Priceline: Why the online agency model still works for us, especially in Asia-Pacific
NB: This is a guest article by Charlie Li of China TravelDaily.
The secret to The Priceline Group’s success may not be evident from watching William Shatner’s outings as the Priceline Negotiator.
One key element is that outside North America, the company drops its name-your-own-price model and uses a traditional booking model that has allowed it to become the world’s biggest seller of hotel rooms by selling 141.6 million room nights in 2011.
Primarily driven by international business, Priceline has achieved a 46% CAGR in the past five years.
During the year ended December 31, 2011, international business (the significant majority of which is generated by Booking.com) represented approximately 78% of gross bookings, and approximately 88% of consolidated operating income.
At a market capitalization of over $32-billion (U.S.) as of June 2012, Connecticut, US.-based Priceline has become one of the largest US Internet companies.
From its stronghold in Europe, Priceline is actively extending its reach into Asia-Pacific, building its brand profile, recruiting more accommodation and looking for more growth opportunities.
Glenn Fogel, head of worldwide strategy and planning for Priceline, shares with Travel Daily China the group’s plans for Asia Pacific and his take of the landscape going forward for online travel in the region.
Booking.com and Agoda have been making significant contributions to Priceline’s phenomenal growth over the past several years. As we know, you are the person who led these two acquisitions, so what made these acquisitions and the business integration afterwards so successful?
The Priceline Group actually has made four significant international acquisitions, including Booking.com, ActiveHotels (which has been folded into Booking.com), Agoda and Rentalcars, which is our international car hire service that previously was called TravelJigsaw
We think that there are several reasons for the success of our acquisitions to date. Excellent management is one reason. We have acquired companies where the senior management was enthusiastic about staying on after the transaction to continue building their businesses.
Over my more than a dozen years at the Priceline Group, we have met with literally hundreds of companies that were potential acquisition targets for us. And we have seen some great ones that we thought on initial review might be a good fit with our strategic needs.
However, we did not pursue many of these companies because we did not think the entrepreneurs fit with what we thought (and still think) was necessary for long term mutual success: namely, a desire by the entrepreneurs to continue to work hard with us after the acquisition to make their companies even stronger.
A second reason for success to date is the independence that companies retain after becoming part of the Priceline family.
We recognized that the entrepreneurs who built their companies know more than we do about their businesses and their markets. So we give them a great deal of independence to continue to do what they have been doing well. And our final reason is that we generally do not do full integrations.
For example, Booking.com markets hotel rooms under the agency model, while Agoda uses a merchant model. A common tactic after an acquisition is to cut costs by choosing one platform and merging systems.
Another acquirer might have thought of integrating Agoda into Booking, keeping only the Booking agency platform. But that is not what we did and we are better off having fast growing agency and merchant players in the group.
Of course, some people may recall that Active and Booking were merged together, but that was a decision that Active and Booking management were fully involved in and it was an integral part of the acquisition plan when we approached Booking so they, the local managers, were very much part of the decision.
It was not the faraway corporate HQ demanding the integration.
What challenges do you see from emerging channels and models, or how to leverage such as last-minute, flash sales, group buying, social media, etc?
The world of hotel distribution continues to evolve and there is constant innovation and new, creative ways to book travel. I don’t see any of these as challenges.
Instead, they offer opportunities for us to consider and leverage if we think they can help us best match travel demand with hotel supply at the right price.
The Priceline Group’s brands such as Agoda and Booking.com utilize many different ways including last minute, flash sales, etc. to best serve our suppliers and travelers and we will continue to do so.
We are much better positioned due to our breadth of supply, best prices and brand awareness among consumers to present deals through these different sales channels than single-focused startups that might get some mentions in the travel press and perhaps venture money.
In the end, what matters is how many rooms did you book for your hotel partners today? And how many will you book for them tomorrow?
What will be the key driving force that will impact the way that consumers buy travel in the next few years? Google? Facebook? Mobile?
If only I knew what the future would be, my job would be much easier!
The truth is no one knows how the future will unfold but, due to our size and flexibility, we are better positioned than many to adapt as the market changes.
OTAs have been competing on price primarily. Will the battle continue to be on price, and price alone? Or will there be new battle fronts (service, marketing or what)? If the battle extends to service, how do OTAs compete with travel agents?
The claim that OTAs have only been focused on price is a myth. No doubt, price is a critical component when a consumer decides to book a hotel, but the consumer is also concerned about breadth of inventory or availability, customer service, cancellation policies, ease of use of the site, site language, payment method, etc.
There are many factors that determine which site a traveler uses to book a hotel. And OTAs have been quite busy making the customer experience more satisfying from beginning to end.
In terms of competing with offline travel agents, I think the speed with which people around the world have chosen to use OTAs like Agoda and Booking.com instead of offline agents, is proof that the OTA model has significant advantages for the consumer.
Some suppliers are increasingly reluctant to rely on OTAs because of higher distribution cost. Does that cause concerns for OTAs?
Unfortunately, another myth. Just look at the steady growth in hotels participating with various brands in the Priceline Group. OTAs provide hotel revenue managers with a highly efficient distribution tool that can sell their unsold rooms to travelers from all over the world.
Those travelers can even shop and book rooms in their native language. And we are aggressive marketers. Hotel revenue managers who understand the value we provide consider OTAs to be excellent value for the money.
Also, using our services is a much less expensive way to fill rooms than most channels, particularly when compared to the outrageous levels of compensation certain wholesalers or consolidators demand.
As you said two years ago at a TravelDaily conference, the hotel consolidators may disappear in the future since the Internet is creating a more transparent business environment. Do you still think this will happen in the near future?
I think a basic economic truth is when one service is much cheaper than another, eventually the less expensive service gains share.
If a hotel can distribute its rooms through an OTA at a much lower price than through consolidators, it will do so. As more and more demand comes through the OTA channel, hotels will hand over less and less inventory to more expensive consolidators.
What are the major differences between the online travel habits in Asia Pacific vis-à-vis the more developed Western markets or global trends?
I think generalizing across broad parts of the world is a dangerous thing to do and trying to compare Asia-Pacific to a Western market is not very useful.
How should Asia-Pacific online travel market be tackled strategically given such differences?
We do not think of Asia Pacific as a single unified market. Every country is unique and even within countries there can be substantial differences. The important thing is not thinking of Asia Pacific as a single market.
Which Asia Pacific markets offer the most promising growth prospect for OTAs? What is Priceline Group doing to expand its market share and penetration in Asia Pacific and specifically China?
As a rule, we do not talk about what we are going to do in the future. However, we can talk about the prospect for growth in general and one can just look at travel statistic trends and see there is great opportunity throughout the Asia-Pacific region.
It is an obvious point that as people’s incomes rise, they are more likely to travel.
We have been fortunate over the last two decades to witness the greatest movement of people from poverty to middle class in the history of the world and most of this upward mobility has occurred in Asia-Pacific.
These new entrants to the middle class want to travel and as the economies in the regions continue to expand, the amount of travel will also grow.
NB: This is a guest article by Charlie Li of China TravelDaily.
NB2: Fogel will appear at the 2012 China Travel Distribution Summit, due to be held at the Wyndham Bund East Shanghai from September 12 to 13. More information.
NB3: Suitcase-mouse image via Shutterstock.
Special Nodes is the byline under which Tnooz publishes articles by guest authors from around the industry.