Exclusive Interview: Priceline.com

E-commerce had its share of superstars emerge in 1999, but few companies had a greater impact on the industry than Priceline.com.

What began as an outlet to “name-your-price” for airline travel has exploded to include car rentals and purchases, hotel bookings, grocery sales, mortgages and yard sales, forever redefining the way that goods and services are sold over the Internet.

In the following exclusive interview with Priceline.com Vice-Chairman and Founder Jay Walker, the E-Commerce Times examines the “name-your-price” model and explores the origins, attitudes and strategies of this dynamic operation.

Q Which products or services are Priceline’s best sellers? A In terms of sheer volume, our airline service is both our oldest service and best seller. Last week, we sold about 80,000 airline tickets. Given that the airline product is about 20 months old, it currently represents the largest portion of our sales.

In terms of rapid growth, our licensee, the WebHouse Club, has sold in excess of three million items in its first 70 days in the New York market.

Q How did you come up with the “name-your-price” concept?A An intellectual property laboratory that I am chairman of, called “Walker Digital,” created the concept.

So, unlike many start-ups, this one was created in a laboratory with a group of marketing and other support people designing solutions to business problems.

Q What has made Priceline so successful?A Businesses that are successful in the marketplace typically offer a significantly better value proposition for their customers, and that value proposition drives the business to scale.

In the case of Priceline, the value proposition is two-fold. The buyer is able to buy things at a substantial discount below the retail price, or below the price line, hence the name of the company.

Savings motivate buyers. Sellers, however, are equally motivated in the Priceline system. The reason for this is they can generate incremental sales of their products by selling below retail prices but behind a brand shield. We shield the sellers’ brands so that they can continue to capture more of the market below their own retail prices.

Obviously, that is a very simple answer. But value is a part of it — so are good execution, good management, good timing and a little bit of luck. Those factors are all critical elements in executing a value proposition, since the value proposition alone certainly would not constitute success in the marketplace.

Q What do you do on a regular basis to promote Priceline?A Priceline is an aggressive marketer. In fact, in many ways we view ourselves much more as a marketing company serving the customer than as a technology company. For example, we have extensive advertising and marketing programs. We are a large advertiser on radio, newspapers and television. Our best-known programs on the advertising side are with [actor] William Shatner, formerly of [the] “Star Trek” [television series].

Even though we do a lot of advertising, word of mouth has probably been the single largest marketing factor in Priceline’s success. The average Priceline customer tells around 14 or 15 other people about their Priceline experience.

Q What made you decide to use William Shatner to advertise your service?A The original decision to use Shatner had to do with credibility. When you are telling people that they can name their own price, the most important thing is to ensure that people understand that it is really going to happen.

Our decision was very much focused on the fact that Bill [Shatner] had enormous credibility among almost all of the age groups in the U.S. population.

We also felt that he was very forward-looking. People think of Bill Shatner as the head of a starship from the future. That is a great image for the kinds of customers that we want and who understand that this is the way pricing is going to be done in the future.

Q What e-commerce software are you using?A It is proprietary software that was written internally, because as the inventors of our own business model, the software we needed did not exist. We are not an auction, so we cannot use auction software. We are not a stock market, so we cannot use market-making software. So we have had to use our own.

Q What has been your biggest surprise in doing business online?A I would say that the biggest surprise in doing business online is how quickly your business can grow. It is one thing to hear people talking about well, “if your business is doing well, it is going to grow rapidly online and it’s going to stress your systems,” et cetera. It is another thing for somebody to say, “you know what, you are going to grow five percent a week compounded for 20 months straight.”

When you grow five percent a week compounded for 20 months straight, everything that has to be done has to be done quickly. There is no time to catch up.

It is a very difficult mindset to incorporate — we are just not used to things changing at that rate. That has nothing to do with our people. I think it has more to do with human nature. We just don’t continue to believe that it is going to snow that hard every day for 20 months, but it does.

Our second biggest surprise is probably the importance of the offline world. When we started, many people felt that online was its own world and that offline was its own world.

From the very beginning, we have believed that it was a blended world — that people were going to want to call 800 numbers and that they were going to want to talk to real people.

The conventional wisdom was that wasn’t the case. We believed strongly that it was, and that partnering with grocery stores, airlines, hotel chains and banks — as opposed to building our own — was the way to go.

Q What is your next marketing strategy to keep your business growing?A It is the same marketing strategy that we have always had to keep the business growing. We know that if we consistently delight the customer here by delivering a value equation that is unprecedented for the consumer, they will tell their family, friends and neighbors about our service.

As the Internet continues to grow, we will grow dramatically along with it, because we own a very strong value proposition. So, we plan to do tomorrow what we did yesterday. It is working well.

We are the kind of company that is very slow and steady in the sense that we don’t change our strategies quickly at all. For example, we said to the marketplace we were going to steadily narrow the losses and we have. We said to the marketplace that we were going to spend consistently on marketing and not go up and down wildly — and we have. We said to the marketplace that we were going to be on a path to profitability, and it is very clear and distinct that we are.

Q What percentage of your users are from outside the United States?A Currently, it is almost zero. Our travel services are U.S.-based products. Though we have announced to the marketplace that by this summer we expect to have three international joint ventures in place.

There is nothing U.S.-centric about our business. We have been growing so fast in what we are already doing. In 20 months we cannot do it all. That being said, this is a business that will have a global perspective.

