Uber’s surge pricing

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Uber has been getting some flack for their infamous “surge pricing” that’s been in effect for the past few months. I was warned about it the first time on New Year’s Eve and saw on the app rates as high as 7.5 times the regular rate. Lisa Chow did a story on NPR, other similar stories got published and the general mood is that it is an asshole move by a company that already makes heaps of money and just upsets riders (their very core customers, the ones they should keep happy).

I disagree.

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Surge pricing isn’t new. A drink is more expensive outside of happy hour, airplane tickets are generally much more expensive closer to the time of the flight and you can snag day-old muffins for half their regular price.

Flexible pricing tries to adjust two things: the inefficiency of waste and the reliability (or predictability) of a service. An airplane with one hundred empty seats, after all, equals one hundred seats that technically just got wasted. An empty bar at 5pm isn’t good for the bar (be it the owner or the tip-dependent staff), muffins going uneaten and an empty fleet of taxis are all inefficient and wasteful.

A notable difference between the above examples and Uber’s surge pricing is that the happy hour at your favourite bar is generally known before you head over there (incentivising you to do so, perhaps). Uber’s surge pricing is only made known to you when you’re actually in need of their service (they recently added a feature to the app to notify you when surge pricing ends).

This leads me to the more important aspect of flexible pricing: the reliability or predictability of a service. Empty cars are inefficient, but not having any at your disposal is probably even worse.

Most people are annoyed at Uber because of their inability to know exactly, in advance, how much a trip using their service will cost. Or just the fact that they perceive a price hike to be unfair. This, to me, completely misses the point. Uber doesn’t market themselves as providing reliable prices (or even fair prices), but rather providing a reliable service. I find it far more important to have a service at my disposal for when I truly need it (in an emergency, say) rather than to have a service available at a constant flat rate. If I had a family crisis and really had to fly to Johannesburg within the next few hours, I’d probably be able to get a flight right away, albeit at a much higher price tag. In certain cases like that, the cost wouldn’t matter, but the reliability of having a service would. If I need to fly somewhere for a holiday, on the other hand, I’d probably forego the expensive immediate options and shop around until I got a deal I perceived to be (comparatively) fair.

The advantage that Uber has (over the industry, in general) is that they can adjust the prices in real-time (as the heartless forces of supply and demand then dictate).

In closing:

Service providers need to think if price (be it sky-high, rock-bottom or somewhere in-between) or service is their biggest priority and give that their utmost attention.

Post Script

  1. I opted to walk to my party on New Year’s Eve. Who the hell pays $45 to get to a house party a few blocks away?
  2. This post didn’t mention the topic of benefit to the drivers employed by Uber. They get to keep 80% of the proceeds of each trip, including during surge pricing. I’m purely looking at it from the consumer’s side (those complaining most), but not the drivers. I’m not sure if they’re actually benefiting in real terms, so I won’t comment on it. Investor Bill Gurley has a lot about that (and surge pricing in general) on his blog.
  3. This post didn’t mention the topic of class. The only people who take Uber when it is at 7.5 times the normal rate (or even the normal rate) are the super rich and those who really need it. There are far too many people who really need (various) reliable services –in South Africa and elsewhere– but will ultimately never have access to them. There’s a fine line that need to be walked with this type of thinking, where one can start justifying providing services exclusively to the rich. There needs to be a safety net in society to help those who truly need something, but can’t necessarily afford it. There can be luxury services, but public/alternative options need to be available (such as transport, education and healthcare) and good enough for those who need it (and might not otherwise be able to afford it).

About the author

Werner van Rooyen

Formerly Business Development and Marketing at the fast-moving Bitcoin Exchange, Luno (South Africa, Nigeria, Malaysia, Indonesia, Singapore and Europe). Currently travelling and doing research on a round-the-world trip.

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About me

Werner van Rooyen

Formerly Business Development and Marketing at the fast-moving Bitcoin Exchange, Luno (South Africa, Nigeria, Malaysia, Indonesia, Singapore and Europe). Currently travelling and doing research on a round-the-world trip.