Priceline: Outperforming the Online Travel Agency Business Globally
The Priceline Group has consistently outperformed it's competitors in the Online Travel Agency business. So what is Priceline doing well?
The Priceline Group is an Online Travel Agency (OTA) which offers discounted prices for travel related services (i.e. airlines, hotel chains, car rental companies) to both leisure and business consumers. Growing mainly through a successful acquisition strategy that has included Bookings.com, Kayak.com and Agoda.com among others, the Priceline Group’s results have become particularly impressive between 2010 and 2014. During this period total revenues grew at a CAGR of 28.6%, going from 3.08 to 8.4 billion USD, while its net income grew even faster, at a CAGR of 46.3%, going from 528 million US$ to 2.billion USD. Moreover by December 2014 Priceline showcased an ROE of 30.86%, the highest of the Online Travel Agent (OTA) segment, above Expedia (20.55%) and TripAdvisor (22.39%). These results evidence that Priceline’s business model and operational model have been very well aligned, making it a company worth analyzing to understand how is it that both elements work together.
https://youtu.be/o5-XidvLF_Y?list=PLg5_wcdn25Vw5Ew3FPQzSRP8TDoSDMnUX
Priceline’s Business Model
When Priceline was founded, it became famous for being the first OTA to offer the “name your price” scheme. Under this model, customers would state their willingness to pay for a travel related service and in return Priceline would show them several options without disclosing the name of the providers offering them. Whenever the customer chose one, Priceline would earn the spread between what the customer was willing to pay and what the service actually cost. This is a revenue source was a competitive advantage because it allowed the firm to differentiate in front of consumers and to charge an attractive fee to providers by acting as merchant when choosing the provider for consumers instead of having consumers choose themselves.
Priceline’s other two revenue sources are agency revenues and advertising revenues. Agency revenues represent the fees Priceline charges service providers through the traditional price-disclosed model, when someone chooses one of their products offered on one of Priceline’s web platforms. Advertising revenues is what Priceline charges service providers to place ads on its webpages. As of December 2014, the distribution of the firm’s total revenues between merchant revenues, agency revenues and advertising revenues is 26%, 69% and 5% revenues respectively. The Agency model has become Priceline’s most relevant model as it requires a lower level of investment from the company and carries lower operational costs, there for it is the most profitable of the three.
To continue growing and increasing its relevance in the OTA market, Priceline describes its strategy in its 2014 10-K as being composed by four pillars:
- Providing the best consumer experience when searching and booking through Priceline’s many online platforms
- Partnering with travel service providers in mutually beneficial relationships
- Maintaining multiple independently managed brands to offer reservation services in ways that appeal to different consumers
- Investing in profitable and sustainable growth through developing new services, entering new markets, and pursuing strategic transactions like acquisitions and joint ventures
Priceline’s Operational Model
The operational model that Priceline uses to ensure the materialization of its business model starts by using its online platforms to offer mainly three kinds of products: room nights, airline tickets, and rental car days. Most of Priceline’s sales come from room nights, mainly through Booking.com, which it acquired on 2005. In 2014 alone, it 346 million room nights were booked through the plataform, representing an increase of 28% from the previous year. In 2014, Priceline also sold 7.8 million airline tickets and 51.8 million rental car days, showcasing growths of 18% and 12% respectively compared to the previous year.
Booking.com has 21 million directly bookable rooms listed, making it the largest offering of the sort in the world. Most of Booking.com’s growth has been driven by the European market, were its listings have increased 35% year-over-year. Moreover the acquisition of Agoda.com and its joint venture with CTrip has allowed Priceline to establish a strong foothold on the Asia-Pacific market. Developing its presence in international markets has been essential for the company to compensate the stagnant growth that the US market has experienced since the 2008-2009 crisis and were at least by 2014 it only held 16% of the market while Expedia held more than 40%. This explains why by 2015 94% of Priceline’s revenues came from international markets and only 6% from the US.
Another factor that has enabled Priceline’s success has been the customization of its platforms to ensure a comfortable experience when accessing them through mobile devices. The percentage of online users that access OTA’s through mobile devices has grown from less than 5% on 2011 to around 30% on 2015. By developing new applications and upgrading its webpages, Priceline has been able to adapt to this shift. Finally, Priceline has recently acquired the restaurant table reservation site OpenTable, which once again proves the importance the company gives to leveraging its knowhow while innovating in its value proposition it offers to its consumers.
