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Case Study: Priceline By James Maguire November 27, 2002 Although many e-commerce businesses were hurt by the events of 9/11, discount airfare site Priceline took a double blow. In the first few months after the terrorist attacks, air travel was viewed as favorably as a trip to the dentist. But even as air travel has rebounded, says Priceline spokesperson Brian Ek, the company's business "continues to be affected by the prolonged practice of airlines to discount their own retail tickets." "Consequently, the difference between an online retail ticket and a Priceline ticket is not as great as it once was," he says. This makes it tough for Priceline's "name your own price" model, a groundbreaking development in e-commerce. Shoppers enter their desired travel dates, destination, and the price they're willing to pay. Their bid is accepted only after they've committed to it with a credit card. Purchases cannot be cancelled. With a ticket bought through Priceline, you might have to fly at 6:15 a.m. and enjoy a 3-hour layover in Dubuque, and you won't get to choose your carrier. However - and here's the Priceline advantage - fares are usually far below retail. If you've got some flexibility, offers Priceline, we can save you a bundle. The business model benefits not just consumers, says Ek. It's also "a very potent way for airlines to fill seats without harming their retail fare structure." But now that airlines are discounting, "It has an effect on the trade-offs that certain people are willing to make for a Priceline ticket," he says. Furthermore, he adds, "As soon as there's a trend of airline prices to go up, [an airline] jumps in and undercuts." Not that travelers have stopped loving cheap seats. In the third quarter of 2002, Priceline received 1.2 million bids, and sold 645,000 tickets. However, in the third quarter of 2001, the site received 1.5 million bids, and sold 1.2 million tickets. (In the fourth quarter of 2001, after 9/11, ticket sales fell to 840,000). The Online Travel Market Priceline has positioned itself as the cheapest outlet among the four online airfare channels. The most expensive outlet (until recently, that is) has been the airlines themselves, whose sites offer a mix of retail and discounted fares. Less expensive are sites like Expedia and Travelocity, essentially online travel agents, which help shoppers by displaying prices across many airlines. They also offer some discounted fares. Below them in price is what's referred to as "gray marketers," sites that buy in bulk to offer discounts. Like the Expedia-style sites, these sites publish fares. At the cheapest level, the "opaque providers," are Priceline and its chief competitor, Hotwire. These sites won't publish full flight information until after a consumer has committed a credit card. Hotwire publishes prices but won't reveal what flight you're on; Priceline doesn't publish prices. Forrester analyst Henry Harteveldt notes that Priceline is far ahead of Hotwire in the battle for online airfare dollars - at this point. Priceline is #8 among top travel sites; Hotwire is #24, according to recent Forrester research that measures both site traffic and total dollars spent. But Hotwire is still new, Harteveldt points out, having launched in late 2000, and has not been aggressively marketed. And he says that Hotwire may enjoy a competitive advantage because it's partially owned by the airlines themselves. Because Hotwire publishes its fares, "It takes the guess work out of the process," Harteveldt says, but adds that there may be better rates available on Priceline. The competition between these two sites is "fiercely contested" says Harteveldt, who expects the competition to extend over the next couple years. "It's going to be fun to watch it play out." Changing Rankings "Priceline has a very strong reach," says Harteveldt, citing recent research that says 26 percent of all online travel shoppers visited the site to explore travel options. But this same research demonstrates Priceline's struggle in the face of airline discounting. Priceline's current rank of #8 represents a steep fall from last year's #2 rank. In contrast, many of the airline sites - fueled by discounted fares - saw increases. American, Southwest and Delta are each ranked higher. United Airlines cracked the Top 10 for the first time. "The prices out there are almost absurdly low in the retail market," Harteveldt says. Consequently, "the benefit of a Priceline or a Hotwire is diminished." A Shifting Model Priceline creates revenue using the spread between the price at which airlines sell discounted tickets and consumers buy them. Unseen by shoppers at the site, Priceline monitors changing airline pricing and availability on a minute-by-minute basis. "We have tickets at multiple price points, depending on the restrictions on the ticket," Ek says. "When you put in an offer, we try to match you up with the ticket that's closest to what you put in." The advantage of Priceline's e-commerce model is that the site owns no inventory, it merely facilitates transactions. The site purchases each ticket only after a consumer has paid for it with a credit card. Priceline is expanding its model using LowestFare.com, a retail site it acquired this spring. With LowestFare, Priceline competes with Expedia and other sites that sell retail tickets, though at this point shoppers can only view these fares at the LowestFare site. But in what Ek refers to as "selective integration," Priceline plans on displaying LowestFare offers at the Priceline site by early next year. If a Priceline shopper makes a bid that's not successful, Priceline will offer them fares from LowestFare. The plan is to keep customers from going away empty-handed, Ek says. "If we can offer you the same price as the other guy, why not buy the retail ticket from us?" Harteveldt's says the acquisition of LowestFare is a strong move, which could allow Priceline to address all a travelers needs, increasing the company's income by expanding its market niche beyond deep discount. He also sees great value in Priceline's recent alliance with eBay, in which Priceline uses the popular auction site as an additional "name your own price" sales outlet. Hotels and Cars While Priceline was originally founded as an airfare discounter, at this point it sells more hotel rooms. The site sold more than a million rooms per quarter for the last two quarters, Ek says. "The trade-offs for hotel rooms are so much less than with airline tickets," Ek says, explaining that shoppers - still naming their own price - can chose dates, location, and number of stars; everything but brand of hotel. He claims hotels rooms can be discounted 50 percent or more. The site offers the same amount of choice in rental cars; travelers chose everything but brand of vehicle. Ek claims car rental discounts range around 20 percent. Flying in the Future Harteveldt suspects that market conditions will improve markedly for Priceline. "We'll continue to see fewer planes flying, and the average number of seats per departure will be smaller next year, so there will be fewer cheap seats out there," he says. Consequently, Harteveldt says, "Airline pricing will creep back up, at which point Priceline's value to the consumer becomes higher."