A Deluge of Opinions On Uber’s Surge Pricing

Surging ocean waves
The storm continues online around Uber’s surge pricing model

As the weather starts to worsen for us Northern Hemisphere types, it’s been interesting to watch the debate develop around Uber‘s use of surge pricing during a particularly wintery snowy December weekend in New York.

Cards on the table, Uber fascinates me. Whilst I’m not quite as bullish in my assessment of their future as some who are confidently predicting that it’ll grow into a more significant company than Facebook, I’m convinced they’re on the cusp on something huge and far more important than simply providing high-end transport through a slick app that handles payment directly (see my previous post on the two-way feedback mechanism they employ for both drivers and riders). The moment they start to use that data to morph into more than simply transporting customers with high levels of disposable income, things could really start motoring (excuse the pun). To quote Shervin Pishever:

“Uber is building a digital mesh – a grid that goes over the cities. Once you have that grid running in everyone’s pockets, there is a lot of potential for what you can build as a platform”  

Like all modern businesses, there’s a potential goldmine of user data being generated. But it’s the current use of that data that’s the current hot topic. By using surge pricing, Uber relies on an algorithm that temporarily increases the price of a journey when the supply of cars gets tight. Relying on basic economics, a sharp increase in demand for rides (due to weather or infrequent events, such as New Years’ Eve) causes prices to spike upwards in order to entice more drivers out onto the roads to satisfy that demand.

It all sounds fine in principle, although there are plenty of suggestions about alternative models that Uber could be using. But the current problem is that every time they use surge pricing, Uber walks headlong into a customer backlash, fanned by the social media platforms that are so integral to the daily routines of their target customers. Many are now asking the question: is it worth making extra money out of your loyal customers during peak times if it means risking customer dissatisfaction over the longer term?

Of course, variable pricing as a concept is not new. Every time you fly, the chances are that you’ll end up sitting next to someone on the plane who paid a different price. Yet there are still a huge number of companies who leave their prices unchanged whilst supply and demand vary on a daily basis. Is it just the case that we as consumers need to catch up with dynamic pricing models as they become more common? To my mind, it’s not too far-fetched to imagine society moving towards an individual ‘e-bay on steroids’ style of commerce as we become increasingly connected and systems get better at accurately identifying demand.

But for that to happen, customers need to be comfortable about how the prices are being set. In Uber’s case, the app displays a clear message about the temporary price hike before any journey takes place. But it’s prompted a debate about how those prices are set – in this case, how transparent an algorithm can ever be that is used to identify high demand and power the price spikes. Once a company starts to build up significant data about you, it goes without saying trust becomes critical. What happens, for example, if a price rises simply because the data shows that the customer is a regular has always been happy to pay higher prices in the past?

Remember when Amazon tried charging a higher price to regular shoppers who hadn’t cleared their cookies back in 2000? Not their most popular move. Of course, there’s no evidence that this will be Uber’s chosen path. But in the wider scheme of things, it’s possible to see this question being asked more frequently as the market becomes increasingly frictionless, search more powerful and transactions faster to conclude digitally.

One thing that is certain is that Uber is a young business that is making enviable sums of cash. It’s clearly doing something very right by focusing on monetisation (as opposed to traction) far earlier than many other tech giants did at a similar stage. It’ll be interesting to see how it pans out over the longer term however as Uber becomes more ubiquitous.

photo credit: AGrinberg via cc

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