Conclusion
Analyzing the main aspects of Priceline’s business and operating models allows to visualize their clear alignment. The market has seen the alignment as well, which has taken the stock price from 399 USD on December 31, 2010 to 1300 USD by December 4th, 2015. By November 5th, after the company released its 3Q15 results, more than 70% of analysts recommended to buy stock, with a 12 month target price of 1485. All this tends to indicate that as long as the company keeps ensuring that its operations work towards the successful implantation of their strategy, the positive results they have achieved so far should be scalable further.
References:
“How Priceline Group Makes Money”, <http://www.investopedia.com/articles/markets/080715/how-priceline-group-makes-money.asp>
“Growth AND Widening Margins: the Priceline Story”, <http://finance.yahoo.com/news/growth-widening-margins-priceline-story-165751304.html>
“Why Priceline and Expedia clash over ‘opaque’ hotel offerings”, <http://marketrealist.com/2014/04/priceline-business-model/>
“An Overview of Priceline’s Revenue Sources”, <http://marketrealist.com/2015/11/an-overview-of-pricelines-revenue-sources/>
“Understanding Priceline’s Business Model”, <http://marketrealist.com/2015/11/understanding-pricelines-business-model/>
“How Has International Growth Helped Priceline?”, <http://marketrealist.com/2015/11/how-has-international-growth-helped-priceline/>
“How Did Priceline Perform on Key Operating Metrics?”, <http://marketrealist.com/2015/11/priceline-perform-key-operating-metrics/>
“Will Hotel Bookings Remain Priceline’s Most Profitable Segment?”, <http://marketrealist.com/2015/11/will-hotel-bookings-remain-pricelines-most-profitable-segment/>
“Has Priceline Geared Up for a More Mobile World?”, <http://marketrealist.com/2015/11/has-priceline-geared-up-for-a-more-mobile-world/>
“Priceline.com – Goldman And Operational Performance Add To Strong Momentum”, <http://seekingalpha.com/article/1857531-priceline-com-goldman-and-operational-performance-add-to-strong-momentum>
“Priceline: OTA model has significant advantages for the consumer” <http://www.traveldailynews.com/columns/article/50017/priceline-ota-model-has-significant>
“Priceline: What Are Analysts Estimating Post 3Q15?”, <http://marketrealist.com/2015/11/priceline-analysts-estimating-post-3q15/>
“Priceline Stock Price – December 31, 2010 to December 4, 2015”, <http://finance.yahoo.com/echarts?s=PCLN+Interactive#{“customRangeStart”:1293771600,”customRangeEnd”:1449205200,”range”:”custom”,”allowChartStacking”:true}>
Interesting! I wouldn’t have imagined that so much of their revenue was coming from more traditional bookings than from the mystery price model, because I would have thought that it would be so much easier to extract additional value. Do you think that this is because the consumers of the two different types of services are different (just have different willingness to pay) or because the forum encourages consumers to start with a low WTP and work up from there as needed to get the quality desired?
It seems that over time, Priceline has shifted its focus more towards the traditional online travel agency model and away from the name-your-price model in the hotel industry. I think the name-your-price model has decreased in share of revenue over time due to a couple of reasons:
1) There is a supply issue because hotels are afraid of cannibalizing their existing loyal customers by heavily discounting through Priceline. Savvy travelers were able to figure out which hotels were being discounted based on general descriptions and location and able to take advantage of the model to book the hotels that they wanted at extremely low prices.
2) The less travel savvy consumer segment that didn’t want to expend the effort to figure out which hotels were being discounted through the “mystery” descriptions preferred booking through the traditional model to guarantee a specific hotel. The idea is that not all 4-star hotel properties in a given area are created the same, so these consumers wanted to ensure that they had all the information available before booking, even if it meant not receiving the lowest possible price.
Thanks for sharing, Max. I have used Priceline in the past, but I have actually heard of a trend of using Priceline and other OTA’s to find the best prices, and then calling the hotel, airline or rental car agency directly to honor the price. I started doing this after I had to change a reservation through Priceline and it ended up being a disaster. The Priceline operators were not helpful, and when I tried to instead work directly wit the hotel, I was told that they could not help me, since the reservation was booked through Priceline. Given this experience, I started doing this for all flights, hotels and rental cars, and always appreciate working directly with the vendor when problems or scheduling changes arise. Do you think this is something other consumers will catch on to? If so, it could be damaging to their volumes and sales.