HOTELMARKETING.COM

Setting prices on Priceline, a mathematical approach

February 05, 2010 | Internet Marketing

How can a hotel best use an opaque online travel agent, such as Priceline.com, to best advantage? According to Cornell research, using mathematical models it is possible to improve both sales volume and rate.

Customers looking to acquire services through Priceline’s name-your-own-price (NYOP) mecha- nism submit bids or offer prices for service without knowing the actual service provider. Us- ing hotels as an example, a customer submits a price for an overnight stay arriving November 1st for a 3-star hotel in Midtown Manhattan. Pric- eline then determines whether that offer can be fulfilled. If the offer is declined, the customer can alter the bid by changing an attribute, changing the 3-star to a 4-star, changing from Midtown to Times Square, or changing the stay date. Alter- natively the customer could rebid on the 3-star in Midtown after 24 hours has lapsed. Priceline’s method of determining whether a bid is ac- cepted is unique and greatly favors the service provider. Following a customer’s bid, pc, Priceline creates a list of all n qualifying properties (e.g., all 3-star or better hotels in Midtown Manhat- tan). Priceline then randomly selects one of these qualifying properties, each with an equally likely probability of being selected.

Priceline then checks the prices that the hotel has loaded to Priceline (all prices are loaded into the Worldspan global distribution system). Properties are allowed to load multiple rates into Worldspan. If the selected property has a price, p, lower than the consumer’s bid, then a transac- tion occurs. Generally speaking the hotel receives p the customer pays pc and Priceline keeps pc-p as its share.

If the property has more than 1 room rate less than the customer’s bid, the property receives the highest price less than pc. For example a customer bids $100 and the selected property has loaded rates of $100, $90, and $70, the customer would pay $100, the property would receive $90 and Priceline would keep $10.

Download the full research brief at Cornell University (free registration)

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