A case study analysis requires you to investigate a business problem, ….

GUIDELINES FOR WRITING A CASE STUDY ANALYSISA case study analysis requires you to investigate a business problem, examine the alternative solutions, and propose the most effective solution using supporting evidence. Please limit case study analysis to 3 pages maximum. Preparing the CaseBefore you write, here are guidelines to help you prepare and understand the case study:1.Read and examine the case thoroughly?Take notes and highlight relevant facts?Note key problems.2.Focus your analysis?Identify 2-4 problems?Why do the problems exist??How do these problems impact the organization??Who is responsible for them?3.Uncover possible solutions?Use course readings, discussions, research, & your personal experience.4.Select the best solution?Consider supporting evidence, pros & cons, and how realistic your solution isWriting the CaseOnce you have gathered the necessary information, a draft of your analysis should include these sections:1.Introduction?Identify the key problems and issues ?Formulate and include a thesis statement, summarizing the outcome of your analysis in 1-2 sentences.2.Background?Brief overview of background information, relevant facts, and the most important issues3.Alternatives?Outline possible alternatives (not necessarily all of them)?Explain why alternatives were rejected?Discuss constraints/reasons4.Proposed Solution?Provide one specific and realistic solution & explain why this is the solution you chose?Support this solution with solid evidence?Include concepts from class (text readings, discussions, lectures), outside research, & personal experience 5.Recommendations?Determine and discuss specific strategies for accomplishing the proposed solution.?If applicable, recommend further action to resolve some of the issues?What do you recommend be done and who should be responsible for doing it?
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For the exclusive use of M. Alsedairy, 2018.
9 – 3 1 6 – 17 7
MAY 6, 2016
LEONARD A. SCHLESINGER
ANISH PATHIPATI
The Priceline Group: Booking a Place for the Future
Introduction
On April 28, 2016, Priceline Group (“Priceline”)a CEO Darren Huston resigned from his post.1
The Chairman, Jeffery Boyd, stepped in as interim CEO and the company announced a search to find
a new leader.2 Boyd was no stranger to Priceline’s operations. In fact, he had served as the
company’s CEO for over 11 years from 2002 to 2013.3 He was proud of the company he had helped
build. With a market value of over $65 billion, Priceline was the world’s most valuable travel
company and the third most valuable e-commerce company.4 In 2015, the Group had recorded $55.5
billion in gross bookings, $8.5 billion in gross profit, and $3.0 billion in net income5 (see Exhibit 1 for
historical financial performance). The future seemed bright – the company forecasted constant
currency, year-over-year bookings growth of 18%-25% for Q1 2016.6
While Huston had successfully executed during his two-year tenure as CEO, Boyd was already
thinking about the challenges and opportunities that Priceline’s next leader would face. The
company was at a crossroads as it decided how to deal with an evolving external environment,
including enhanced direct competition from Expedia, the threat of disintermediation from
TripAdvisor and Google, and substitute offerings from the likes of Airbnb. How sustainable were
Priceline’s competitive advantages in data analytics and customer service? Should the new CEO
centralize processes to coordinate the activities of each division or should the divisions continue
operating autonomously?
Priceline Group – History and Company Overview
Priceline launched its business in 1998, entering the then-nascent online travel agency (OTA)
market with Priceline.com, a “Name Your Own Price” service. This allowed consumers to specify
general parameters for a trip, including dates, locations, and prices, and then offered itineraries from
unidentified airlines and hoteliers. Only after the booking was complete would consumers learn the
identity of the travel suppliers. This “opaque” model of online bookings offered suppliers a way to
liquidate excess inventory while minimizing the brand risk associated with openly offering steep
a Throughout this case, “Priceline” will be used to refer to The Priceline Group rather than Priceline.com, which is one of the
Group’s operating businesses.
Professor Leonard A. Schlesinger and Anish Pathipati (MBA 2016) prepared this case. This case was developed from published sources. Funding
for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis
for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
Copyright © 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by Meshal Alsedairy in Hospitality Management taught by Helene Okabe, Montclair State University from March 2018 to May 2018.
For the exclusive use of M. Alsedairy, 2018.
316-177
The Priceline Group: Booking a Place for the Future
discounts. Consumers, in turn, typically found more attractive prices than they could through other
OTAs at that time. Priceline.com hired William Shatner, the Star Trek legend, as its spokesperson (a
relationship that lasts to this day), and the company quickly became an icon of the internet boom.
