This does not denigrate the increased popularity of name-your-own-price due to the economic downturn, the clever Shatner as Negotiator commercials or even how offering the reverse-auction product differentiated Priceline from its Online Travel Agency (OTA) competition. It was much more simple than that.

When Priceline launched, despite Walker’s incessant hype, it was a niche product – The company knew, at the time, only 3% of the traveling public would be willing to risk using the internet to buy a product when the brand name was withheld until after the purchase settled. Even 3% of the US travel market was a big share for an online player.

The challenge however was that during peak seasons and other periods of strong market demand, the sources of Priceline’s deeply discounted inventory evaporated. Hotels closed gates on revenue management tiers that shut off Priceline while other OTA’s maintained access to inventory at lower discount levels.

What saved Priceline was the astute management decision to become MORE like its competition. Priceline began selling travel using the same business models as Expedia, Travelocity and Orbitz. This not only appealed to customers hesitant to name-their-own-price, but filled priceline’s shelves with inventory during high demand travel periods. This also helped to monetize the site traffic created by the media campaigns, specifically improving visitor to sales conversion ratio.

This strategy also led to the strategic acquisitions of TravelWeb, Booking.com and Agoda that had developed strong supplier relationships, but were in need of greater demand aggregation to satisfy all those supplier deals.

Bottom line, Priceline dramatically increased its sales by adding a conventional online travel sales process, while maintaining the reverse auction model as a unique point of differentiation. Priceline has also effectively cross-sold the two products under each respective booking process. This approach has cleverly provided consumers with clearly defined product options that help reinforce the purchase decision, regardless of which alternative was selected.

Priceline’s management was smart – they shelved the hype and focused on listening to and addressing customer needs. This approach also caused Priceline to be the first OTA to eliminate booking fees, a strategic move at the time, which has now been adopted by the remaining OTAs as a tactic to curtail Priceline’s gains in market share.

Smart management, true customer focus, strong supplier relationships and a technical point of differentiation – that’s a pretty strong set of attributes for any company. And a great recipe for success.

I think that as long as the balance of powers between hotels and Priceline remains as it is today, the system would thrive. If prices become more attractive in other places, users would compare and leave, and then Priceline’s fall would be quick, because it needs the critical mass of consumers and the critical mass of competing hotels in each zone in order to make the model work.

I was amused to see that in the business center, around 11pm, no less than THREE other guests were checking prices and looking for deals on Priceline at the same time!

I agree with Om, this is no short-term trend. It’s also a wonderful example of how the web matches supply and demand combined with a brief casino-like thrill as the Priceline roulette wheel spins.

A small dissenting point. I think the change in our attitudes might be more permanent because the shock to the system has been quite intense. Overall economy has become more sensible and focus has shifted to saving money. I think even if the good times do return, there is a new kind of reality that has been infused into the minds of many — being smart about money and saving cash is a good thing.

Priceline could do well if it takes this name your price approach and applies it to other high-ticket and inefficient markets.