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How Priceline Got Its Mojo Working Again

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priceline1Of all the dot-com superstars that appeared in the ’90s, shone brightly and then disappeared from sight, few have been granted a second act. One exception is Priceline (s pcln), which 11 years after it was founded — and 10 years after its stock price collapsed — is quietly thriving. It’s no superstar now, but it’s an interesting case study of how an online company once written off for dead can in fact age gracefully.

At its peak, Priceline’s “name-your-own-price” business model created a stir. Its founder, Jay Walker, trumpeted the idea as a revolution that would upend the travel industry, and a lot of smart people bought it. George Soros and Paul Allen invested their money, and the stock surged to a $15.7 billion market cap, larger than most airlines. Forbes called Walker a “modern-day Edison,” and Priceline expanded into new markets like gasoline and groceries.

The revolution was over before it began. Priceline’s stock peaked nearly a year before the Nasdaq did, and it just kept falling: By the end of 2000, its market cap had shrunk by 99 percent to $220 million. Forbes regretted its praise for Walker, admitting he “hasn’t lived up to our label,” and Walker left the company soon after. Priceline backed out of the gasoline and grocery businesses, retreating to online travel, where it faced increasing competition from Expedia (s expe), Orbitz (s oww) and others.

But writing off Priceline as another failed dot-com also proved premature. Its approach wasn’t revolutionary after all, but neither was it a bad idea. Somewhat ironically, it took another market crash for Priceline to begin to deliver on its promise. Its stock, which has risen 265 percent in the past year, has joined the S&P 500 — the market’s way of saying you’ve finally arrived. Its capitalization is back above $7 billion, making it larger than Expedia.

In the first six months of 2009, Priceline booked $4.3 billion in travel services, an increase of 12 percent during a period when overall bookings declined by 8 percent. The company will update those numbers for the third quarter next week, and analysts are expecting bookings to grow by more than 25 percent, faster than many of Priceline’s online rivals.

What changed for Priceline? Its management avoided the hype about the revolutionary potential of naming your own price. William Shatner and Leonard Nimoy did refer to it in commercials, but Priceline waited patiently for the concept to take root — the way Amazon (s amzn) has been patient about free shipping, or Netflix (s nflx) has been about streaming movies online with no extra fee. The company has also expanded piecemeal, buying up smaller companies like when it could, and expanding abroad. It now offers travel in 78 countries.

There’s a lesson in Priceline’s riches-to-rags-to-riches story for other Web companies. A lot of people watching tech companies — especially ones like me who write about them — get all antsy about their ability to deliver on their promise. This comes up when we talk about companies like Facebook not being public yet, or Twitter looking for revenue.

But often, consumers move at a much slower rate. It can take years to grow comfortable with a new business model. There is a lot to be said about moving quickly in a fast-evolving industry. But there’s just as much to be said about being patient with the people who are going to make you money.

5 Responses to “How Priceline Got Its Mojo Working Again”

  1. There is actually an entirely different reason for Priceline’s success, and it has very little to do with Jay Walker’s method patent on the reverse-auction model.

    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, 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.

  2. I have always preferred companies that chip away at a business and 4-5 years time, become a solid leader in the industry vs flash in a pan model. Compare Trulia vss Zillow – both are at the same place right now (in terms of traffic) even when Zillow’s overnight popularity because of Zestimate gave it a huge mileage over Trulia.

  3. The main thing about Priceline is that once users get used to booking with it – there is no way back, because you are getting used to paying 1/2 price for hotel rooms, gain trust for the way the system works (the main barrier), and appreciate what may seem like a disadvantage (no ability to choose the hotel) as an advantage (no time wasted on weighing different hotels).

    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.

  4. Phil Jackson

    While priceline has done a good job of staying alive. It has more to do with priceline being more of a counter recession company. As people spend less on travel, hotels and the like put more products into priceline’s inventory. When the economy improves and people book more travel it reduce what priceline can offer business will drop off.

    • Phil

      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.