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Priceline founder Jay Walker is launching a new travel booking site in September. The focus is business travel for small and mid-size companies, and the goal is to save the company money while offering gift cards to employees.
I spoke with Jay last week about how development of the site progress is going, the ideas behind it (and whether they’re replicable in other industries) and also his history with Priceline. Jay also founded Synapse Group which pioneered auto-renewing magazine subscriptions and which he sold to Time, Inc. (Frequent flyers may be most familiar with Synapse’s Magazines for Miles product.)
He talks a mile a minute, with everything he says packed full of ideas — about the travel industry, about marketing, micro-economics, and opportunities that he sees that other people are missing. And he does it with a level of excitement that’s infectious.
In the past I’ve interviewed the CEO of Cartera Commerce, the company behind mileage-earning shopping portals. I’ve interviewed the CEO of ThanksAgain, the company behind earning miles for all your spend at airports. Getting insight behind the businesses is one of my favorite things.
I had met Jay before, but our last conversation was off the record. So I was thrilled a the change to share some of his stories publicly. The interview is edited lightly, any mistakes are mine.
What’s the reception been like for Upside?
- Very positive, the question I get most is “there’s a way to save 5-15% on business travel how is that possible?”
Then when you tell people they can exchange flexibility for an average of $150 in gift cards, how is that possible?
You don’t get anyone who says I don’t like that idea, once people understand flexibility is inherently valuable when interests are aligned inside a business purchase, peoples’ experience is that a difference of an hour in flight time or star level between a 4 and 3.5-star hotel, we’ve all had that experience where we shake our heads and say ‘I didn’t need a gym at this hotel so paying for the fantastic hotel wasn’t the best idea.’
The Hotel Treadmill Was Probably Broken Anyway (Hyatt Pier 66, Fort Lauderdale)
You’ve started a number of companies and launched several new concepts, but the one you’re most famous for — perhaps because of William Shatner! — is Priceline. Tell me a bit about starting Priceline.
- The idea was created our of our labs at Walker Digital, we invent business systems, we were working on a problem in 1996-97 of ‘how do you see demand for perishable inventory all the way down the curve?’
There’s all this invisible demand below the retail price of something, but if you aren’t seeing demand you can’t market to it. Priceline is that – there’s a line at which you have a price, at which you’re harvesting demand. If New York – Los Angeles costs $400 roundtrip, there’s demand at $390 or $380 or $360 but you don’t see that demand with a retail price of $400. There’s no mechanism to collect that demand.
The idea of Priceline was ‘let’s build a demand collection system,’ so consumers would tell us at what price they’d be a customer. [GL: Jay explains how the name Priceline is literally based on the demand curve.] Let’s come up with mechanism at which suppliers would fill demand below retail price without destroying retail. Anyone can discount but then you destroy the retail price.
Airlines, hotels, and others perishable inventory never had solution to that problem. Name your own price, you have to be flexible on airlines, on time of day, so carriers would be willing to sell inferior product guaranteed by a credit card so demand was real.
[Consumers make a…] “conditional purchase offer” and you have an entirely new product and new mechanism, the internet with zero variable cost for demand collection, you get enough volume and do advertising and promotion.
How did you scale this?
- William Shatner was our spokesperson on radio. We couldn’t afford TV, we went with radio because it was efficient. He had a good radio voice, and we literally became the largest radio advertiser in the US because we were aggressively promoting people to come on the web and tell us what you might pay for a leisure airline ticket guaranteed by credit card where you couldn’t know flight times or your stop or connection until after you bought.
If you’re a senior citizen, a college student, driving to Cleveland for 10 hours the alternative is way better. Or the alternative was not going at all or taking the bus. It was a super leisure product built on ultimate flexibility.
Airlines said nobody will buy or do this, the same with GDSs, they thought there’s no market of people willing to fly any airline any time on nonrefundable nonchangeable tickets.
Priceline had a billion dollar run rate, the fastest company to grow to a billion in sales in US history at that point. We were really solving a customer problem and a big one.
William Shatner Advertising Priceline in 2000 — Before He Was the Negotiator
Does the Priceline model work outside of travel?
- It works in other industries, too. We had 2 million customers in Priceline for gasoline in 6 months. We did launch mortgages, gas and groceries, the issue was the travel business was such a phenomenal success, so we had to focus.
