Fixing Uber's much hated surge pricing

During periods of excessive demand or scarce supply, when there are far more riders than drivers, Uber increases its normal fares with a multiplier whose value depends on the scarcity of available drivers. This so-called surge pricing uses microeconomics to calculate a market price for riders and drivers alike.

The goal of surge pricing is to find the “equilibrium price” at which driver supply matches rider demand and riders’ wait times are minimised. Studies show that surge pricing achieves what it was designed to do: It brings more drivers online and allocates available rides to those who value them more.

Yet surge pricing has a major image problem. Hardly anyone has a good thing to say about it, and far too many people equate it with price gouging. This is a huge headache for Uber. The ride-hailing service’s key differentiator is flexibility and the convenience it provides riders, and surge pricing is essential to delivering these benefits.

Concerns about surge pricing stem from the way in which it is structured and from how it is explained to consumers. These factors have led to rider dissatisfaction and bad press. But these problems can be fixed. Here are four actions Uber can take to address the major issues surrounding surge pricing.

Cap the surge multiplier at a reasonable number and communicate the cap clearly. The surge multiplier at the heart of Uber’s pricing is a black box. No one outside the company knows how it is calculated or how high it can climb. Riders have expressed outrage at having to pay inflated prices when the multiplier starts rising beyond five. Media reports from Sweden suggest that Uber has tested multiplier values as high as 50.

For the company, an open-ended cap on the multiplier is counterproductive for two important reasons. First, it creates the impression that Uber is out to exploit riders. Second, the open-endedness generates uncertainty. Even though Uber has gotten better at notifying riders about when and to what degree surge pricing is in effect, the fact that there’s no known ceiling is both a public relations and a customer relations problem. Some drivers even feel embarrassed by the service’s huge rate hikes.

The solution is simple. Uber should choose a reasonable multiplier cap, say five (beyond which there is evidence that consumers become upset), and clearly communicate that the surge price will climb no higher. Such a policy would go a long way towards addressing consumer angst and media criticism.

Reduce the volatility of price fluctuations. Uber riders have vociferously complained that surge prices fluctuate wildly from one moment to the next. Delaying a ride by only five minutes can result in paying either twice as much or a fraction of the original amount. One study reported that surge prices changed every three to five minutes. Others have pointed out that surge prices are highly location specific.

Prices may be several times higher in one neighbourhood than in the adjoining one. When prices are so volatile, many consumers simply stop trusting the company, because they don’t know when to pull the trigger or whether they’re getting fleeced.

To solve this problem, Uber needs to reduce the frequency of its price changes. Fewer and more predictable fluctuations, such as higher prices during rush hours and on weekend nights and normal prices during late mornings and early afternoons, will make the experience more comfortable for riders.

Market the benefits of surge pricing to riders. Many Uber customers focus on the high prices they are paying without noticing the significant benefits they receive in exchange. To deal with riders’ price-focused decision calculus, savvy marketers should clearly explain the benefits customers are getting for the price they pay.

Take a major supermarket chain like Kroger. Every customer receipt includes a detailed accounting of savings with information on manufacturers’ coupons, in-store promotions and customer loyalty programmes. The “you saved $X today” ends the customer’s shopping experience on a high note.

Such transparency is even more important when higher surge prices are being charged. Going the extra mile to send a rider an end-of-trip text to explain that “Because of the surge price, you had to wait 30 minutes less this evening” or “It would have taken you 45 minutes to reach your destination had you taken a taxi, but it only took you 20 minutes because you used Uber” can make a big difference. Such explanations clarify the value of surge pricing to riders and can help them think differently about its usefulness.

Priority pricing

Rebrand the surge pricing concept. The phrase “surge pricing” is descriptive and accurate, but it derives from economics, not marketing. The Merriam-Webster dictionary defines the verb “to surge” as “to suddenly increase to an unusually high level.” As far as customers are concerned, this is not something that any price should do. Is it any surprise, then, that most people associate surge pricing with price gouging?

A potential solution here is to simply move away from the name. Surge pricing should be replaced with a term that describes the method’s benefits to riders rather than the velocity with which prices increase. Labels such as “convenience pricing” (it reduces wait times), “certainty pricing” (it provides certainty about accessing a car and what the rider will pay for it) or even “priority pricing” (it gives priority to riders who really need the service) are all more customer-focused names for this pricing method. The “surge” label needs to go.

Uber’s surge pricing offers a good example of how technology and economics have combined to create a sophisticated pricing approach — but without adequately bringing customers into the equation. After all, it is riders who choose Uber over a taxi or a bus, use the service and pay the asking price. So it is vital that their assessment of the company’s pricing approach be considered carefully. Just because technology allows us to rapidly change the price of a service does not mean that it’s the best thing to do.