Wall Street recognized it as such – the company underwent an initial public offering in 1999 and
immediately traded up to a market capitalization of $12.9 billion, the highest first-day value for a
company at the time.7 The stock continued to multiply in value as investors believed the company
would revolutionize not only travel, but other industries as well. Priceline.com began selling
groceries, gasoline, telephone services, home mortgages, and cars with its Name Your Own Price
model.8 When the dot-com bubble burst, it became apparent that Priceline’s promise had been
overhyped. The stock lost >99% of its value, falling from a peak of $974 in April 1999 to <$7 in December 2000.9 Its founder, Jay Walker, who Forbes had hailed as a “modern-day Edison,” left the company in 2000.10 Following its near-death experience after the dot-com bubble, Priceline entered a period of retrenchment. The company exited its non-travel businesses, and ironically, actually became profitable for the first time in 2001. In 2002, Jeff Boyd was named Priceline’s CEO and began expanding the company’s travel operations beyond the Name Your Own Price model.11 In 2004 and 2005, he led the acquisitions of European hotel booking sites ActiveHotels and Booking.com for $300 million.12 These would prove to be transformational and are widely hailed as among the most successful acquisitions in internet history. Indeed, Booking.com is Priceline’s largest subsidiary today and accounts for the supermajority of its $65 billion market value. Boyd focused on growing the businesses organically but supplemented growth with acquisitions. The group acquired Agoda.com (a leading OTA in Southeast Asia) in 2007, rentalcars.com (a leading car rental service) in 2010, and Kayak (a leading meta-search company) in 2013.13 Boyd’s efforts and those of his team steadily built a business to substantiate the hype from the dot-com era. In mid-2013, Priceline’s stock price finally surpassed the prior peak it had reached in April 1999 (see Exhibit 2 for Priceline’s stock price over time). Boyd retired as CEO in 2013 (though he remained Chairman) and left behind a large, highly profitable, and still rapidly-growing enterprise. His 11-year tenure saw the stock increase in value more than 100-fold, earning him the moniker “Mr. 100 Bagger” among Wall Street analysts.14 Upon Boyd’s retirement, Darren Huston was named Priceline’s new CEO in 2014. He had joined Booking.com as CEO in 2011 and, in that capacity, had been responsible for much of the operating success and value creation of the Group as a whole. From 2014 until his 2016 departure, Huston served as CEO of both Booking.com and the Group. Huston’s two years as CEO saw the company expand its footprint. In 2014, Priceline acquired OpenTable, the leading restaurant reservations service. Through 2014 and 2015, Priceline invested nearly $2 billion in convertible bonds and American Depository Shares of Ctrip, the leading Chinese OTA.15 In its current form, the Priceline Group is comprised of six operating businesses: Booking.com, Priceline.com, Kayak, Agoda.com, Rentalcars.com, and OpenTable (see Exhibit 3 for descriptions of each business). Of these, all but Kayak and OpenTable have business models oriented around generating gross bookings. Although the company does not report financial performance for each business separately, analysts estimate that Booking.com comprises 76% of Priceline’s gross bookings and that its “bookings-generating” businesses contribute 94% of gross profit16 (see Exhibit 4 for estimated gross bookings and gross profit by business line). Across its businesses, Priceline’s 2 This document is authorized for use only by Meshal Alsedairy in Hospitality Management taught by Helene Okabe, Montclair State University from March 2018 to May 2018. For the exclusive use of M. Alsedairy, 2018. The Priceline Group: Booking a Place for the Future 316-177 operations are driven by accommodations bookings,b which comprise >85% of gross bookings and an
even greater share of profits.17
Industry Background
Addressable Market and Growth
Priceline operates in the $6.6 trillion travel and tourism industry, one of the largest and most
ubiquitous segments of the global economy.18 More specifically, Priceline’s businesses focus on
travel bookings, which is itself a $1.3 trillion industry segment.19 The industry is predominantly
composed of bookings for air travel and accommodations, which were each estimated at over $500
billion in 2015.20,21 Global travel bookings have historically grown at twice the rate of global GDP as
greater economic wealth has translated to disproportionate spending on leisure and business travel.22
Analysts forecast that the industry will continue to grow at an annual rate of 5%-6% in coming years
(see Exhibit 5 for historical and forecast travel bookings growth by geography).
