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Building the value triangle:

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Title: Building the value triangle:


1
Trey Urbahn, President - Travel
  • Building the value triangle
  • A Case for Reintermediation

2
Buyers and sellers must compromise opposing goals
in order to complete a commercial transaction
Buyer
Seller
  • Highest price
  • Non refundable/
  • exchangeable
  • Lowest cost
  • Lowest price
  • Returnable
  • Highest Quality

3
Different forms of commerce favor one side or the
other
Barter (no price) Markets (negotiated
price) Retail (seller-set price) Auctions
(buyer- competitive price) RFP (seller- competitiv
e price)
EFFICIENCY
Buyer
Seller
4
Market inefficiencies have fostered valuable
roles for intermediaries
Buyer
Seller
  • Geography
  • Overcoming Imperfect information
  • Establishing objective value
  • Enabling a transaction

Intermediary
5
But the internet changes everything.
  • Has no geographical bounds
  • Buyers can find sellers
  • Sellers can reach a huge base of buyers
  • Buyers can comparison shop
  • Assess product attributes
  • Find the lowest price

6
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7
Historically viable roles have diminishing value
in the E-Commerce world
  • Retailers
  • Wholesalers
  • Brokers
  • Agents

8
Within the travel industry, internet frenzy has
has driven many to hastily migrate traditional
roles onto the net
We need an e-commerce strategy
The Internet is a great distribution channel
Our competition is online
We need to be online
The future is on the Internet
9
Dont use television like radio
  • Leverage the internets potential by
    reinventing traditional business processes
  • Recognize fast changing economic forces
  • Know your customer
  • Know your product(s)
  • Ask why am I here?

10
Successful E-Commerce players have developed
compelling and defensible value propositions
  • They create value across three dimensions
  • For buyers
  • For seller/suppliers
  • For themselves

11
Buyers dont understand business model allowing
them to speculate in airline seat futures
Buyer
Seller
Intermediary
They just want to get there
12
This artificially-driven declining price model
has no linkage to underlying supply/demand
economics
Buyer
Seller
Intermediary
Therefore does not elicit compelling supplier
pricing
13
This priceline wannabes opaque model is highly
dilutive to sellers existing revenues.
Seller
Buyer
Intermediary
Fixed markup produces dubious operating
economics, as well
14
Case Study A Three dimensional value equation
enabled by the internet
15
We have invented and patented a new, sixth form
of commerce
  • The Demand Collection System
  • Its brand name is priceline.com
  • Priceline intermediates buyers and sellers,
    creating exceptional value for both.
  • Collecting unconstrained demand from consumers
  • Presenting it to sellers

16
A Demand Collection System has specific
characteristics
  • Buyers name a range of parity goods theyre
    ready and able to buy.
  • Buyers commit to buy if any qualified seller
    agrees to their price.
  • Buyers guarantee their committed price,
    typically with a credit card.
  • The DCS is authorized to consummate the
    transaction
  • The transaction, once complete, is irrevocable.

17
Buyers use a DCS when theyre willing to trade
off certainty of product and price... for the
chance of getting a better price.
Trade off
18
Price is clearly a compelling consumer motivator
  • In exchange for getting the best price (their
    price), consumers appear willing to trade off
  • Certainty
  • Brand choice
  • Convenience
  • Flexibility
  • Refundability
  • Average priceline customer saves 65 off the
    best applicable retail airfare

19
A demand collection system allows sellers to
offer low prices without competing on price
  • Avoids this sellers nightmare
  • The net gives consumers perfect price
    information
  • Fosters downward pricing spiral Can destroy
    retail price integrity
  • Which C-2020 Olympus zoom camera would you buy?
  • The one for 899
  • Or the same one for 750?

20
A demand collection system offers a particularly
compelling value equation for sellers
  • Allows them to dispose of excess inventory
  • Without having to resort to destructive markdowns

21
All Sellers Seek To Optimize Margin By Matching
Price and Inventory
  • Its easy to sell all at a low price
  • Its easy to sell a few at a high price
  • Its hard to sell the most at the best price

22
Successful Sellers Create Excess Capacity
  • Not the result of poor business practice
  • The byproduct of optimizing revenue and profits
  • The disposal of excess capacity typically means
    selling at the wrong price
  • Which produces sub-optimal revenue results


23
Marking Down Excess Inventory Creates Serious
Longer Term Implications for producers
  • Threatens brand equity
  • Reduces consumer expectations
  • Destroys retail price integrity
  • Disrupts existing distribution channels

24
Pricelines demand collection system solves the
Markdown Paradox for sellers
  • Conceals the selling price from buyers as well as
    competitors
  • Non-disruptive to existing distribution channels
  • Targetable
  • Works within existing legacy systems
  • Does not trigger competitive response

25
Priceline solves the markdown paradox by
collecting unfilled, ready-to-buy demand.
  • Demand is collected at every possible price
    level.
  • Sellers fill demand at as low a price as they
    want.
  • Retail prices are unaffected since there is no
    low price (or sale) advertising to confuse
    consumers.
  • No free-riders. Each buyer gets his own price.
  • Outcome uncertainty protects the retailer from
    brand/price dilution.

