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Priceline Webhouse Club
2
Priceline Overview

• Introduction
• Business Model
• Introduction to WebHouse Club
• How Revenue was generated
• WebHouse Club Investors
• Revenue Model
• Strategic Issues
• GBF
• What eventually happened

3
Priceline Introduction

• Founded by Jay Walker.
• Online Market Maker.
• Created unique online marketplace.
• Sold Airline tickets, hotel reservations, and
  rental cars.
• Customers bid the price they wanted to pay and
  Priceline found the best ticket closest to that
  price.
• Gave airlines a online presence.
• Airline tickets are a perishable item.
• Airlines could sell their seats at lower price
  without affecting their retail structure.
• Launched in 1998.
• In 1999 revenues were 482 million and were
  projected to be 1 billion by 2000.
• Gross margins were 14.2 and climbing.
• In January 2000, priceline represented 3 of all
  leisure airline tickets sold in the US.
• Jay Walkers stock in priceline in September 1999
  was valued at 9 billion.

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Priceline Business Model

• Generated Revenue in two ways
• Kept the spread from consumer bid to actual
  airline price. (100 consumer price - 70 ticket
  30 spread.)
• Practiced gross revenue.
• Priceline patented certain business models so
  they could not be duplicated.
• This eventually led the way for Jay Walkers new
  invention, Priceline Webhouse Club

5
WebHouse Club

• A fixed price is always the wrong price. Always.
  Its either too high or too low for everybody.
  We engage in price discovery based on elasticity
  in advance of the purchase process.
• Jay Walker

6
Webhouse Club

• CEO was Jonathan Otto.
• General Manager was Jose Suarez.
• The main idea of WebHouse Club was to change the
  way people did their shopping.
• Used the Internet to deliver prices to customers
  instead of products.
• Was started to bring same type of airline ticket
  auction, to buying groceries.
• Later evolved to other products.

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Webhouse Club

• Launched November 1, 1999 in New York City with
  600 supermarkets.
• Website created to provide convenience for the
  customer.
• By Febuary 2000, the site had over 200,000
  members and 3 of households in New York City.
• Webhouse club extended to grocery stores in
  Philadelphia, Washington, Baltimore, New Jersey,
  and Connecticut.
• Groceries online was fast becoming the best
  selling online product.
• 80 of all Webhouse sales were to repeat
  customers.

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How Revenue Was Generated

• First Time Customer credit
• Webhouse Club would put free 10 in new
  customers account
• The customer chooses several items while
  selecting the half off price special.
• For example, if the customer picked 20 of items
  and picked them up at the grocery store, they had
  in fact used their free 10. At the grocery
  store, the items came out to 20.60 though. The
  bill was sent to WebHouse Club who was later
  reimbursed by the manufacturer for the products.
• The reimbursement was where WebHouse Club made
  money and also from the repeat customers. In
  1999, 94 of customers used service more than one
  time.
• Sponsorship(Cross-Subordination)
• WebHouse Club offered customer free 25 for
  signing up for new credit card.
• Meanwhile, the credit card company paid Webhouse
  Club 50 for each new customer acquisitions.

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Webhouse ClubInvestors

• Vulcan Ventures (the investment organization of
  Microsoft founder Paul Allen)
• Capitals Arista Fund
• Walker Digital Capital
• Goldman Sachs
• All 4 companies together invested 65 million in
  first round financing.

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Revenue Model

• Customer would register with a credit card and
  then was sent a debit card.
• Members could then name their own price.
• The customer would then print out their shopping
  lists, with a barcode, and take it to the
  participating grocery store and pick up their
  groceries.
• Coupons had historically driven the market.
• In 1998, 4.8 billion coupons were used saving
  3.6 billion.
• Jay Walker didnt want to compare Webhouse Club
  to those coupon sales, but did point out that
  this presented an opportunity for Webhouse.

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Strategic Issues

• Webhouse Club had yet to close a deal with a
  major manufacturer by the end of 1999.
• Had to pay out of their own pockets to satisfy
  customers.
• Led to negative margins.
• Early customer success later led to significant
  losses and cash burn.
• Projected that 200-500 million of capital was
  needed for customer acquisition.
• Meanwhile, the company was toying with the idea
  of where and when to expand.

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GBF

• Network Effects
• Fairly Strong for customer because 94 of
  customers said they would use site again and
  again. Also after the word got out, many new
  customers popped up.
• -This produced a viral network effect.
• - High for the airline industry because they
  now had a voice to sell their tickets
  without affecting their economic structure.
• Scale Economics
• High initially because after the initial cost of
  the website, and the high volume of customers who
  started to be repeat customers, the upkeep of the
  company costs were minimal.
• There is a high contribution margin.
• The customer lifetime value exceeds the
  acquisition costs.
• Customer Retention
• - High due to the fact that it was so easy to
  just go on line and name your own price for
  products like airline tickets and groceries.
  Everything was taken care of for you. For
  example, the groceries were already picked out
  and paid for by the time you got to the grocery
  store and it made things convenient.

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GBFContinued..

• A GBF winner take all strategy was certainly used
  by WebHouse Club.
• This was probably what led to their demise.
• They did not pay attention to other key aspects
  of their operations.

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What Happened???

• WebHouse Club never made it and died horrible
  death.
• In October of 2000 WebHouse Club announced that
  they would cease operations and used 50 million
  they had in reserves to fulfill any obligations
  to customers for grocery of gasoline bids.
• I think main reason WebHouse Club failed is
  because, although gross margin was up, operating
  margins were steadily headed downhill and nobody
  caught this in time.
• Another reason was that they were looking to
  expand before first fixing problems with the
  company.
• Priceline managed to exist though.
• Priceline almost felt to the same fate as
  WebHouse Club.
• Stocks went from 104/share to 6.85/share for
  Priceline, when WebHouse Club tanked.
• Still thrives today thanks to Captain Kirk.

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Questions???????

• Questions??????????

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