Travel bookings have undergone a sea change over the last two decades with the advent of the
internet. Priceline is both a driver of and a beneficiary from continued online penetration of bookings
at the expense of offline paths such as brick-and-mortar travel agents, phone calls, etc. Global online
penetration stood at 37% in 2015, though there is wide deviation across geographies, from <25% in Latin America to >45% in Europe.23 Analysts forecast that global online penetration will continue to
increase in coming years, reaching 41%-42% by 2018.24
While online travel bookings comprise a large and growing market, some analysts question the
degree to which all of it is addressable for Priceline. For example, Priceline’s businesses are focused
on leisure travel as opposed to corporate travel. As a result, analysts estimate that the 15%-33% of the
market that is already served by corporate-focused intermediaries might be un-addressable for
Priceline.25, 26
Industry Structure
While all travel bookings ultimately result in a travel supplier (i.e., airlines, hotels, cruise-lines, car
rental companies, etc.) providing a service to a consumer, the industry’s value chain takes different
permutations for online vs. offline and corporate vs. leisure bookings. The online leisure booking
value chain, where Priceline’s businesses are most active, includes 4 potential steps: (1)
Search/discovery, (2) Research/reviews, (3) Meta-search, and (4) Booking on an OTA or supplier
website. Exhibit 6 includes an overview of key players and business models in each step of this
funnel.
Search / Discovery Consumers typically begin their online travel experience through a search
engine such as Google or, to a lesser degree, through social media channels such as Facebook. These
internet portals at the top of the “online travel funnel” provide consumers access to a plethora of
travel websites, including those with information about travel destinations, travel suppliers, and
booking engines.
b “Accommodations” are predominantly hotels and also include alternative categories such as vacation rentals, primary
residence rentals, hostels, and bed & breakfasts.
3
This document is authorized for use only by Meshal Alsedairy in Hospitality Management taught by Helene Okabe, Montclair State University from March 2018 to May 2018.
For the exclusive use of M. Alsedairy, 2018.
316-177
The Priceline Group: Booking a Place for the Future
Research / Reviews After starting their search on Google, many travelers then visit websites
such as TripAdvisor to read reviews and ratings of the travel suppliers they are considering. This is a
particularly common part of the online travel funnel for accommodations.
Meta-Search After the discovery and research phases, consumers typically begin their actual
“shopping” for travel services.
Meta-search websites offer consumers a way to compare
prices/itineraries from several OTAs and travel suppliers for their chosen travel plan (the consumer
sets parameters such as travel dates, places, times, etc.). Consumers are then able to click through
from the meta-search page to the OTA or travel supplier website to purchase the itinerary of their
choice. In some cases, they can also complete the booking directly on the meta-search page.
Online Travel Agencies (OTAs) OTAs are online travel booking engines with inventory
from multiple suppliers. They are the websites where consumers can actually book hotel rooms,
airline tickets, cruises, car rentals, vacation packages, etc.
The OTA revenue model is often simplistically expressed as a % “take rate” of the value of travel
bookings processed (e.g., a 15% take rate suggests that an OTA would take $15 of $100 that a
consumer might pay for a hotel room).c The take rates that OTAs charge vary dramatically across
travel categories and geographies. In general, air take rates are <3%, hotel take rates are 15%-20%, and car rental/cruise take rates are ~10%.27 Travel Supplier Websites Large travel suppliers including airlines and hotel chains run their own websites that have booking engines directly connected to their internal reservations systems. These websites offer consumers an alternative booking path versus using an OTA. Although the online travel funnel contains several steps, by no means does a consumer need to go through all of them. Indeed, each player in the funnel would prefer to “own” consumer mindshare. For instance, Priceline prefers consumers to navigate directly to one of its sites rather than arriving through Google or TripAdvisor so that it can minimize its advertising expenditure on those portals. The Priceline Way – Building the Dominant Online Travel Platforms Priceline has become by far the world’s most valuable travel bookings company. At >$65 billion,
its market capitalization is >3.5x that of its closest competitor, Expedia, and is a multiple even of the
lofty private market valuation of $25.5 billion accorded to Airbnb.28 This success is attributable to
focusing its businesses in the most attractive segments of online travel and leveraging operating
processes into competitive advantage.
Choosing Attracting Segments
Priceline has built its businesses in the segments of travel where OTAs can add the most value.
