Uber's Dynamic Pricing Strategy

Uber Technologies Inc, is a US based technology company operating at a global scale that provides ride hailing, food delivery and logistics services. The company was founded in 2009 by Garrett Camp and Travis Kalancik. Uber quickly acquired global fame based on its disruptive business model and easy to use app. Today, it is the largest ride hailing platform connecting millions of drivers and riders. It has also expanded its business beyond its core ride hailing services.

In 2014, Uber introduced UberEats, a food delivery service that helps users order food from local restaurants. The company has also entered into the logistics business with Uber Freight and offers tailored services to corporate clients through Uber for Business. The level of competition in the ride hailing sector has grown a lot with the emergence of Lyft and several more providers across various corners of the globe.

However, Uber has maintained its leadership position and solid competitive edge despite all the challenges. It has navigated regulatory challenges around the globe in several markets and has become adept at influencing the regulatory framework in various markets where it operates. Now, Uber provides its services across more than 70 markets and connects consumers with drivers in more than 10,500 cities through various tiered services.

The pricing strategy employed by Uber and its profitability have remained a topic of discussion for long. In this post, we will take a look at the pricing strategy of Uber, which is popularly known as surge or dynamic pricing. We will also evaluate the advantages and disadvantages of this pricing strategy and its long term suitability for Uber as well as alternative pricing strategies.

Uber’s Dynamic Pricing Model

The dynamic pricing strategy employed by Uber is commonly known as surge pricing or price surging. This pricing model is based on diverse factors. Demand, supply and some more factors together influence the cost of individual rides for consumers. Dynamic pricing model is different from the static pricing model employed traditionally by taxi businesses. Under the static pricing model, prices are fixed based on distance traveled, but not in the case of the dynamic model. In the dynamic pricing model, demand and supply are the key factors determining the costs of individual rides. However, time of the day, weather and other factors too influence the pricing of rides.

Uber’s pricing model is dynamic that adjusts the costs of rides in real time according to supply and demand in an area. Prices increase in an area when the demand exceeds the supply there. This surge in prices is known as surge pricing. Its exact opposite happens when the supply exceeds demand and Uber’s pricing algorithm reduces the prices to improve demand in the area. Users are informed when the prices in the area are lower because of lower demand. The surge and fall in prices happens automatically supported by the price setting algorithms of Uber.

What factors influence Uber prices?

There are many crucial factors that affect prices in the case of Uber. Demand and supply are the most critical factors influencing its pricing. However, weather, timing of the day, as well as special events can also cause prices to surge.

Demand:

Higher demand for rides means increased prices. Suppose the demand in an area on a day is much higher than Uber can easily match. Prices are bound to grow higher in that case. Increased prices encourage more drivers to join and help manage demand and supply. As the number of taxis in the area increases, supply matches demand and prices fall. In most cases, demand tends to grow unexpectedly high during holidays, special events, festivals and so on.

Supply:

Supply is another key factor influencing prices in the case of Uber. Lower supply means higher prices. For example, if the availability of taxis in an area is lower than the level of demand, prices would be higher. This happens to encourage more drivers to offer rides in the area. Limited supply causes prices to increase whereas once the supply is higher, prices decrease.

Traffic:

Traffic is also a key factor that affects prices in the case of Uber. For example, you are traveling during peak hour of the day in an area. So, the time taken to complete a ride may be much longer compared to the normal which will increase the cost of the trip. During normal hours, you are charged normally.

Weather:

Weather may also sometimes affect demand and supply and can increase or decrease the prices. If demand is higher, it will increase the costs, but if poor weather causes the demand to fall, prices can be much lower compared to normal.

Special Events:

Prices surge during peak times or during special events. Demand can grow all of a sudden during festivals and on holidays and can cause the prices to grow. In some areas however, demand can also fall on specific festivals causing prices to decline. On various holidays when more and more people are shopping, prices can be much higher than normal due to very high demand.

What is Surge Multiplier?

Surge pricing is represented in the form of a multiplier which shows how much the fare has increased compared to the standard fare. A surge multiplier of 2X means that the fares have increased to twice the standard rate. On some days when demand remains high and stays high for quite long, the surge multiplier may remain in effect for longer. However, the multiplier does not last very long because once cabs start reaching the area where the multiplier is in effect, prices start normalizing. Moreover, Uber informs the users when the multiplier is in effect. It shows them the notification that the prices are higher than normal because of increased demand and the users can accept or reject the prices before booking. Users can wait for prices to reduce and they will be informed again when prices are lower.

Prices can vary based on ride type:

Uber prices can also vary based on the ride type. For example, if someone wants a normal cab for normal prices, he can book Uber X or Uber go, in which case he will be charged the standard rates. However, someone who wants a premier cab will need to pay higher prices. One can hire Uber Premier or Uber Select for higher prices, in which case he will be offered a premier ride in a higher end vehicle. With Uber Pool, users going in the same direction can share the same vehicle and will be charged lower prices.

Uber’s Pricing algorithms:

Uber employs complex pricing algorithms to calculate prices dynamically. These algorithms use real time data related to supply and demand as well as traffic conditions and other relevant factors to decide suitable prices for each trip. There are various factors to be considered when it comes to setting appropriate prices for each trip. If the data shows an increase in demand, prices may increase for a short period and soon as the number of cabs increases in the area, the algorithm will consider demand and supply to reduce the rates.

