© 2005 UMFK. 1-1 Priceline Webhouse Club internet business models text and cases Jeffery T. Pelletier

© 2005 UMFK. 1-2 Priceline Overview Introduction Business Model Introduction to WebHouse Club How Revenue was generated WebHouse Club Investors Revenue Model Strategic Issues GBF What eventually happened

© 2005 UMFK. 1-3 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 In 1999 revenues were $482 million and were projected to be $1 billion by Gross margins were 14.2% and climbing. In January 2000, priceline represented 3% of all leisure airline tickets sold in the US. Jay Walker’s stock in priceline in September 1999 was valued at $9 billion.

© 2005 UMFK. 1-4 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 Walker’s new invention, Priceline Webhouse Club

© 2005 UMFK. 1-5 WebHouse Club “A fixed price is always the wrong price. Always. It’s either too high or too low for everybody. We engage in price discovery based on elasticity in advance of the purchase process.” »Jay Walker

© 2005 UMFK. 1-6 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.

© 2005 UMFK. 1-7 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.

© 2005 UMFK. 1-8 How Revenue Was Generated First Time Customer credit: –Webhouse Club would put free $10 in new customer’s 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.

© 2005 UMFK. 1-9 Webhouse Club Investors Vulcan Ventures (the investment organization of Microsoft founder Paul Allen) Capital’s Arista Fund Walker Digital Capital Goldman Sachs All 4 companies together invested $65 million in first round financing.

© 2005 UMFK 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 didn’t want to compare Webhouse Club to those coupon sales, but did point out that this presented an opportunity for Webhouse.

© 2005 UMFK Strategic Issues Webhouse Club had yet to close a deal with a major manufacturer by the end of –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.

© 2005 UMFK 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.

© 2005 UMFK GBF Continued….. 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.

© 2005 UMFK 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.

© 2005 UMFK Questions??????? Questions??????????

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