Is the Price Right? Ask Jay Walker (page 1 of 2)

That contention may not sound surprising coming from Priceline.com, founder and vice chairman Jay Walker. He argues that lower prices are the only factor separating Internet-based e-commerce from other sellers of goods and services. People will not pay more for convenience in the long run. That is why Wal-Mart became the largest retail store in North America instead of 7-Eleven, and why Dell Computer is the best-selling PC maker.

"Every network that has come before has pulled people in," Walker says. "Now it's the information grid. We don't think about the electricity we are bathed in every day. And the definition of business has to change. We as an industry and a society are rewriting the rules of business as we learn what this network can and can't do."

Walker defines business as any enterprise that can deliver value on a sustainable and competitive basis. And price must be where companies distinguish themselves. The key is letting the customer decide the price he or she is willing to pay, the central tenet of Priceline.com, which opened in 1998 and went public in March 1999. The Norwalk, Conn., company provides a "demand collection system" for aggregating consumer requests. A patented process lets bidders set their price on items ranging from groceries to new cars and airline tickets and delivers that information to suppliers who can confidentially accept or reject the offers.

Priceline is betting that large groups of consumers are prepared to be flexible about their demands if that means getting a lower price, Walker says. Once sellers in any marketplace set their prices, they do so to ensure that the customer gets a certain measure of quality. Discounters can cut margins to lower consumer prices, but they cannot sustain that advantage indefinitely. Someone will eventually make a sale at a loss to raise cash.

But when buyers name their price and they have imperfect information, they may not pick the lowest possible price. They may even offer more than the retail asking price if the item is valuable enough. And the entertainment feature that comes with an auction or competition for the item adds consumer interest and value.

"Once you have enough food to eat, the most important issue is price. That is why people modify their behavior every single day," Walker claims. "You can't have a price advantage with a fixed price. If your e-commerce business can save people money, you have more slack. Convenience is nice, but savings are crucial. Disneyland reinvented amusement parks not by engineering out costs but by adding more value and raising the prices."

Other Internet companies including Lendingtree.com, Iown.com and Progressive Insurance have facilitated the delivery of several bidders for a customer's business. Those companies, and others, return offers for mortgages, insurance policies and loans by competing on more than price or interest rates. The companies also provide flexible terms, additional service, complementary products or some other benefit.

Despite the current frenzy to implement business-to-business e-commerce, Walker is confident about the prospects of the business-to-consumer market. When professional buyers and sellers meet, there is a match-up of expertise, and it creates a team that is "phenomenally good at destroying the middle" and "rules out anything but commodity margins," Walker claims.

Priceline recently began to offer customers the ability to bid for groceries online.