26
Unconstrained offers form a pyramid of demand.
Sellers observe and measure natural demand
elasticity
350 (list price) 340 - 330 offers
330 - 320 offers 320 -
310 offers 310 - 300
offers 300 - 275
offers
275 - 250 offers
250 - 200 offers 200 - 150
offers 150 - 125 offers
125 - 100 offers
Under 100 offers
8 12 20 buyers 32 buyers 45 buyers 67
buyers 89 buyers 115 buyers 142 buyers 165
buyers 280 buyers
Sample New York to Los Angeles Round-trip Ticket
Offers
27
In priceline, buyers win because sellers win
  • Unsold inventory is no longer the byproduct of a
    well managed business, but a choice
  • Airlines and hotel chains have learned to use
    priceline as a complement to their existing
    revenue management and distribution strategies

28
Most Premium Branded U.S. Hotel Chains Now
Participate in Pricelines hotel product
29
All 8 Major Full Service Airlines use pricelines
DCS
Source DOT Form 41 Database, 1999 for 2Q2000
Priceline traffic
30
Our participants are selling a lot of tickets
Weekly Tickets
  • 20 month over month growth since 1/99
  • Weekly tickets now exceed 100,000
  • Over 20,000 on peak days

31
By adding value to both consumers and producers,
priceline has created value for itself
  • Almost 500MM Revenue in First Full Year of
    Operation
  • Annualized Gross Profit Run Rate of Almost 100
    Million
  • Successive Decreases in Operating Losses
    Throughout 1999 and 2000
  • Market capitalization exceeding 4.5 billion

Priceline Revenue Growth
32
Online Air Travels Projected Growth is Strong
Millions
33
Online Air Travel Market Competitive Segments
34
Air Travel Market Market Size and Segments
  • 1999 Market was 84 billion
  • 44B leisure
  • 40B business
  • Of the 84B total
  • 5B online
  • 79B offline
  • Of the 5B online
  • 4B leisure
  • 1B business

35
Key Players Air Travel Marketplace
Trip.com
ITN
Online Leisure
TVLY
PCLN
Online Business
Cheaptickets
AMEX
Carlson
Liberty
Rosenbluth
Airlines
Airlines
Offline Business
Offline Leisure
36
Competitive Landscape
1999
3.6 B
2001
Offline TAs converting to net
Online Consolidators
Online Retail
Opaque
37
Projected opaque segment growth outpaces other
online leisure segments
38
Priceline.com is in a Statistical Dead Heat with
Amazon.com as the Most RecognizedE-commerce Brand
  • 2000 Ad Spending Will More Than Double Including
    New Television Campaign
  • The Average Priceline User Tells 18 Friends and
    Family Members About Priceline
  • Priceline is the Most Recognized Brand among
    non-Internet Population

Company
Adults
9/98
4/99
8/99
Today
AOL
79
83
88
87
170
mm
Yahoo
51
70
76
81
159
mm
Amazon
37
52
60
69
135
mm
Priceline
32
46
55
66
130
mm
Netscape
49
58
65
64
125
mm
eBay
6
32
46
60
118
mm
ETrade
13
30
44
56
110
mm
eToys
na
22
26
46
91
mm
Earthlink
na
na
na
46
91
mm
MSN
24
35
39
44
87
mm
Source Opinion Research Corp.
39
Our Business Model Applies Across All Sectors of
the Economy
We partner with premier companies in the physical
world
Telecom
Travel
Auto
Financial Services
C2C
International
B2B
Retail
Small Business PerishableInventory
Media Utilities Telecom Office
Equipment Supplies
LD ILD ISP PrepaidWireless
Airline Tkts Hotels Car Rentals Virtual
Pkgs Travel Ins Cruises
New Cars Used Cars Car Parts
MortgagePurchasing Refinancing Home
Equity Auto Ins Term Life Credit Cards
Groceries Gasoline Retail HardGoods
Used Goods Like New Goods
S.E. Asia Australia/NZ Europe Japan
Latin America Canada
250 Billion
325 Billion
500 Billion
2 Trillion
400 Billion
2 Trillion
5 Trillion
2 Trillion
40
Across all of our products, pricelines buyer
driven commerce model is based on a simple value
proposition
  • Create exceptional three dimensional value
  • For our customers
  • For our seller partners
  • For our shareholders

41
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