Customers hated surge pricing. Although reaction to it is fascinating because it’s almost perfectly inversely correlated with understanding of economics. Surge pricing:
- Got more drivers on the road during peak times, or times they’d rather stay home such as during snow storms. That meant more rides, and shorter wait times.
- Surge pricing was disclosed up front and voluntary. You had to agree to the surge, and if you didn’t want to you could wait for the surge to end.
- It meant more money to the driver, with Uber capturing only a fraction of the increase.
Copyright: think4photop / 123RF Stock Photo
Getting rid of surge pricing would have meant the same kinds of problems we have with lack of taxis, and drivers who simply won’t drive you when they would rather not work. Surge pricing made Uber more reliable.
THE ALTERNATIVE TO SURGE PRICING IS NOT ENOUGH RIDES AT ANY PRICE. The alternative to a ‘surge’ price is an infinite price.
Still there was blowback, so a year ago Uber started to replace ‘surge pricing’ with ‘total trip pricing’. Instead of telling you a ride would be 2x, 4x, or 10x ‘normal’ they just started telling you the price. Sort of like Delta award tickets. It was still a surge but it was hidden. And much of the uproar disappeared. Because people are easily fooled by ‘framing effects’.
Total trip pricing also turns out to be worse for drivers, because they aren’t always getting their historical share of the increase.
And now that Uber presents a price, they’re no longer locked into charging for each trip based on time and distance.
In the 14 cities where Uber offers UberPOOL, they offer route-based pricing which “charges customers based on what it predicts they’re willing to pay.”
Daniel Graf, Uber’s head of product, said the company applies machine-learning techniques to estimate how much groups of customers are willing to shell out for a ride. Uber calculates riders’ propensity for paying a higher price for a particular route at a certain time of day. For instance, someone traveling from a wealthy neighborhood to another tony spot might be asked to pay more than another person heading to a poorer part of town, even if demand, traffic and distance are the same.
When they raise the price, they’re pocketing more of the fare, instead of paying drivers a flat percentage of the fare.
Uber is going to start reporting to drivers the total amount riders pay, although they won’t share the percentage payout (drivers can do the math). Many drivers are frustrated when customers pay more but they don’t make more.
One risk to the model is that rides shift towards higher paying routes, either because Uber favors those routes or because drivers do begin to capture more of the fare increase. If higher fares are between more prosperous destinations then “lower fares in lower-income places [could mean] longer wait times” and that could become another scandal waiting to happen.
Still what Uber is trying to do is plot the demand curve, and vary pricing accordingly, much like airlines do. Uber, like airlines, isn’t super popular. But it’s a model in some sense we’re already used to.
(HT: Alan H.)
In New Orleans, Uber’s total trip pricing is based on estimated time and distance (and surge), but with one exception: Trips to/from the airport are flat rate. A trip from the downtown Hyatt Regency to the airport is $33, while a trip from the Hyatt to the IHOP right across the street from the airport is an estimated $18-24. And I’ve already heard of some Uber drivers who will only accept pickups from hotels, and even call the rider to find out the destination and then cancel the ride if it’s not an airport run.
So yes. If more routes start offering substantially higher driver pay, you’ll see similar behavior continue to grow.
Sorry Swag but the drivers are paid on time and distance. Yes Uber may change more for an airport run but that goes to Uber and not shared with the driver. Drivers call and ask because they are tired of driving 15 minutes to pickup someone and taking them to get cigarettes 1 mile up the road and making $2. UFP is a scam Uber is running where the riders pay more and the drivers make less. Uber is a dirtbag company that mistreats drivers, and manipulates both rider and drivers.
Customers hate surge pricing because it’s something that Uber do. Anything Uber does is ipso facto bad because brand is deservedly toxic.
The CEO is a vile Ayn Rand fan who was glad to participate in the Trump administration until he realized it was bad PR, the policy division lobbies local governments against their own best interests, it’s a terrible, abusive, sexist employer of engineers, it’s an even worse employer of drivers (and of course they won’t admit they are an employer of drivers), and it’s repeatedly tried to drive out competition with what at first seemed like dirty tricks but now seems likely to be criminal industrial espionage.
Condescendingly explaining the “economics” is not going to satisfy the people who find surge pricing problematic, because the problem is Uber, not the pricing model.
@ Chad – Except for the fact that working for and using Uber is, you know, a choice. You can drive, get a taxi, use Lyft, Wingz, etc.
At some point, uber has to find a model that doesn’t lose them $12 billion/year. If they don’t, it won’t be an option and there won’t be uber drivers and users. They’re just trying to find a model that works.
