How does Priceline make money?
The Name-Your-Own-Price business model
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This is Edition #11 of the newsletter. You can find the previous editions here.
Priceline.com, a travel site, distinguished itself early during the travel wars of the '00s by introducing their name-your-own-price concept, in which vendors bid to meet the prices customers set for hotel stays and air tickets.
Bookings offered under the name your own price program are not disclosed by name (or itinerary, in the case of airfares), which protects suppliers by not linking them to the discounted quotes that would otherwise change the prices they regularly charge. By concentrating on hotel bookings and high-end overseas travel, Priceline also protects itself from the risks of putting too much emphasis on products in the volatile air travel market.
What’s the catch? Well, the catch, is that when you’re bidding there are 3 sections to consider: Region, Star Rating and Price. The correct combination of the 3 if accepted could land you a hotel somewhere remote, with a small room-size and no breakfast. Or, you could end up with a 3 AM flight that still matches your price criteria. Once the bid is accepted, you cannot cancel.
Name-Your-Own-Price (NYOP) Business Model
Name your own price is a pricing strategy where the sellers let buyers decide the final price they want to pay for the offering, but the transaction only takes place if that offer equals or is greater than the unrevealed threshold price set by the seller.
The transaction flows in this way –
Sellers list products with their own threshold prices over which they’ll accept the bid. This threshold price isn’t visible to the buyer.
Once the buyer likes the product, s/he places the initial offer for the product.
If the price offered by the customer equals or is greater than the threshold price, the transaction takes place at the price quoted.
If the offer is less than the threshold prices set by all the sellers, the buyer gets a chance to update his/her offer in subsequent rounds.
The intermediary (in this case Priceline) makes the difference of the ask price and the offer price.
This model is also called the reverse auction where there are multiple sellers selling the least price to one buyer - in contrast to an auction where there are multiple buyers offering the highest price to one seller. Feedough illustrates it well in this image:
Industries where this model works well:
Standard Offering across service providers eg. Air Travel, City Cabs, Last mile deliveries etc. I often wonder if I could NYOP $10 for a cab and let the drivers choose if they want to take up the offer. These are offerings where price is the only differentiator between the sellers. Also applies to some software products like e-signature solutions.
Last-minute tickets eg. Sports, Concerts, Cinemas, Amusement Parks etc where the seller can sell-off its unsold inventory by accepting bids of lower costs. This way, they do not dilute their offering by selling the products at discounts.
Perishable goods eg. Bakery products that have a fixed shelf life and need to be thrown away. Sellers can avoid this sunk cost with an NYOP model.
Clearance sale goods at fashion retailers like H&M or As-is section at Ikea where the seller has discontinued a product line and wants to get rid-off remaining goods.
A common theme in all the above examples is products that are of no/little value after a point in time.
Industries where this model does not work:
Specialized Services eg. designers, architects, developers. Buyers could suffer from low quality of service if their low-ball bid gets accepted by an inexperienced seller.
Non-standard offering eg. consumer electronics, Enterprise SaaS, Schools etc. where there are too many variables in the service offering and price is not the only differentiator.
Exclusive or luxury products that lose value by discounting its products.
While the NYOP model is quite innovative, there are pros and cons associated with adopting it. Also, over a period of time, and after a series of corrections, the buy/sell prices might eventually end up matching the market price - an equilibrium state. A testament to this is that Priceline terminated its NYOP service for Flights and Car Rentals since 2016.
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Hi how can I make money with price line