Priceline is now one of the biggest Internet companies in the world, but it wasn’t always that way. When Jay Walker founded the company in 1997, it was more of a proposal: What if leisure travelers could use the Internet to find last-minute deals offered by hotels and airlines that want to clear excess inventory?
Walker, who has the itchy drive of an inventor-turned-entrepreneur, left Priceline in 2000, not long after the company’s blockbuster IPO. His latest venture, called Upside, returns him to the category.
Unlike Priceline, Upside doesn’t target leisure travelers. It’s meant for unmanaged business travelers, the term for the group that books business travel on their own for later reimbursement by their employer. The service uses tactics old and new—from packaging and “opaque” discounted pricing to gift cards—to compel this group to choose travel that saves their employers money. Upside is still in its infancy (today marks the service’s 100th day since launch) but Walker, its chairman and CEO, believes that it has the same kind of “proprietary advantage” that set Priceline apart, as he explained to the Wall Street Journal in 1999. And he estimates the market to be worth $165 billion in the U.S. alone.
To find out more, I spoke with him on the phone.
Fortune: You’ve started new ventures in a number of different industries. Why return to the travel category?
Walker: Business travel was always the great, unfinished piece of the innovation puzzle when it came to rethinking the way people thought about travel.
The travel industry generally views the business traveler as a very rich asset and it resists any innovation in that space. I always thought that was odd—innovation almost always helps both the seller and the buyer. But most sellers preserved the status quo for maybe 25 years. This always intrigued and mystified me. I always understood elements to solve the problem, but until about two or three years ago, I didn’t see a way to solve the entire problem—that is, solve it for all three players at the table: the travelers, the suppliers, and the companies paying for it.
Priceline was about filling empty seats. That’s not a problem anymore. Today the airlines are running mostly max loads and trying to figure out how to increase their revenues in a capacity-constrained market. With cloud computing, big data, mobile phones—what if every member of the purchasing community has a supercomputing device and you can process the data in the cloud overnight? Technology has come along to offer possible ways to solve the problem, and not just for travel, where small amounts of flexibility aren’t yet monetized. This is true for every market.
Walk me through the business model.
We buy travel at wholesale using private deals. Airlines and hotels are willing to discount to get the business traveler in part because they can substitute that business traveler for a less valuable leisure traveler in our system. So the suppliers say, “As long as I don’t have to reveal the discount, I will give it to you.” This isn’t a unique idea—they give companies like IBM and GE discounts, too. But you and I can’t buy at those rates. So we accomplish that by packaging. By selling your air and hotel together, we can pass 90% of that discount along. We make our margin that way. Say a flight’s $1,000—we might buy it for $850 and sell it for $900.
That satisfies the sellers and the employer. But what about the traveler? Why would the traveler change their behavior to save their company money if indeed it wasn’t their own money? Their interests are not perfectly aligned. The business traveler wants to maximize comfort and convenience within the limits allowed by their employer. So we pass part of the discount to the employer and part to the traveler, in the form of free gift cards, as a thank you. Notice this doesn’t change our profit margins. We’ve aligned interests. So we can make more money if we can show you how to spend less with our preferred providers, where we have a much better deal.
So the model is: First get a concealed discount, sell packages, get a good margin; then optimize the margin by showing you options that are better for you, me, the employer, and the supplier—but you don’t have to take them, they’re voluntary.
This is hard to do. Easy to say but hard to do because you need a software-based system to evaluate every package in real time and instantaneously show you logical and hopefully persuasive choices.
We are all dealing with the result of radical transparency in the marketplace. How do you sell something when a guy 3,000 miles away with no overhead has a lower price for the same product? How do you get pricing control back? The answer is the same in every market: packaging. The way you deal with radical price transparency is that you no longer sell the transparent item alone. You bundle it with valuable, in some cases high-margin, benefits such that the total price becomes irresistible even if the component price is less expensive.
How can I sell an airline seat for less than the airline sells it themselves? Because I sell it and conceal the discount. The airline can’t do that because it will trigger a downward spiral in prices.
How have customers responded since launch? Competitors?
When you’re the first to try something entirely new, you’ll almost never have any competition. [Your company’s advantage] could be non-consumption, inefficiency and waste, misalignment of market participants. So we have no direct competition.
We tend not to worry about how the market is going to respond to us. We tend to focus on how the customer is going to respond to us. And it’s working. We’ve had a million visitors come to the site. People are curious.
So far companies are happy—they’re going to save money on an uncontrollable expense. Employees are happy; they can choose suppliers they like and get gift cards and make good choices for their employers. And suppliers are happy.
You’ve hinted that you’re already thinking beyond the travel category.
I’ve done work in dozens of industries. Unmanaged business travel—where the traveler books the flights themselves; more than half of business travel is this way—is the perfect market to monetize flexibility. There are other large and powerful markets that would benefit from this approach: healthcare and insurance are two good examples. I have a history in travel, which is both a plus and a minus. Like a good inventor, you go where the solution takes you.
This is a system solution—a giant system. We are totally focused on unmanaged business travel, but there’s no reason to believe that, when we believe we’ve proven it a success, we’ll take it other places.
Name one lesson you learned during your Priceline days that you’re applying at Upside.
People underestimate the things that consumers will do if you make it in their interest to do it. When I started Priceline, airlines said people wouldn’t buy a ticket on a concealed-name airline. We called them “superleisure” travelers. For them, budget was a huge consideration. I have a lot more respect for the customer’s willingness to be flexible if you show them how to do it, make it easy, and make it highly remunerative.
People with big powerful brands tend to forget this. Bob Crandall at American Airlines taught me this. He said, “We’re not $5 better than TWA,” which at the time was the worst airline. He never felt that his brand was so much better that people should pay more for it. It was sort of a Sam Walton lesson: price, price, price. Here was a man who did not fall in love with his advantages and did not believe his customers would, too. Competition was right down to the last dollar.
The disadvantage of my Priceline heritage is that people think I’m back in the leisure space. But I’m in the business travel space. The rules are different. Business travelers can’t take a risk. They’re not interested in saving the last dollar but they’re interested in the total cost of the choice. It’s a much more sophisticated frame of mind. So you have to design your product differently.
Any big change takes time, but I suspect we will have a great deal of success. There are only winners in this. The only ones who are not don’t participate in our system.
Correction, June 2, 2017: An earlier version of this article misstated Jay Walker’s role at Priceline. He is its sole founder, not co-founder.