Taken for a Ride

Here's what William Shatner won't tell you about Priceline.

PART 1 | 2

IF YOU'VE LISTENED to Priceline's pitch, you'd think the company takes your bid and shops it to various suppliers to see which will accept it. Not exactly, says Ek.

Here's how it works with plane tickets: Every week Priceline sends its 30-plus airline partners a "demand book" that lists every bid it received for flights the past week. The airlines page through that and input into a database what they'd be willing to accept for the following week. For example, they might say: "Okay, for Chicago to Atlanta, we'll accept anything above $350. We'll take bids at $200, but the customers will have to fly at 7 a.m. and have a layover. And if they're willing to have two layovers, we'll take bids at $140."

If the bid exceeds the airline's acceptable price by enough that Priceline gets an adequate cut ($10 on average, Ek says), the customer gets his ticket. That spread is how Priceline makes most of its money. To ensure that it doesn't get squeezed by customers who start low and keep inching their bids up a few dollars, Priceline has a rule: If you rebid, you have to change one of your travel dates or one of your airports.

Last year Priceline added a wrinkle. Instead of being rejected outright, people whose bids are close now get a message to call a rep, who then offers them the ticket for typically an additional $25 or $50. Ek maintains that the service benefits customers because they don't have to switch their itineraries to rebid. Still, to some, the tactic reeks of the old bait-and-switch. Says Allen Tsai, a Phoenix software programmer, "It sure didn't feel like I was the one 'naming my own price.'"

Through interviews with consumers and airlines, Forrester Research estimates that Priceline customers save 10%, on average, on advance-purchase fares. (Forrester figures that the average successful bid is $200 to $250 per ticket, which is how it derives its $25 savings estimate.) "Priceline succeeds because of the marketplace confusion created by the airline industry," says Harteveldt, the Forrester analyst. "The fares change all the time. What's available now may not be available in two minutes. Priceline is able to tap into consumer confusion and frustration and sell tickets."

Forrester's numbers are "way off," claims Priceline's Ek. "We've found that it ranges: If you buy your ticket more than 21 days in advance, the savings are 20% to 35%. Inside of 21 days the average savings is more than 40%."

Yet Priceline's site, under the heading "What price should I offer?," says this: "To maximize your chances of getting a seat at your price, we strongly recommend that you do not request ticket prices below the airlines' lowest advance-purchase fares."

"That means to maximize," Ek hastily points out.

No matter how much Priceline customers are saving, one thing's for sure: It has decreased, and it's going to decrease even more. The company's 1999 10K report points out that "gross margins increased each quarter as a result of," among other things, "decreased sales of tickets that were sold below cost." Explains Ek, "What we were doing in the past was, if your bid came within $10 or $5, in the very early days, in order to bring the first-time business in, we would sometimes sell the ticket below cost. We found as more and more customers came to the door, we didn't need to do that."

Scroll down the same page of the report and you'll find this statement: "Anticipated consumer demand (is) sufficient to allow the company...(to sell) its products at increasing positive margins." In other words, goodbye bargain-basement fares.

The spread is how Priceline makes most of its money on hotels and rental cars, too. With new cars and mortgages, however, it gets a fixed fee from consumers -- $25. For its new long-distance service, the company is charging suppliers a slotting fee: Phone companies have agreed to pay Priceline a total of $30 million over three years to participate, Ek says. Another source of revenue: companies who do piggyback marketing. If you're trying to score a plane ticket, for example, a screen might pop up offering to add, say, $25 to your bid if you sign up with a particular credit card company.

One recurring complaint Priceline has had to deal with involves the charges that are tacked on to airfare bids. Customers don't know what the total will be until their bid is accepted and their card is charged. (That's because the taxes depend on the route, says Ek.) So in March the company added to one of its Web pages an explanation of potential costs, which had been on a link. That, Ek says, cut "way down" on the number of complaints.

