Now that Priceline (PCLN), the name-your-price innovator, is hitting on hard times, people are wondering whether really new pricing innovations are part of the Internet's future.
I expressed considerable skepticism about Priceline's decision to enter the grocery and gasoline business in an article I wrote a number of months ago (Gambling for Groceries with Priceline.com). Unlike airline seats or hotel rooms that provide no income to the supplier if unused, extending this pricing concept into selling non-perishable items seems flawed.
NEW PRICING IDEAS?
While the future of Priceline may be in doubt, the idea of pricing innovations on the net seems economically sound, and the net sure allows for all sorts of new pricing schemes.
Its not surprising then that we have pricing "innovations" from companies like iderive.com.
With iderive you search for a product and are shown the List Price and the Iderive price (a "Bargain pricing you won't find anywhere else", they claim). The catch is that the Iderive price is for some specified future date, and when that date arrives, the product may or may not be available.
To compensate those who buy a product that is later unavailable, buyers are given a "Get Paid" amount; a cash payment that compensates them for their time.
If this sounds like an "options pricing contract", well, essentially it is.
The belief seems to be that customers on the Internet are as motivated by buying electronics, automobiles, airlines, and hotels via the Internet as they are buying options in the stock market.
Companies that focus on complicated pricing models-like this one-- run the risk that even bargain hunting customers will have little interest in trying to understand how these buying models work. Academic research has long told us that complexity in any aspect of an innovation-the product or its price-hurts the adoption and diffusion of both products and ideas.
Priceline, for example, has already run into this problem. In Connecticut, some consumers claim to have misunderstood the basic rules for the air tickets bought on Priceline's site.
And demographic tides seem to flowing against more complicated pricing models. While Internet-enthusiasts have historically dominated the web, the Yankee Group reports that the web seems to be reaching a mass market.
As the Internet looks more like the general population, I wonder whether bargain hunters in the generally conservative mass market want pricing models more complicated than the readily available and more easily understood shopping bots, buying clubs, and deep discounters. Personally, I doubt it.
What's more, who is iderive targeting? It must be the bargain hunter segment of the market. This is the same segment that Priceline attracts, as well as the buying groups like Mercata, and sites like mysimon.com, bottomdollar.com, dealtime.com, etc.
Of course, except for Priceline - who spent millions educating the market about their unique pricing approach through singing advertisements - these other pricing models have been more readily understood by consumers since there are clear surrogates in the offline world in the form of buying clubs and deep discounters.
But iderive must also be targeting bargain hunters that get a thrill out the risk of an uncertain outcome - will the product be available or not? - and the comfort of knowing they'll get a small sum for taking this risk if it doesn't pan out. How big is this group? I seriously doubt anyone really knows.
WHERE DOES THIS LEAVE PRICELINE?
Priceline's approach is unique. The billion dollar question is whether it will survive. On the plus side, they have achieved strong brand recognition. But brand recognition alone doesn't guarantee survival.
While I can't make a strong prediction, I will say this. People eventually tire of gimmicks, and to the extent that Priceline's model is perceived as an interesting gimmick, interest in its model will likely wane. In any event, playing a pricing game where you have no control over costs or supply rarely creates barriers to entry, but it sure can lend itself to price wars.
For this reason, it's not at all surprising that the airlines have banded together to compete against Priceline. Lauched on Tuesday (Oct. 25, 2000), hotwire.com consists of the airline heavyweights including United Airlines (UAL), American Airlines (AMR), and Continental Airlines (CAL).
These players do control the supply of seats, and they're not the least bit interested in letting Priceline control their destiny. With airlines' margins running low, they likely have little incentive to facilitate Priceline' quest for dominance in the name-your-own-price player on the web, at least for airline tickets. If the airlines can successfully enter this space, it wouldn't be a stretch to imagine car rental agencies, hotels, and even long distance carriers doing the same.
Will pricing innovations on the web succeed? Priceline's innovative model will probably make it, but not necessarily with Priceline as a major force. As history tells us so often, the first mover often does not have an advantage in long-term survival.