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.)