Still, even when customers do their homework, they sometimes wind up feeling ripped off. When Ira Zimmerman decided to book a Las Vegas trip on Priceline, the San Juan Capistrano, Calif., man was wary, having heard stories of added charges. He saw that Priceline's Web site warned of a possible fuel surcharge, but it also said, "This charge is the same whether you buy your tickets through Priceline, a travel agent or from the airlines directly."

So Zimmerman called up American and America West-two airlines that run the route-and both said they did not have a fuel surcharge on it. Perfect, thought Zimmerman, who bid $59, estimating a total with taxes of around $74. Wrong. His email confirmation showed $92 (more than the going rate) for an American flight. And, yes, his total included an $18.20 fuel surcharge.

Steamed, he called American again, which reiterated that the route had no fuel surcharge. (American now says that it does have such a charge on that route.) So he sent a scathing email to Priceline saying he was outraged that it appeared to be charging fees that did not apply to other passengers.

A day later, he received a message on his answering machine from a member of Priceline's customer-service department. "I'm calling in regards to the fuel surcharge," the gentleman intoned. "It is true that American Airlines does not charge the fuel surcharge to their regular customers. But Priceline customers aren't regular customers. We're considered discount customers."

BEAMING, BRIAN EK slaps a videocassette into the office VCR and hits play. Up on the screen comes a parody done by Saturday Night Live earlier this year. A turtleneck-clad comedian impersonating Shatner croons: "You can order groceries online, yeah, you order fish, ham, cider, raisins, shrimp, jelly, you spend an hour, just one hour online, you can save 12 or 13 cents, baby."

Ironically, this was a milestone for the company: "To have Saturday Night Live pick it up and do a spoof on it, they've got to assume that just about everybody has seen it," says Ek. Though Ek relishes the fact that Priceline has worked its way into pop-culture vernacular, the parody hits on a key issue for the company. Horror stories aside, will customers continue to put up with the added nuisances in return for relatively small savings?

Jennifer Lambert, for one, is still making up her mind. Curious about the much-hyped grocery service, she logged on to her home computer in Greenwich, Conn., and bid for her weekly groceries. With her slow connection and the graphics-heavy pages, it took her more than an hour to bid for her four or five items.

There were other glitches: Since Priceline doesn't let you choose which brands you buy, when she bid on laundry detergent, she ended up with "really smelly" Tide. ("I have allergies and was sneezing all month.") When she got to the local Food Emporium, she found the store didn't carry the 16-packs of AA batteries she had bid on. (She would have to call Priceline to get a refund.) Then there was the wait in line, where she dutifully separated her Priceline goods from her regular goods. ("It's guaranteed to cause some pretty heavy eye-rolling in the line behind you.") It all just seemed like too much hassle to save a couple of bucks. "In the time-value equation, I'm starting to think my time is worth more than that," she says.

Ultimately, Priceline's fate will ride on whether it can get customers like Lambert to keep coming back. Mark Rowen, a Prudential analyst who has a Strong Buy rating on the company's stock, is betting it can. "With some of the (newer) product offerings -- groceries, home mortgages, new cars -- the restrictions are much less oppressive. Going forward, you'll see that consumers like those offerings much more than the early ones."

But investors are not so sure. Priceline's stock, at $65 in mid-April, is down from $165 a year earlier. Even Shatner dumped about 35,000 shares this spring. Meanwhile, Priceline, which lost a billion dollars last year as it expanded, is fighting tooth-and-nail with Microsoft's (MSFT) Expedia, a close competitor, in a lawsuit Priceline filed to protect the patent on its "reverse-auction" system.

Of course, Priceline's customers do have one inducement to stay loyal: Call it the pity factor. Just ask Greg Raymer. The Stonington, Conn., man was not too pleased about having to change his departure to Logan Airport in Boston -- three hours away -- to rebid on a Las Vegas trip. Once on board, he started chatting with the flight attendant, telling her how his wife had to drive him all the way to the airport and back and how he hardly saved any money at all. Later, as the attendant offered up $5 headsets for the in-flight movie, Raymer decided to pass. "Here," she said with an understanding smile, "you can have them for free. You had to buy through Priceline."