Running head: CASE STUDY: PRICELINE.

COM 1

Case Study: Priceline.com

Don Lee

Marylhurst University

MGT 536E – E-Business Strategies

Dr. Gordon E. Whitehead

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Abstract

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, 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.

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.

The business model benefits not just consumers. 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. As soon

as there's a trend of airline prices to go up, an airline jumps in and undercuts.

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Case Study Questions

1. What are the core components of Priceline’s business model?

Priceline.com’s business model is based on what is called the reverse auction pricing

system. This allows its users through the use of placing bids to located discounted travel in

various categories. In today’s economic turbulent times a term called aging inventory is even

more present and it applies to Priceline’s business of airplane tickets, hotel room reservations,

and car rentals. Offering the services of the middleman, they just providing price quotes from

various major hotel chains, airlines, and rental car companies and are almost considered an

independent representative or broker. Originally its services were catered to the bottom feeders

of the pricing game and that is why their name your own price system was so successful. The

main difference between similar business models is that with Priceline you cannot select your

hotel, airline, or departure time.

2. Do you think Priceline will ultimately succeed or fail? Why?

Sharing similar start-up problems many new companies face, Priceline initially had a

hard time turning a profit. They lost over 1 billion dollars in their beginning stages and starting

with their 2003 turnaround, today have reached successful profitability. A large part of this is

due to the change in the economy and the commoditization of the travel business industry. A

major contributor to their success and profitability has come from their reverse auction model

which connects the sellers with buyers. During a recession those that are affected and sacrificed

first by consumers are luxury items. Priceline’s profitability would be affected and even with

their successful business model they also are not recession proof. Because Priceline’s overall

success has been filling that aged inventory of their suppliers and many of those suppliers cut

back during hard economic times reducing their aged inventory. (Quality Insider. 2010)
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3. How has Priceline (and similar online services) impacted the travel services industry?

Competition is good for the industry no matter what stage the economy is in. Using their

business models have given the consumer choices in saving versus service, therefore making

options of sales and service more flexible. Discounting without the consumer knowing the

behind the scenes details allows non-vendor cannibalization of its own distribution pricing

structure processes and policies. The success is measured by the additional revenue provided by

selling its products for below retail prices without having to create a completely different pricing

structure. It also allows the general population an alternate means to book more affordable

vacations. (Prof Fornell, C. 2010)

4. Follow up on developments at Priceline since August 2009 when this case study was

prepared. Has its business model and/or strategy changed at all, and if so, how? Who are its

strongest competitors? Is it profitable or operating at a loss?

This recession has helped Priceline advance to the next level of success due to their

continued “name your own price” feature and because of significant savings on hotel rooms and

the popular hotel/resort packages. This is an explanation why they have been so successful. Since

the 2001 recession the hotels in America have been struggling and were looking to find a

solution in returning profits close to the 1990 levels. Even though cost cuts have to be made

especially in advertising they are not doing so. Not wanting to start a price war and lose branding

and perceived value many hotels are turning to Priceline to strategically discount sharply their

rates up to half off and fill their empty beds. With this in mind Priceline is probably the largest

seller of hotels in the U.S. today. There have been many changes at Priceline in the past couple

of years in order to be competitive and in maintaining a profitable bottom line. For those not

using the site frequently they may have missed changes and economy based innovations.
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Did you know, for instance, that Priceline lets you "blind book" air/resort packages? You

don't have to place a bid because Priceline tells you the total price of a package plus the name of

the resort. The twist is that Priceline doesn't tell you the name of the airline or the departure time

for the plane tickets automatically packaged with the deal. You will, however, be told the

number of layovers and the airports you'll be stopping at, plus the window for flight departures

(between 6 a.m. to 10 p.m.). If the flight doesn't work, you can choose from other available flight

options. The package will usually cost less than the price of the flight and hotel room booked

separately. Savings can total 50 percent. (O'Neill, 2009)

Interested in just booking a hotel? Here are some up-to-date strategies for making the most of

Priceline:

While Priceline is a full-fledged booking engine; it's most valuable for its bidding system.

As you may know, you don't learn the hotel (or airline, car-rental company, or vacation package

details) until your bid has been accepted and your credit card has been charged. You’ll find out

whether your bid has been accepted instantly. (In the past, it took quite a while to hear back.)

Research neighborhoods in advance, and consider choosing neighborhoods in financial districts.

Right now, Priceline’s appear to be for business and upscale hotels. (Levy, A and Farzad, R.,

2010)

Beware of this catch: Despite denials from Priceline, it seems all-to-common that hotel

managers give Priceline users their least desirable rooms, next to noisy elevators, restaurants, and

ice-making machines. There have been complaints that this treatment is happening at two-star

hotels and below. So the best suggestion would be to bid on three- and four-star hotels, and even

if you get a room that's slightly less desirable than what a hotel gives its repeat customers, you'll
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still be in great digs in a great location at a great rate. But expect your window view to be of

something like rooftop air-conditioning units instead of something pretty. (Quality Insider. 2010)

The other major catch: Once you "name your own price," you can't make any cancellations or

other changes.

