S+B: So you think the B2B focus is very much missing the point?
WALKER: I think 95 percent of it is nuts.
S+B: But if the advantage is not in cost-cutting, and the advantage is not in convenience...
WALKER: The real issue is value. Americans drive to Wal-Mart to buy their things. Why? Is it convenient? No, it's on the outskirts of town. Sam Walton reinvented value. He did it in part by cutting costs; his primary way to deliver value was to give you lower prices. But the result was that he could offer value that nobody else could offer. He had a greeter at the door that added costs. That is not cheap. But it added value. He gave stock options to all of his people who worked for him. Why? It cost him money to give stock options. But it added value, because the employee-shareholder would behave. He installed large MIS systems, not a cost-cutting move at all. But ultimately he realized he could replace inventory with information. He was only cutting costs because he had to do that as his way of delivering his value to the customer. He never took more margin over more value. Never.
If you sit down and you ask, "Where is the value center, where is the economic engine for e-commerce?" I guarantee you it is not in cost reduction. Not even close. The economic engine is always in value.
S+B: But low price, as in the Wal-Mart equation, can serve as a magnet.
WALKER: Low price is the driver that gets the behavior you want. The customers will establish price/value trade-offs. This is why Priceline exists. Priceline is all about personal elasticity. If I provide sustainable price/value, people are smart, they'll get it, and they'll come back. They'll know that I'm not trying to trick them; they can sense it.
S+B: So in the Priceline environment, auction pricing...
WALKER: Don't say auction. We're not an auction. An auction is a price competition among buyers for the benefit of the seller. We are price distributors. We are a pricing system. We are essentially the sixth pricing system in the history of the world.
S+B: The other five would be?
WALKER: Retail price. Auction pricing. Barter. Market price. And RFP, a request for a proposal.
S+B: That's not an auction?
WALKER: No, an auction would set them off against each other. An RFP just says, "Everybody give me a price, I'll pick one."
S+B: In what way is Priceline the sixth system?
WALKER: The sixth way to set price is to let all the buyers set every possible price, and let the sellers decide which ones to take. That's what we do.
S+B: And you figure that value proposition alone is enough to drive the Priceline brand across flanker services, such as the new WebHouse Club, the grocery pricing service; and Perfect Yard Sale, the used-goods site?
WALKER: It's a $100 billion value. Probably bigger.
S+B: Did you know that at the beginning?
WALKER: I knew it day one. It's like saying, if you had discovered the cure to a terrible disease, the minute you discovered it, would you have known you had it? We discovered the cure for a terrible disease, a disease that has existed for hundreds of years. Sellers always have inventory that they could sell at a lower price. And there are always more buyers willing to buy at the lower price, but the seller can't afford to reduce price without destroying his rate card. The seller therefore was forced to hide the discount in some way. In the airline case, for example, if you didn't sell the seats, you'd just let them perish. The seller had no choice. His best interest was to never chase the last sale at the lower price.