Q Who do you think has benefited the most from the “name-your-price” travel service: Business users or consumers?A The travel service is focused entirely on consumers in the airline sector. Our airline service product is for leisure travelers. “Fly any time of the day on any airline” is not a business proposition and never was — and we never said it was. It was a leisure travel proposition. Our story was that instead of driving or staying at home, consumers could now afford to fly. Since airlines had a lot of empty seats, it was a win for both groups.

Our hotel product is surprising in the travel sector. Last week we sold more than 20,000 hotel rooms, and half of those rooms were probably sold to other businesses. So, Priceline is very much capable of handling the business-to-business sector of the hotel or lodging travel sector of the marketplace.

As a whole, the group is primarily leisure-focused because that is where the travel industry wants us to be.

Q What effect do you think Priceline is having on competition in the travel industry?A I don’t think Priceline is having that much of an effect on the competition of the travel industry. Most of the other travel sellers are published fare travel sellers, or off tariff list price travel sellers.

So, I think that consumers will continue to shop in online travel services that list prices that are static prices. I also think that is the vast majority of the industry.

The area where we are having our impact in the travel industry is in the utilization of excess capacity. Where our system allows an airline, or a hotel or a rental car company that truly has excess capacity to capture incremental sales without publicly discounting their product.

If you publicly discount your product on the Internet, everybody sees it. We solve a very big problem by allowing the seller to privately discount their product and dynamically price it as a way to clear excess capacity.

So, there is an enormous impact in the travel industry in that sense. However, in the larger context of the couple hundred billion dollar travel sector, the majority of that is currently sold with static pricing.

Q Are there any goods or services that are not appropriate for your “name-your-price” model?A There probably are, but we haven’t found many. Cosmetics would be the closest where the customer is not willing to be flexible in brand, because they want a specific cosmetic. Ultimately, I don’t think that this is a way to sell T-bills or coal or steel because those markets are highly efficient markets where there is no excess capacity or inventory.

However, any market that has excess capacity where the buyers are willing to be flexible on some critical dimension is ideal for our system. That buyer flexibility can be brand flexibility in one sense. Or it could equally be seller flexibility, as it is in our car service, where you don’t know the name of your dealer until you get the car.

Q Why do you believe that your “name-your-price” model is entitled to federal patent status?A We don’t believe it, the U.S. patent office believes it. The patent law is fairly specific. If you meet the tests of patentability, which are novelty, non-obviousness and usefulness, then in the U.S. you are entitled to a patent.

That is not a judgment that we make, it is a judgment that the Patent Office makes. We don’t have one patent — we have three issued, 17 pending and five allowed. So, you get a strong sense here that this isn’t a one-shot concept, but this is a portfolio of intellectual property. I think that this has always been the case with intellectual property. If you truly can invent new and useful things, it is in the interest of society to protect those ventures from simply having large companies come in and copy their property and resources and thereby crush start-up competition.

Q Where do you see your biggest area of growth coming from in 2000?A Our goal for this year, and it is just a target, is to do in excess of one billion dollars in sales at in excess of 15 percent gross margin. There probably aren’t very many Internet companies that have a billion dollars in their second year as a public company.

One area that I think that you are going to see a fair amount of growth from is our licensee affiliate [Perfect] YardSale, our new affiliate for used goods. WebHouse is included as well, and I think that you’ll see others.

You are also going to see a lot of growth in our power curve in the travel sector, where we are really coming into our own. We are really accelerating nicely in that sector. We currently sell about three percent of all airline leisure seats in the U.S., and that is a big deal. You are also going to see growth in our international sector as we announce joint ventures internationally

In the middle of the year, I think that you are going to see a lot of growth from our business-to-business initiatives. As you can see, Priceline has been steadily expanding the coverage of the horizontal business model. I think that you can expect to see some powerful results from us in that area.

Q Which major e-commerce industry trends do you expect to prevail this year?A I think the biggest e-commerce trend that we are going to see this year is the distinction of companies that are relevant to the consumer and the distinction of the companies that are just ideas.

This is the year where I believe that the trend of companies that really serve the customers in unique ways are going to separate from the pack. You are going to see multi-million customer bases, not just eyeballs or user registrations, but literally customers in volume.

This is going to be a giant differentiator this year, as we move from the earliest “anybody with an idea on the Net” phase to “who are the real businesses with real traction and real consumer service?” I think that’s going to be our biggest trend this year.

Q What advice do you have for beginners who are interested in selling on the Web?A My advice to anybody who is looking at the Web to launch a business is to focus on the value equation. Ultimately, the value equation is how you are going to serve the buyers and sellers.

The rules of human behavior haven’t changed simply because they are on the Net. People shop with the places that deliver them compelling reasons to shop there, and ultimately the Net has both advantages and disadvantages over the brick-and-mortar world.

Net businesses that are looking to start have to not only say “what is my advantage,” but “what is my sustainable competitive advantage, and how does that drive the value I deliver to the customer?”

If you are launching a business that simply anybody can come in and copy, that is going to create a real problem for most people because the Net has low barriers to entry.

Similarly, if you are launching a business that has high consumer value, but relies on other companies to support that value, it is very likely that those other companies might say, “Well, why do I need you? Let me go around.”

This is a marketplace that requires a great deal of thinking discipline for long-term success. It may have low entry barriers, but the real issue isn’t day one or day 100. It is day 1000 that business entrepreneurs need to think about when they go into the Net space.