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Getting Acquainted with Priceline

Priceline is the ultimate bargain bin of travel agencies. It takes the extra rental cars, airline seats, and rooms that travel suppliers don't think they could possibly sell, marks them w-a-a-a-y down, and gives them to you for cheap.

Priceline isn't an auction. You're not competing against other bidders. You don't really Name Your Own Price, and Priceline doesn't shop your prices around.

Priceline sells hotel rooms, airfares, and car rentals really cheaply by hiding the details. Priceline's products have fixed prices just like everyone else's — but it hides the prices from you. You have to guess them.

Travel gurus call Priceline's deals opaque fares, because you can't see the prices. Priceline isn't the only seller of opaque fares, but it's by far the largest.

In exchange for all the mystery, travel suppliers give Priceline really low rates — usually lower than everyone else's. That's because they see Priceline buyers as the most desperate, price-sensitive travelers anywhere, willing to give up all kinds of convenience for the absolute lowest price.

Priceline also sells regular airline tickets, hotel rooms, rental cars, and cruises. But the Name Your Own Price super-discounted rates are what made Priceline famous.

Building the mystery

Airlines and hotels want to sell their goods for as much money as possible. Fortunately for you, that's not always possible. Oftentimes, more airline tickets and hotel rooms are out there than people who are willing to pay high prices for them.

So airlines and hotels offer several levels of prices, depending on the hoops you're willing to jump through.

For example, airlines may have one, very high price for people who decide at the last minute that they absolutely need to travel. They have a lower price for people who can plan three weeks in advance. And they have an even lower price for people willing to stay over a weekend, because those travelers are probably bargain-hunting vacationers rather than cash-rich business travelers.

Even after all these discounts, though, some airline seats and hotel rooms are still left over. So the travel firms came up with the ultimate hoop: mystery fares and mystery hotel rooms. They decided to sell their last available seats and rooms at super-discounted prices to truly desperate bargain hunters, people who don't care what airline they're flying on or what hotel they're staying in.

Those fares and rates are called opaque, because you can't see through them and find out your flight or hotel details before you buy. Priceline is the king of the opaque fare services, selling more opaque fares than anyone else. Hotwire.com, formerly run by five airlines and now owned by the folks who run Expedia.com, is the number-two seller of opaque fares. Expedia also sells some opaque fares.

Opaque fares and rates are a great way to save money. But Priceline found a way to squeeze even lower prices out of airlines and hotels: Name Your Own Price.

Guessing Priceline's price

Name Your Own Price is a lie. The reality is more like "Guess Our Price." It's a trick, a game to balance customers' savings with hotel and airline profits. If you play the game well, you'll save thousands of dollars. If you play it poorly, you'll pay through the nose.

Priceline's computers connect to the Worldspan reservation system, which lists Priceline rates that airlines and hotels set for tickets and rooms. When you submit a bid, Priceline checks your bid against its partners' Priceline rates. It grabs all the rooms, fares, or cars you can afford, and then, using a complicated computer formula Priceline has never explained to anyone, picks one of the bunch to give to you.

Many hotels have three different Priceline rates for the same room, so you can't predict which hotel you get by how much you bid. Experts have guessed (because Priceline isn't saying) that Priceline also throws a random element into the mix.

The Priceline rates may change every day, or they may remain the same for weeks or months at a time.

If you bid exactly at Priceline's price, the hotel gets its Priceline rate; Priceline gets its transaction fee; you get your room, flight, or car; and everybody walks away somewhat happy.

If you overbid, though, Priceline and the travel supplier pocket the difference and don't tell you. Because some people overbid, travel suppliers are often willing to give Priceline even lower rates than they give to Hotwire and other opaque-fare sites. The profits reaped on overbids make up for the losses caused by smart bidders getting the lowest possible rate.

It's a complicated strategy, but it works. Priceline sold $360 million in travel during the first three months of 2004, and made a gross profit of $43.4 million. According to the company's financial reports, it expected bookings to grow by 50 percent as it moved into the 2004 summer travel season. In other words, Priceline is here to stay.

Priceline grows up: Travel the traditional way

Priceline offers "normal" airfares and hotels, too. Last year, it bought Lowestfare.com and Travelweb, two online travel agencies that sell airfares and hotels just as Expedia, Travelocity, and Orbitz do.

During 2004, Priceline started sprinkling its Lowestfare.com and Travelweb rates around its Web site. If you want to buy airline tickets, for instance, you have to go through a page of normal fares from Lowestfare.com. These fares may be better than Expedia or Travelocity — then again, they may not. Lowestfare.com is a travel agency just like any other — no better and no worse.

Similarly, when you click on links to buy one-way airline tickets, you get shunted to the Lowestfare.com travel agency.

Priceline also sells cruises through a partnership with NLG (a travel agency specializing in cruises) and sells travel insurance through American Home Assurance Company (a major travel insurer).

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