To help judge how much you should bid, visit Priceline's Hotels page and look for a

section on the right called Winning Bids. Click on it to see recent winning bids for specific star

level hotels in various cities around the country. You would have to look at this section before

you make your bid because it's not embedded in the booking process. For an independent

perspective, turn to BiddingForTravel.com for examples of recent successful bids. (Levy, A and

Farzad, R. 2010)

Priceline has an “informal” rewards program, in which repeat customers occasionally

receive surprise rewards. For example, if you use Priceline at least once, you may receive an e-

mail with a $25 coupon good for your next hotel purchase. The reward would typically be for a

Priceline product you haven’t tried yet. If you bought a plane ticket, your coupon might be for a

future hotel purchase. But there are no set rules about when Priceline hands out rewards, so you

may book several times in a row without receiving any perk. (O'Neill et al., 2009)

Priceline also asks every one of its hotel customers to fill out a review of their hotel. The

site has more than a half-million reviews of U.S. hotels now. Priceline only posts reviews by

people who have actually paid to stay at hotels, eliminating fake reviews by hotel owners. A

spokesperson says that if a hotel gets multiple negative reviews, the property is automatically

evaluated to decide if Priceline should stop selling its rooms. (Rappa, M. 2010)

No one I know has recently used Priceline to bid on airfares, given the sales that airlines

are throwing on their own websites. But airlines have cut back their service to smaller cities, and
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fares have skyrocketed on these routes. For these unfortunate markets, when it comes to last-

minute (less than 14 days before departure), Priceline may offer enough savings to be worth its

additional hassle. And you'll get an instantaneous response to your bid. No more waiting,

although Priceline may first make a counter-offer in some cases. (O'Neill et al., 2009)

Given that Priceline now responds instantly to your bid, it makes sense that – before you

buy a high-priced, last minute ticket from an airline – you should make at least on quick bid on

Priceline, starting at about 20 percent lower than the fare you know for sure you can get. For

some travelers, saving 20 percent or more off an expensive ticket may be worth the uncertainty

of knowing when your flight will depart (Answers.com).

One key point to understand is that Priceline does not offer "interline flights" for a flight

you bid on. In other words, the site only sells tickets for flights on a single airline, not a mix of

airlines. By going to a site such as Kayak instead, you may find cheaper fares for tickets that use

more than one airline to cover a route. (CLARIFICATION March 2: Since publication of this

post, Priceline's spokesman Brian Ek has reminded us of the following: Kayak’s two interline

search partners are Orbitz and CheapTickets. Both charge $7 to $15 booking fees per ticket.

Priceline offers interline ticketing as part of our published-price airline ticketing service. The

difference is Priceline doesn't charge booking fees for its published price tickets. It charges a fee

for its Name Your Own Price tickets but doesn't disclose what that fee is.) (Business trends in the

travel industry 2007)

For flights you bid on, Priceline does not guarantee a non-stop flight, but it does promise

a maximum of one-stop each way. All layovers capped at 3 hours. Flights may depart anywhere

between 6 a.m. and 10 p.m., however, the site guarantees that your trip will end no later than

12:30 a.m. the following morning. Says spokesperson Ek, "You can instruct us to broaden our
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search and theoretically increase your chances of getting a ticket by adding a redeye option that

could get you to your destination by the following morning. But the default is no redeyes."

Rappa, M. (2010)

In conclusion, Priceline has created their e-commerce business model niche. There have

been a few companies who have tried to emulate them but have not been successful. Priceline

also was very business savvy in patenting their inventive business model. As the travel business

is struggling to hang on, Priceline is one of the few in the travel business who is profitable and

has been growing every year. As the airline, hotels, and car rental agencies consolidate, it will

be interesting how Priceline adjusts their e-commerce business model to combat this type of

competition.
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References

Answers.com, Priceline.com Inc. Retrieved July 15, 2010,

http://www.answers.com/topic/priceline-com-incorporated

Business trends in the travel industry (2007). The Paradigm Shift of Travelport, Travelocity,

Priceline, Orbitz and Expedia, Retrieved July 15, 2010, http://biztraveltrends.com/

Levy, A and Farzad, R. (2010), How Priceline Fought Its Way to Success, Retrieved July 15,

2010, http://www.crm-daily.com/story.xhtml?story_id=11100ACSGA1I&full_skip=1

O'Neill, S. (2009, February 9). Think You Know Priceline? Retrieved July 15, 2010, from Budget

Travel Web site: http://current.newsweek.com/budgettravel/2009/02/

priceline_is_bloggin.html

Osterwalder, A. (2010). What Is A Business Model, Slideshare, Retrieved July 14, 2010,

http://www.slideshare.net/Alex.Osterwalder/what-is-a-business-model

Prof Fornell, C. (2010), Q4 2009: Retail Trade; Finance & Insurance; E-Commerce, The

American Customer Satisfaction Index, Retrieved July 16, 2010,

http://www.theacsi.org/index.php?option=com_content&task=view&id=203&Itemid=214

PhoCusWright 2010, Hotel Review System Is Leading Source of Customer Choice, Inside

Quality Insider. (2010, April 9), Retrieved July 15, 2010,

http://www.qualitydigest.com/inside/quality-insider-news/hotel-review-system-leading-

source-customer-choice.html

Rappa, M. (2010), BUSINESS MODELS ON THE WEB, Managing the Digital Enterprise,

Retrieved July 15, 2010, http://digitalenterprise.org/models/models.html#Brokerag