Initially Priceline had big hopes and massive expectations among those who invested millions in it. However, after nine years since the foundation and pre-announced bankruptcy in 2002, the company does not perform as good as expected, though does not look bad on paper either. There has been substantial improvement in bookings comparing to last year and impressive growth in Europe, resulting in over 60% gross profits. In view of that, first question comes to mind: why the company has not been as successful as first imagined.
At the beginning many people, mainly money saving driven segment, were actually attracted to the pricing innovation scheme, as for the first time they felt that they were able to set their price and get offers which, according to the Priceline advertisement, were 20 to 40% less than buying from traditional channels. What majority of the customers were not realizing or understood only later is that they were not really setting up prices, but only saying how much they were willing to pay for product or service; and then Priceline would search if there were any suppliers willing to fulfill the request at that price. In other words, while customers felt that they were empowered to control prices, the company was simply collecting demand for discounting products/services and match potential customers with suppliers who were willing to sell those discounted products.
In spite of being extremely promising, Priceline approach does not seem like a long-term winning strategy. It has to do with the number of reasons. First one is unstable and difficult to forecast level of revenues. The company generates their profits from those customers who name their price higher than suppliers are willing to accommodate (relying on naivety of customers) and from requests that were met. Though statistics show that about 5% of customers overbid, it is almost impossible to predict how many customers will overbid in the future and by how much. Tendency also shows that people are more and more aware of average price for a hotel or destination they are setting the price on, meaning that chances of overbidding would get even less. Regarding the number of offers that were met, they represent only 15% of the total requests, for which company's fees varied from 10 to 20$ (on airline tickets and hotel bookings). Though Priceline acts as an intermediary, meaning it does not spend money on producing the products it offers, the company still has big fixed costs accumulated from latest computer technology systems with large capabilities and high velocity to process orders. Fixed costs also include recruiting people 24/7 to be able to proceed with orders immediately, out of which 85% will not result in revenue.
Secondly, though the company achieved high awareness, it does not mean that it lead to high purchasing consideration and loyalty. Brand recognition alone does not guarantee survival, as it can carry not only good but also bad popularity. More important is ability to meet customers' expectations by providing satisfactory service. Expedia is a very good example to it. With much lower awareness percentage, level of loyalty among Expedia customers is higher by almost 7%. Perhaps competitors were able to achieve greater loyalty level through being more transparent to...