The accommodations market (i.e., hotels, vacation rentals) is far less concentrated than air travel. As
a result, intermediaries like OTAs who can aggregate demand generate more value for hotels than
airlines. This is reflected in the 15-20% take rates OTAs charge for hotel bookings vs. <3% take rates for air bookings. Priceline is over-indexed to accommodations both in absolute terms and relative to its online travel peers. Whereas hotels comprise >85% and air comprises <10% of Priceline’s gross c Due to different accounting treatments, reported revenue is not comparable across all OTAs. As a result, analysts typically discuss the “top line” in terms of gross bookings, which reflects the total value of travel bookings processed and gross profit, which reflects the gross bookings * average take rate. 4 This document is authorized for use only by Meshal Alsedairy in Hospitality Management taught by Helene Okabe, Montclair State University from March 2018 to May 2018. For the exclusive use of M. Alsedairy, 2018. The Priceline Group: Booking a Place for the Future 316-177 bookings, hotels are 48% and air is 44% of Expedia’s bookings.29 The difference is even starker compared to other competitors like Travelocity, which prior to being acquired by Expedia, generated the majority of its bookings from air tickets. Travel suppliers in Europe are far more fragmented than in the US. The European hotel market is dominated by independent properties while the US market is dominated by chains.30 Directionally, independent hotels comprise 2/3 of available room inventory in Europe vs. 1/3 in the US. The relative fragmentation in Europe offers OTAs more bargaining power in take rate negotiations. It also means that hotels have a more difficult time attracting demand through direct channels and that the demand OTAs offer is incrementally more important. Indeed, OTAs and meta-search drive 70% of hotel bookings in Europe vs. 35%-50% in the US.31 Priceline is under-indexed to the less attractive US market and over-indexed to Europe. The US comprises just 12% of Priceline’s gross bookings and 6% of consolidated operating income.32 Analysts estimate Europe and the UK comprise >75% of
Priceline’s gross bookings.33 For comparison, 56% of Expedia’s revenue is from the US.34
The Data Analytics Process as a Competitive Advantage
Priceline applies scientific and systematic processes to its businesses. On the demand side, the
company makes extensive use of data to optimize how it buys online ads. In the words of former
CEO Darren Huston:35,36
We try to be as data-driven as possible with where we buy demand and be very
careful about watching our wallet and being very strategic about it as well… Take
Google, for example, we’re still one of their largest customers in the world, and we just
learned to do more and more and more with Google.
Our scientists [can fill a] room with PhDs. They just work on all the switches and
tweaks and things to optimize the ROI, the landing page, everything else.
The data-driven approach across its businesses has allowed Priceline to achieve industry-leading
advertising effectiveness. In fact, the company’s ad spend per hotel room night booked stands at just
~$7.50 vs. ~$16.00 for Expedia.37
Priceline also takes a scientific approach to improving its website to maximize “conversion,” the
process whereby a consumer moves from visiting the website to making a purchase. High conversion
is important because it not only leads to more bookings, but also increases profit margin on the
bookings. Priceline has achieved the industry’s highest conversion rates. Huston explained:38,39
We believe Booking.com has the highest converting online accommodation
reservation path in the world, achieved through a deeply ingrained culture of
innovation that results in experimentation at a transactional data scale and velocities
that few companies can match.
The way you do it is just through a really tight connection between demand, supply
and the store. We have an A/B experimentation framework and concurrently run over
1000 experiments. If you go into an Apple Store, just go to the iPad table and launch
versions of Booking.com on every iPad, and you’ll see that every site is different. And
the reason for that is, we’re taking A/B experimentation and consumers are making the
site better and better and that’s what drives ultimately to higher conversion in a very
simple way.
5
This document is authorized for use only by Meshal Alsedairy in Hospitality Management taught by Helene Okabe, Montclair State University from March 2018 to May 2018.
For the exclusive use of M. Alsedairy, 2018.
316-177
The Priceline Group: Booking a Place for the Future
Given the importance of technology analysis, Priceline has allocated significant resources to it – in
fact, the company employs >2,500 developers and other technology professionals.40
Service Processes as Competitive Advantages
In addition to leveraging data analytics, Priceline has built service-oriented processes to great
benefit. For instance, its OTA businesses have created large customer service organizations to deal
with consumers in need of help. 20% of Booking.com’s customers speak with a service representative
on the phone and an even higher proportion leverage online service tools.41 Priceline believes it is
particularly well-equipped to deal with complex customer issues. Huston described:42,43
We like to deal when customers get into a lot of trouble, which, fortunately is very
rare. (But) we go out of our way to fix it for them… The work that we do is actually
really hard…the Google guys don’t get phone calls on the weekend from angry guests
like I do. The customer services stuff we deal with in the real world is really, really
messy, and I think we’re really good at it.
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