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Harvard Business School, Case 9-500-070 – Priceline.com: Name Your Own Price

Case Summary, SWOT Analysis and Recommendations

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Case Summary

Priceline.com had developed a unique pricing system known as "demand collection system",

using the information sharing and communication capabilities of the Internet to create a new way

of pricing products and services. Its patented reverse auction scheme allowed consumers to

specify the price they were prepared to pay for a particular product or service.

Challenges

In the year 1999 Expedia was the most visited online travel site, posing a serious threat to

Priceline’s core business. Other challenges were the company’s goal to more than double its

revenues in the year 2000 and a pending law suite with Expedia, threatening ownership of patents

held by Priceline.

SWOT Analysis

Potential internal strength Potential internal weaknesses

Brand name awareness Priceline pursued an “aggressive brand enhancement strategy” and achieved internet “mega-brand” status within 150 days after its launch in 1998.

Inflexible service Compared with other online travel services Priceline left customers with little choice during the product purchase process.

Intellectual property In 1999 Priceline.com held three U.S. patents, protecting its buyer-driven commerce system and related elements.

High Sales and Advertising expenses Priceline’s Sales & Advertising expenses were 67% of its revenues in the year 1998 and 17% of its revenues in the year 1999.

High warrant payments To win Delta Airlines and United Airlines as partners, Priceline gave out high amounts of warrants.

Potential environmental opportunities Potential environmental threads

Exploit new market segments Exploit Business-to-Consumer market segments, unrelated to travel. Business-2-Business services offered additional opportunities.

High dependence on airlines Priceline was substantially dependent upon the continued participation of airline partners in the Priceline.com service.

Expansion into foreign markets Priceline’s business model and its intellectual property provided leverage for partnerships with foreign E-commerce service providers.

Increased competition In 1999 Expedia announced a competing service. In addition CarsDirect and Lending Tree, two niche players, emerged as competitors to Priceline’s home financing and car sales service.

Co-Marketing & Co-Advertising Co-marketing and co-advertising agreements with other online companies provided additional low cost advertising and marketing opportunities.

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Recommendations

Priceline.com’s reverse auction scheme was inflexible, leaving customers with little choice.

Only budget minded leisure travelers had the flexibility demanded by its airline ticket and hotel

room services. Priceline should provide more product choices, targeting less flexible but better

paying travelers.

The U.S. market started to get crowded with competitors, while Australia, Asia, and Europe

lagged behind in E-commerce technologies, offering significant opportunities. Priceline,

capitalizing on its patented auction scheme, should pursue international expansion.

While Business-to-Consumer transactions like those conducted on Priceline.com captured

most of the headlines, Business-to-Business transactions dominated online transactions in overall

value. Using its experience and intellectual property with online auctions, Priceline should

explore B2B opportunities. Priceline should also license its patented technology to other

businesses, enabling them to offer products and services under the patented “Name your own

Price” scheme.

Priceline’s sales and marketing expenses were 67% of its revenues in the year 1998, and 17%

of its revenues in the year 1999. The company should trim its TV advertising costs. Instead

Priceline should establish further co-marketing agreements with internet companies like America

Online or Yahoo. Co-Marketing agreements are often “cost neutral”, and if not, they are still less

expensive than TV advertisings.

To reach sustainable profitability, Priceline should restructure its supplier agreements with

Delta and United Airlines. The goal should be to avoid high warrant expenses that “salted”

Priceline’s financial results.

Epilogue

In an era where thousands of online business vanished, Priceline.com, “counted dead” more

than once, survived. Today, the company is a profitable business with operations around the

world and net income of $11,916 Million in 2003 and $31,506 Million in 2004. Annual revenues

exceeded the $1 Billion mark for the first time in fiscal year 2000. In retrospect Jay Walker’s

patents proved valuable in defending Priceline’s business model; in January 2001 Priceline settled

two lawsuits against Expedia.com and Microsoft, both associated with violations of Priceline

patents. Under the settlement Expedia agreed to pay royalties to Priceline.