The Billion-Dollar Auction Platform
Since 1997, Priceline has brought an entirely new meaning to "dynamic pricing"
The late-90s were a wild time for Priceline. The company skyrocketed to a pre-2000 stock price of over $100 per share and even crashed 95% to less than $5 at the low. After hitting a gold mine with name-your-own-price for flights and hotels, Priceline figured it was time to expand their fledgling auction idea to other markets - groceries, mortgages, gasoline, and even used lawnmowers.
In November 1999, Priceline launched a crazy idea; a name-your-own price program for gasoline. As a customer, you could load in your credit card information, and input how much you were willing to pay, and if the seller accepts your price - you got the deal! WebHouse Club, the program’s name, also offered the same system for groceries.
Offering consumer essentials over the internet wasn’t a new idea. Other classic dot-com busts launched with the sole idea of providing groceries. Names like Webvan and PeaPod grew to billions in valuation in the same industry.
Just looking at the top-line numbers, WebHouse was a massive hit. Within a year, Priceline claims it grew WebHouse to over 2 million customers and 13,000 participating retailers. Buzz also spread through the investing community, with investments from Paul Allen’s Vulcan Ventures, Wit Capital, and Goldman Sachs.
WebHouse wasn’t alone. Around the same time, Priceline also launched a more scrappy version of eBay - a marketplace for unwanted items called YardSale. People could sell off anything they owned and others could bid for it.
Travel Economics
The story doesn’t end as well as it started. In late 2000, Priceline divested both YardSale and WebHouse after being unable to “raise more capital for a business that was not yet profitable”. The company took a $189 million hit on outstanding obligations. How was it that a name-your-price tool worked so well with Hotels and Flights but not so well with other markets?
Simply put - economics. Consider the mechanics of a flight or a hotel room. The travel company that hosts the seat on the airline or the room in the hotel can do their best trying to judge demand, choose the right locations, and even offer the right deal to get you to book them, but at the end of the day, a large amount of seats and rooms go empty.
According to the St. Louis FRED, anywhere between 70-85% of a given flight is full, meaning at most 1 empty seat for 3 seats. The numbers are even more grim for hotels. After accounting for pandemic recovery, the yearly peak for hotel occupancy is 70% only during the summer, with yearly lows at around 50%.
If 1 of every 3 seats or half of every hotel is empty, the company hosting the seat/room loses out on the opportunity to capture any revenue at all. Even if that seat was sold for a 50% discount, they would be able to create some cash to help operating costs. Airlines long knew that but still refused to sell below a certain point which they called the “price line” (hence the name of the company).
That is, they didn’t want one area of the internet to show the full price and another to show a discounted price - cause people would migrate to the discounted price. Priceline’s team figured - why not let the customer guess the price? The company wouldn’t give away its secret “price line” and it would enjoy re-couping some operating costs. The flight is gonna take off at the same cost to Delta either way, so it makes logical sense to fill that seat at any non-zero price (adjusting for per-person costs).
The thing is, gasoline doesn’t work the same way. If you and I bid on gasoline at a certain price, the gasoline provider doesn’t lose out if he doesn’t take your bid. He has a variety of options.
He could easily just offer the next week, or wait until someone comes to his pump and fills up the tank. We’ve previously talked about price sensitivity - a concept in economics that measures the change in demand after a unit change in price. Gasoline and Groceries are prime examples of price insensitivity - people are willing to buy at the market price because it's a necessary good, they need to fill their car up and need food either way.
Notching Billions
Priceline’s success was evident, but the numbers revealed a different picture. In 2003, the company notched $836 million in revenue, significantly lower than other American competitors like Expedia at $2.41 billion. The name-your-price tool catapulted them, but they knew they would need to add other features. Starting in 2004, they expanded past auction pricing, eyeing to become a one-stop shop for travel.
However, no feature they could add could make a greater impact than their 2005 acquisition of Booking.com. Priceline paid just around $135 million for the company but increased their profit by more than 10x that in the first 10 years. Between 2003 and 2012, Priceline’s profit catapulted from $10 million to $1.1 billion.
By acquiring Booking.com, Priceline had made a strong move towards distinction. American competitors were focused on the local market - but missed the global opportunity. Booking, a Europe-based company, had strategic reach into a European market that was laid out significantly differently than the US.
For example, Booking.com primarily operated off the agency model, something which Europeans were much more used to. Rather than a client paying through Booking.com’s website, they would pay the hotel directly, with Booking.com taking a cut after.
Other factors of difference made an impact too. Booking.com enjoyed a European landscape with much less consolidation, meaning smaller hotel joints benefitted from marketing themselves on the platform. And of course, there’s the classic trope about Europeans - they just simply vacationed more. Amazing in terms of customer retention. Fast forward to 2023, Booking.com notched $21 billion while Expedia barely cracked $13 billion.
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