip airfares. But these ads are different.
There are no airfare prices in sight. Instead, you see "Name Your Own Price" listed next to the various domestic and international destinations.
Welcome to priceline.com, a new type of e-commerce that calls itself a "demand collection system." The Web-based service, which is making a lot of noise with its national radio and print marketing campaign, allows consumers to state how much they are willing to pay for a host of products, including airline tickets, hotel rooms, new cars, and even home mortgages. In turn, sellers -- airlines, hotels, and the like -- generate sales without cutting into their publicized retail prices.
Priceline.com, based in Stamford, Conn., launched its name-your-own-price service for leisure airline tickets in April 1998. From April through September 1998, it sold some 67,275 tickets for 16 airline partners including Delta, Northwest, and America West. In July, the company added a car-buying service in the metropolitan New York area. In October, it expanded to include lodging, allowing consumers access to one- to five-star hotel rooms in more than 35 cities, including New York, San Francisco, Los Angeles, Washington D.C., and Chicago. Priceline.com now has 2.5 million available room nights per month -- with more than 1,000 properties signed up to participate -- and is filling more than 1,000 room nights a week.
"We are literally in the first baby steps of this service."
-- Jay Walker
Founder and Vice Chairman, Priceline.com
"And we are literally in the first baby steps of this service. We've had good cooperation from hotel brands, which have a fair amount of excess capacity even in these good times," says priceline.com's founder and vice chairman Jay Walker.
Here's how it works: Consumers go to www.priceline.com and select a service that interests them. In the case of airline tickets, you name the travel dates and preferred airports. For hotel rooms, you name the city, check-in and departure dates, the exact neighborhood you want to stay in, and the quality level of hotel you are seeking. You then name the price you will pay for that airline ticket or that hotel room. Last, you submit a credit card number. This is the key to the whole operation: If priceline.com finds what you're looking for, you're billed automatically and it's yours.
Unlike the conventional ways of buying services, consumers can't pick the airline or hotel they prefer. Nor can they decline a priceline.com offering once it's been found; the selections are nonrefundable. Priceline.com uses its patented technology, developed by Walker Digital Corp. (another company also founded by Jay Walker), to fulfill one single goal: to get customers a room, a flight, or a car at the best price.
The customer is notified by e-mail within hours whether or not a match is found, Walker says.
"Think of priceline.com as a conduit between the customer and the seller," Walker explains. "What happens after the price is named is unusual. That information is delivered electronically to the sellers or to their computer reservation systems. We repackage the request in a way that the seller can evaluate."
In the case of hotels and airlines, the first company that agrees to release a room or seat at the requested price gets the business. Then, using the customer's credit card number, it's a done deal. Customers get what they want. And the airline or hotel is guaranteed a sale -- with no marketing costs.
Jason Ader, senior managing director at Bear Stearns and a lodging analyst, says hotels, airlines, and other consumer services are indeed selling off product via priceline.com at lower prices than they normally would. Reason: rooms and airline seats often go unsold. "Every hotel and airline finds itself in a situation where it has unsold inventory. With priceline.com, they are able to make a profit, rather than having those rooms and seats go empty," says Ader.
Priceline.com has a unique business model for a Web site in that it doesn't make its money from selling ads. It generates most of its revenues instead from the spread between the dollar figure the consumer offers and the amount it ponies up to the sellers for the product or service.
For example, if a customer wants to spend $85 for a hotel room, priceline.com may offer the hotel $80 -- leaving the company with $5. Priceline.com's success, says Walker, depends on selling in bulk.
With the car-buying service, which priceline.com hopes to expand beyond New York, customers enter the make, model, color, and other options they want. They type in where they wish to pick the car up and how much they're willing to pay. Within one business day, priceline.com tries to locate the vehicle at that price -- without giving out the customer's name or number to the car dealership. If found, the customer must buy the car or pay a $200 good faith fee. If the purchase is made, the dealer pays priceline.com $75 for the transaction.