Friday, February 7, 2014

Taking the Sting Out of Surge Pricing

An Uber Experience

By Kirsten Snyder - Director, Integrated Insight

With two kids under the age of two, I don’t really get out much.  However, when my husband and I were invited to the Delta GRAMMY party featuring Lorde, I immediately began to prepare for the evening.  Since the party required us to drive up to Hollywood from Long Beach during rush hour, we decided to Uber it.  For those of you not familiar with Uber, it’s an app-based car service with offerings that range from affordable everyday cars to high-end luxury cars.

When we told people that we took Uber to the party, it immediately sparked conversation about their controversial pricing model – as they call it surge pricing.  It is not a new concept – just a new term for demand based pricing.  If you Google “Uber surge pricing,” you will get a number of articles arguing both for and against the practice.  Supporters say it is common, and they compare it to airline pricing, while critics argue it is strictly price gouging. 

Uber’s CEO, Travis Kalanick, argues that the objective of surge pricing is to provide more supply -- higher fares incent drivers to get or stay on the road -- rather than to strictly maximize revenue.  In general, I don’t disagree with the pricing philosophy, and believe the Uber model provides customers with a more efficient and reliable service, which is often lacking in the traditional taxi industry.  The problem I have with Uber’s model is it doesn’t allow you to plan your trip based on pricing.  Although airfare changes often, once you book your ticket it doesn’t change, so if you want to fly on the Sunday after Thanksgiving you know that it will cost 50% more than the next Tuesday.  If you are planning to use Uber round trip, it could cost you $50 on the way there and $150 on the way home, but you won’t know the return price until you request the car.  Even if you wanted to request it in advance, you can’t.    Kalanick’s response to the critics is if you don’t like the price, then take a taxi.  But how do you know if you like the price until you actually know the price?

There are a couple relatively simple ways for Uber to offer surge pricing while developing goodwill with their customers.  The simplest solution would be for Uber to offer a round trip pricing guarantee, where you prepay for your return trip as long as it happens within the same day or night.  By getting customers to pay for a return trip in advance, Uber can also see how much demand to expect later that day which could help better align their supply and pricing.

Uber has created a unique business model that provides a great service.  As they continue to grow, creating pricing strategies that encourage use and positive word of mouth will likely improve performance even more.

No comments :

Post a Comment