Surge pricing ideas

2014-01-05 3 min read

    Every time there’s a big event or terrible weather, there’s a slew of complaints about Uber’s surge pricing. By now, you’d think that Uber customers would expect this to happen and yet they’re surprised when a $10 cab ride turns into a $100 Uber ride. I suspect Uber’s already done as much as it can on the messaging side; psychologically it’s just tough for someone to take a $10 ride one day and then a day later pay an order of magnitude more.

    Every Uber transaction involves three parties - the customer, the driver, and Uber. In every case it’s up to Uber to set the prices in order to get the supply (drivers) equal to the demand (customers). In most cases, these are in alignment since people are willing to pay more for an Uber than a cab for the convenience. the problem occurs when the demand side gets too large and Uber needs to drastically increase prices in order to encourage more supply. Uber should have enough data by now to be able to determine the prices that will lead to supply being equal to demand for every demand level but that doesn’t solve the perception problem.

    One suggestion I liked was having Uber drop their margin on these high demand days in order to maintain goodwill. Uber supposedly takes ~20% of each fare and that could remain the case for low fares but Uber can drop that on surge days in order to reduce the customer cost. This way a $10 drip gives Uber $2 but a $100 trip no longer needs to bring Uber $20 and can be set closer to $80. The issue is that people won’t care that a $100 trip now costs $80. Instead they’ll hear that a $10 trip now costs $80. The only way to make consumers happy would be for Uber to have a deep negative margin for the surge days.

    Another option is to move to an auction model. Each customer would specify where they are, where they want to go, and what they want to pay and it would be up to a driver to either accept or ignore that offer. This way Uber can achieve perfect price discrimination with both drivers and customers getting what they want.

    Uber must have considered both of these approaches. The latter one would require a significantly different product with more complicated logistics and a more difficult pitch but it would keep the various parties aligned to their reserve price. The former approach, on the other hand, would be much easier and cheaper to achieve. I believe Uber would be still be profitable if they took a negative margin on the rare surge day and they could offset it with a small increase in the margin on a normal day. The only thing I can think of is that they’re taking the long term view and are hoping to change the customer perception of what’s fair. I don’t know if they’ll succeed but if they do I expect many more services start adopting these “purer price” models.