Surge pricing: What a difference a year makes
When Uber rolled out surge pricing during the 2012 New Year holiday, the feedback from customers was terrible. A year later, they utilized the same pricing model with a much kinder reception. So why the difference? It turns out that if you properly communicate and prepare your customers for price changes, their response is significantly much more positive.
Uber—the service that allows customers to order high-end livery cabs through a smartphone application—has been using what the company calls “surge pricing” on the busiest of evenings (typically Halloween and New Year’s Eve) that significantly raises the price over the normal rate that customers will pay for that 2:00 a.m. ride home. Structured on the principles of dynamic pricing (where the price paid for services is not set, but rather a function of supply and demand and can change at a moment’s notice), Uber’s use of surge pricing during New Year’s Eve a year ago raised quite a few eyebrows from its client base. Here’s what the New York Times had to say about Uber’s spike in pricing during the early hours of 2012. 1
On New Year’s Eve, Dan Whaley, a tech entrepreneur in San Francisco, got into a black Town Car and was driven one mile to a holiday party. The ride cost him $27. At the end of the night out, Mr. Whaley took a Town Car home from the party. This time, the exact same ride cost $135.
Mr. Whaley was using Uber, a service that allows people to order livery cabs through a smartphone application. On New Year’s Eve, Uber, a start-up in the city, adopted a feature it called “surge pricing,” which increases the price of rides as more people request them.
Although New Year’s Eve was very profitable for Uber, customers were not happy. Many felt the pricing was exorbitant and they took to Twitter and the Web to complain. Some people said that at certain times in the evening, rides had spiked to as high as seven times the usual price, and they called it highway robbery. Uber’s goal is to make the experience as simple as possible, so customers are not shown their fare until the end of the ride, when it is automatically charged to their credit card. While the app does not show the total fare in dollars when customers book a ride, Uber did show a “surge pricing” multiple to customers booking rides for New Year’s Eve.
After the torrent of negative feedback from its customers (and the press), Uber co-founder and CEO Travis Kalanick went on the offensive to explain the company’s reasoning for utilizing surge pricing: 2
Phew! What a crazy 72 hours. As many of you might imagine, running a transportation technology company is no walk in the park on New Year’s Eve. It’s something else to see demand 20 times greater than any other time of the year across seven cities and four time zones. Uber’s surge pricing was quite an experience and I thought I’d share slices of it with our customers, fans and the Internet at large.
Without a surge pricing mechanism, there is no way to clear the market. Fixed or capped pricing, and you have the taxi problem on New Year’s Eve—no taxis available with people waiting hours to get a ride or left to stagger home through the streets on a long night out. By *raising* the price you *increase* the number of cars on the road and maximize the number of safe convenient rides.
The demand surge was nothing like we had ever seen. Up until midnight, things would be relatively smooth but like clockwork, when the ball drops in any city’s time zone, all bets are off. There were minutes where we saw more requests than we might see in a typical hour. It felt like there was no sensitivity to price, but what was really going on was a massive torrent of desperate demand.
To our dismay, the pricing multiplier kept going up. The math was doing its job—you could start to see the utilization figures getting some slack, but then another wave of demand would hit, and continue the price surge. At some point the East Coast cities started breaking 6x multipliers—we accepted defeat at that point—the unbending demand breaking our will. We would bring cities down to 3x, only to see conversion go up, supply go down, cars get saturated, and “zeroes” popping everywhere (zeroes is an internal term we use when an app opens and there are no available cars). The surge algorithms would bring the prices back up, and we would again take prices down again. The numbers bore out what we were trying to accomplish. Uber provided 60 percent more rides than our biggest day ever, with the average fare at 1.75x (75 percent greater) than normal.
So a year later, as Uber prepared to deal with similar surge pricing concerns this past New Year’s Eve, the company realized that the most important component of its strategy had to be proper communication to its client base as to what to expect. Again, Travis Kalanick and his Uber team went to great lengths in blog posts and emails to communicate the surge pricing effects to its customer base. 3
Hello Uber Faithful!
New Year’s Eve is upon us, and we’re getting a ton of questions about how to plan Uber into your evening. It’s going to be a crazy night and Ubers are going to be pricey, so here are a few pointers to keep in mind:
Surge pricing is in effect for New Year’s Eve. The price will increase in order to maximize the number of cars on the road during peak times—and automatically decrease when there are enough cars on the road. We do this to make sure Uber is always a reliable ride, even during New Year’s!
So that there are no surprises, we’ve worked hard to provide clear price notifications when surge pricing is in effect.
● You will be able to estimate the fare prior to requesting a ride (iPhone only).
● All riders will need to accept the fare multiplier before finalizing a booking.
● When multiples get really high, we have our own sobriety test.
To the surprise of most skeptics, Uber’s communication strategy seemed to work. Customers were much better prepared for Uber’s surge pricing during the evening hours; complaints were way down from 2012, and the negative press that overwhelmed the company a year earlier was almost non-existent. Uber’s proactive (and informative) approach was really about the only option the company had if it wanted to continue its surge-pricing model.
Having said that, Uber still faces major challenges in improving its pricing model. Unlike other services where the price is known (and agreed upon) before utilizing the service, Uber’s ride prices are not finalized until the customer has reached his or her destination—similar, of course, to most other taxi pricing models. Unfortunately, this quite different from, say, how airlines and hotels price during high-demand periods. Can you imagine the angst of booking a Thanksgiving week airline flight (where you know that the price will be significantly higher than normal), but not receiving the actual bill until you arrive at your destination? Or staying for a week at a five-star hotel during peak tourist season and not knowing the actual room charge until checkout? This is the challenge Uber faces—even without surge pricing, but multiplied almost exponentially when the uncertainly of surge pricing is applied.
1. Bilton, Nick. "Disruptions: Taxi Supply and Demand, Priced by the Mile" New York Times. (January 8, 2012). http://bits.blogs.nytimes.com/2012/01/08/disruptions-taxi-supply-and-demand-priced-by-the-mile/?scp=1&sq=uber&st=cse 2. "Surge Pricing Followup". (January 3, 2012). http://blog.uber.com/2012/01/03/surge-pricing-followup/ 3. "NYE 2012 Surge"(December 30, 2012). http://blog.uber.com/2012/12/30/nye-2012-surge/