Definitely not a perfect company (their CEO seems a little unbalanced), but they have to find an economic model that makes sense for everyone in their ecosystem. Haven’t found that equilibrium yet.
There is something a little daunting about a world where these companies have vast arrays of machine harvested intelligence about you or your habits and use it to price offerings. There is something fundamentally unfair about that to me and I generally prefer to take my business elsewhere. I’ve already cancelled my Uber acct.
Good article Gary. If people are interested in a driver’s point of view of the total ride pricing method, check out this post: http://travelwithgrant.boardingarea.com/2017/05/08/part-4-interview-with-a-professional-uberlyft-driver-is-ubers-upfront-pricing-good-or-bad-for-drivers-shelli/
Uber is involved in an industry where there is very little if any profit margin. Private car service isn’t and shouldn’t be affordable to everyone. Should everyone have maid service as well?
The problem is not some algorithmic or logistics conundrum. It’s just common sense.
BUILD OUT YOUR RAIL SYSTEM!!
If you don’t like Uber, don’t use their service. You can choose a competitor or compete with them yourself. Doing something is better than just whining about them.
POI Uberx from my house to airport was LESS than pool pricing on 3 days I checked! Since when is pool 20% more than an exclusive ride? Oh and lyft was significantly less – so guess who got my business (plus Lyft doesn’t seem to have such a toxic culture – at least no one has reported it so far)
When I receive Uber Pool Rides I go to the top left box and click on stop new ride requests. It eliminates any new riders being added to my route. Uber Pool is the stupidest thing they offered and it takes rides from other drivers.
I would point out that the anger of surge pricing isn’t because people can’t easily be taught the basics of why variable pricing works; the issue is that the variability under uber’s model is quite steep. For example, let’s say I can take the bus from my hotel to the airport for $5 and 50 min. I price it on uber, and find an estimate of $15 and 20 min. I choose to take uber, because I value 30 more minutes at my hotel NOT at the airport. Therefore, I wait 30 min but discover that there is now a price surge, so uber will cost $30. At this price difference, I would have chosen the bus but I am now too late. This is why DC Metro and many toll systems can implement rush hour pricing without the same uproar uber gets with “surge,” because the price changes are known in advance and not usually 2-3 times the basic price. The bottom line is that uber will never be profitable for corporate or drivers if it’s only something nice to ride if it happens to work for a given trip. It has to become people’s primary method of transportation, but this is impossible with hugely variable pricing. Price discriminating based on origin and destination (a) doesn’t solve the variable pricing issue and (b) invites a world of trouble.
@ Andy 11235
Except Uber would tell you that surge pricing was in effect previously and the price estimate would reflect the surge (So it would say $30-$40). Now they just tell you the price upfront so that you aren’t surprised when you see the high total.
In the Chicago market, they have a $500 driver referral program. Meaning if I (a driver) signup another driver that does 75 trips I get $500. That seems a little excessive. How long does it take them to recoup that $500, and then actually make money off of that new driver?
They should also consider raising the rates in a more transparent way. An UberX is only .95 per mile in Chicago, while a taxi is $2.25 per mile. There is no additional charge for more passengers (up to 3 more total), yet there is a $1.00 charge for the first additional passenger and a .50 charge for each additional passenger in a taxi. The wait time on UberX is .20 per minute (.14 on Pool) and a taxi is .33 per minute. Even if all they did was raise the UberX mileage rate to $1.50 per mile, that would still be significantly cheaper than a taxi. Passengers see what they’re paying, drivers see what they’re getting and Uber gets a bigger cut than if they were charging .95 per mile. Instead, they once again choose to operate as shady as possible and try to spin it as a good thing.
Uber should have warned the customers about the new pricing. I was travelling my normal route from home to work; it usually charges me £15 but the price went up to £23 on my last trip. I thought it was because it took me more time than it usually does. I took a uber again and it charged me about the same. I didnt check how much it was gonna cost me because it was my usual route.
But yh no more UBER for me.
BYE BYE !!!!
I have been hit twice with surge charging the first time was twice the normal fair and the second almost three times the normal fair. I do not believe that this is to incentivize more drivers as Uber only pays its drivers around half of the fair. The surge charge is simply profiteering at peak times
Surge pricing is just supply and demand. Profiteering benefits everyone. For example, suppose there is a flood-caused gasoline shortage in a specific location and stations increase their price from $4 to $40. Uninformed people will think that is evil.
At $40, people will get a gallon or two to tide them over until they can get out of town. There will be enough gas to help everyone evacuate. But at $4, people will fill their tank and the stations will run out before everyone is served.
This is different from collusion, where the stations get together and raise their prices to $40 even though there is plenty of gas.