When you’re a public company you can’t do a lot of what you can do as a private company. You can’t have startup businesses inside as easily, but you can have acquisitions. The management team made a brilliant decision to focus and let the other stuff go.
Is one way to understand the new company “Priceline for business?”
- The lessons about how to use flexibility and design business systems, understand consumer tradeoffs and preferences, in part came from that… I brought all of that to the design of Upside, several members of Upside team are members of the Priceline founding team because we’ve reapplied many of these lessons in the business travel space.
You need to have flexibility of changes in business travel which you don’t have in leisure so you have that in Upside.
Yes I’m the founder of Priceline, no this is not “Priceline for Business.” It takes some of the lessons. Priceline’s hotel product bears that out. What 5-star hotel do you want to stay at if I get you a price of $300 a night?
What are the final touches you’re working on before Upside goes live in September?
- This is for business travel, so we have to be perfect. We have to have all the customer service you could need, 24/7 and business-level customer service. We have all of your backend spport systems to provide the level of quality that says we’re a business travel provider.
The systems Upside uses are different than other systems that have ever been offered. Let me explain why. Everyone is using the GDS system, no matter what OTA you go to, you get a long list of choices, you can sort by time/price/carrier/non-stops but you’re just getting long lists of things.
Upside is totally different, we get the entire database of air and hotel systems every night on AWS; restructure terrabytes of data eery night so when in our app or on the website you’re being shown simple choices — the price benefits to you in gift cards and savings to your company in the package we provide.
We have to reconfigure the dataset of the entire travel industry every day, that’s taken months to build, and will take 2 to 3 months to fully work. It works now in our piloting program, it’s not a question of the answers but giving the right answers.
It’s incredibly complex to make [business travel decision-making] simple… being simple for business travelers to see what flexibility is worth. It’s another 10 weeks before systems work so well when you take that New York – LA trip and we ask a bunch of questions about your trip requirements, would you do make a small change in plans for $50 or $30?
Almost nobody reconfigures the data set. HotelsTonight does it in a simple way, takes hotels that meet selection criteria right now within 5 minutes of where the customer is, that’s a great use of the data set. That’s a new data solution to business problem, excess inventory near me.
We’re doing that for the entire travel system,air and hotel combined — 20 days out, 14 days out, not just the days you’re traveling but the night before or if you stay the weekend in New York instead of coming back Friday night. You get the hotel for free, visit friends, your company saves money, those kind of complex alternatives … if you were spending your life searching you could figure it out, but we had to write the AI so you don’t have to be a super expert.
How does this change the way travel providers want to work with customers?
- One of the things we allow suppliers to do is see flexibility of customers and differentially price.
A business traeler willing to fly Southwest is more desirable to other airlines once they realize [your business is up for grabs]. An airline who wants to work with us can compete differentially for those customers. Airlines are pretty smart, when you have an 85% load factor they have to figure out how to grow RASM — without adding airplanes.
With an 85% load factor they need to get customers to get on planes where they have seats rather than where the planes the customers prefer. So it’s a revenue-management dream come true for a carrier.
Is the issue here third party payers – how do you align incentives for cost savings any time we’re spending someone else’s money? Solving the principal/agent problem? So any time there’s a similar product, two sides split the savings and drive towards the less expensive option? (GL: I’m thinking about health care in asking this question.)
- That’s a big part of it, but not all of it. You want to align interests but you’re also using volume purchasing leverage, most medium and small businesses have no leverage in the system.
If I go to Chicago and go to a hotel and promise 200 room nights every night and I’m willing to conceal the price in a package … [I] can pass savings along to customers that they couldn’t get anywhere else. Aggregation power, the ability to conceal the discount since suppliers don’t want to reveal the discount they’re giving.
Being a big enough buyer of hotels I can get 30% off a major hotel in ways only the government gets. We’re going to be a bigger customer for the hotels we work with than any other customer but maybe one for some of these hotels.
Upside isn’t an OTA, we don’t spread business out, that doesn’t mean we can’t get the brand a customer wants, but most business travelers will have flexibility within a couple of blocks — or more now with Uber and Lyft.
Concealing the discounts in a package is the reason we only sell air and hotel packages. Selling packages we have a level of discounting we pass along to customers that’s way better than anybody but the biggest companies could possibly get. We help the unmanaged guy get IBM and GE deals and at the same time aligning [the business traveler’s] interests [with their employer] at a 3-star instead of 4-star hotel because they’re getting gift cards to make the trade.
Why gift cards and not cash? And which gift cards?
- Most of the major gift cards, including all the ones you want. We’ll have a separate announcement of brands. You won’t be missing any of the ones you really want, because we don’t run the business on our ability to buy gift cards for less, we’ll offer gas cards, airline and other cards, that cost 100 cents on the dollar.
For us gift cards are the equivalent of cash, you’ll be able to choose not to take the gift card value and reduce package price dollar for dollar instead. The small business owner can take $150 savings on the trip.
The reason we don’t give cash to employees, we feel it creates dissonance with employers. We heard that over and over when we talked to companies, ‘we don’t mind gift cards but money creates a different point of view of program’ so we’ve chosen to use a near-cash instrument in gift cards, which is better for companies and customers.
Does it make sense for the individual non-reimbursed traveler? Can’t they just pocket the savings from following your flight and hotel guidance and booking a package on their own?
- The flexibility engine we offer for free, you can go use it, it’s a tool all by itself.
[Travel management companies] and others are going to have to build their own flexibility engines, once people realize how easy and useful it is.
Come to Upside, discover your flexibility. If you’re not going to buy from Upside and you book yourself you’re not going to get our rates. On the airline side domestically there won’t be significant airline discounts [compared to buying the ticket yourself], internationally we have great discounts… you aren’t going to have [the hotel rates we do].. “when I check the hotel’s website it’s $279, in a package it’s clearly much less.”
You’d be crazy not to see what your flexibility is worth even if you buy it at Expedia or Priceline or Hyatt or Marriott.
Tell me how a business will know they’re saving money, so they’re comfortable with the employee getting something out of this?
- We have complete documentation of what the air travel system and hotel system looked like at that time a trip is booked. We have the entire system in our database. We can see every flight, every inventory bucket, every hotel price. We take a picture of it, format it nicely and give it to the traveler as a multi-page report to attach when submitting their trip.
That isn’t perfect. It’s almost impossible to talk about what the correct fare comparison is. Does it include baggage fees, seating, priority boarding? There’s always going to be a judgment call. But we’re going to give a complete enough snapshot to pass along so that manager or accounting department sees it as reasonable and will have no complaints about $280 in gift cards.
The way this will play out is that early adopters will go to management and show what they did, here’s an $1180 package but let me show you what it would cost for air and for hotel. Here’s what I would have spent. Is there any reason I shouldn’t buy this and save the company money?
We are so much on side of the employer here we never want the reputation of helping employees take advantage of companies, we want employers telling employees to use Upside.
I’ve had several people ask me about customer service. I know you charge a flat $35 fee per trip to provide customer service, it’s funded, but what does that look like?
- One of our investor partners is BCD travel. They’re a $25 billion global travel management company.. [we’re] already using BCD trained reps and systems, using the quality level they provide their corporate managed customers.
We’re starting at that level and building our own call centers in the Philippines with a partner who has built out business executive travel support call centers for American Express and others on global basis. We will have domestic and international call centers for redundancy and quality.
When you charge $35 for service you’d better provide service or you’ve lost the customer. We’re not an OTA, we’re a business travel service provider. We don’t think about just you as our customer, the company you work for is the customer, if you’re on hold for an hour we lose you forever.
Think about it this way: we provide the service you’d want. You can hold us to that, we’re going to lose you if we don’t.
We’re not launching publicly overnight, the VIP program controls the number of customers we have the day we launch, in the first couple weeks to the hundreds then thousands. Customer service is a contraining variable in the business. Until we provide it we don’t know how much [we need to scale to] provide the quality we want in answer times and resolution times. We’re as motivated as anyone could be.
What helps us here is that our model will make a reasonable profit. We’re not an OTA with thin margins, we buy wholesale and sell retail, and we cut deals with international carriers.
Companies that make a good profit are crazy not to invest in customer service. If you have low profit per customer it may be ok for you to lose a customer. We have a good model so we invest in lifetime value. The customer who comes to Upside is likely to buy 5-6 business trips per year over years and that’s a lot of revenue so we can afford to do a good job.
Thanks, Jay, love hearing the stories and what you’re thinking about and look forward to the launch of Upside.