Surge Pricing : Definition and Examples

Surge or dynamic pricing is the strategy of adjusting the prices of goods and services in real time based on demand and supply. This pricing strategy allows the prices to increase during high demand periods and decline during low demand periods. Its main aim is to balance supply and demand efficiently and encourage more service providers to be in the market during high demand periods. There are several companies in the market currently employing this strategy. Here are some examples of companies employing surge or dynamic pricing:

Uber:

The best example of surge pricing in the entire industry is Uber. It adjusts prices in real time for trips based on supply and demand encouraging more can drivers to be in the areas of high demand. Surge pricing is represented as a multiplier where 2X surge represents a twice increase in fare.

Lyft:

Lyft also employs a dynamic pricing model like Uber. It is a leading competitor of Uber and its surge pricing is known as Prime Time. Lyft also encourages cab drivers to be on the roads during peak demand periods by increasing the prices as demand grows in an area.

AirBnB:

AirBnB also uses a dynamic pricing algorithm to set prices dynamically for different periods. Prices can vary for the same property based on different events including special events, holidays and local demand. The algorithm considers several factors to set competitive prices for each listing. It considers the property location, demand for the property, season and day of the week as well as availability of properties in the nearby area before setting prices dynamically.

Amazon Prime Now:

Amazon’s Prime Now service offers faster delivery of essential items. It uses surge pricing during peak times or periods of high demand. Customers may need to pay different delivery fees based on the urgency and demand for the service.

Ticketing platforms:

Some ticketing platforms also employ surge pricing for selling event tickets. For example, prices can vary (can be high or low) based on different factors including demand, seat location and proximity to the event date.

Ride sharing and food delivery platforms:

Not just Uber or Lyft, but there are several more ride sharing and food delivery platforms operating in various parts of the globe which have also adapted a dynamic pricing model to cater to high demand periods with efficiency. For example, there is Grab operating in Southeast Asia and Ola in India that are using dynamic pricing during higher demand periods. Indian food delivery platforms like Zomato and Swiggy also charge surge prices when demand is higher.

Parking apps:

Some parking apps also employ surge pricing to adjust parking fees according to the demand for parking spaces in specific areas or during peak hours. Technology companies provide these parking operators with the technologies to implement surge pricing and create the data driven strategy required for implementation of the dynamic pricing model.

Advantages and Disadvantages of Surge Pricing Model:

The surge pricing strategy has its own advantages and disadvantages. On the one hand, it has been hailed as a great pricing strategy for balancing supply with demand. On the other hand, it has also faced a lot of criticism regarding overcharging during emergencies. Companies having adopted surge pricing models have taken extra steps to address concerns related to transparency and accountability. Here, we have listed the main pros and cons of surge pricing:

Advantages of Surge Pricing:

Higher revenue:

With surge pricing, Uber can capture extra revenue with the surge pricing model. For example, riders in a hurry are generally ready to pay extra to find a can quickly. Uber connects them with cabs in minutes and charges extra during the peak hours. During the peak hours of the day, the demand is generally higher and riders are willing to pay extra. However, even if demand falls, Uber reduces the price to attract users to ride at lower fares. In this way, it has been able to boost its revenue using the surge pricing strategy.

Higher driver availability:

Higher fares also attract more drivers to the platform. It reduces the wait time for consumers and ensures driver availability during the peak hours. When fares are higher due to one or the other reason, more and more drivers are willing to offer their services. This encourages more and more drivers to join the platform since they can significantly increase their earnings by driving during the surge hours.

Self regulating system:

Surge pricing is designed for maintaining an automatic balance between demand and supply. Prices increase when demand is high and then decline automatically as supply increases. It works as a self regulating system without any need for human intervention. Surge periods can last longer on holidays and other busy days.

Disadvantages of Surge Pricing:

Negative rider experience:

Higher fares can frustrate riders and can hurt brand image and user experience. Riders can also feel cheated in certain conditions like when they are stranded in traffic and have to accept higher than normal fares. Uber generally informs users when the prices are higher than normal but still if users have to accept higher than normal prices due to urgency, they may feel frustrated which may hurt customer loyalty.

Lack of transparency and unpredictable:

Price fluctuations can cause confusion among riders and can lead to customer dissatisfaction. Users who are charged higher prices may grow frustrated and switch to other platforms that are offering more competitive prices or alternative modes of transportation. When surge pricing happens regularly and users are more uncertain regarding the prices, it can also hurt the brand’s credibility.

Regulatory concerns:

Surge pricing has faced legal challenges in several regions and raised concerns regarding fairness, accountability and transparency. Uber has also faced several legal challenges related to surge pricing and has faced penalties for raising prices especially when demand grew and the user had booked a ride in advance.

Alternative Pricing Models to dynamic or Surge Pricing:

Here are some alternatives to the surge pricing model used by Uber. However, each of these pricing models has its own advantages and disadvantages and the suitability of each one depends on a number of factors.

Flat Pricing:

Flat pricing where the prices are predetermined based on distance can eliminate surge pricing but it might not be effective at capturing revenue during peak hours. Flat fares may be popular among consumers but the inherent problem with them is that they only consider the distance and not the other factors related to a journey. The cab drivers might get frustrated during peak hours when traffic level is higher and it takes longer to complete a ride. Flat fares can eliminate pricing related confusion but they cannot balance demand with supply during the peak hours.

Tiered pricing:

Tiered pricing can also be an effective strategy and has its own advantages. For example, a company in the ride hailing sector can adopt a tiered pricing strategy to offer different fare structures based on time distance, vehicle type. This will offer both flexibility as well as predictability. It will also ensure that riders looking for more affordable options have access to affordable rides while riders requiring additional convenience can pay extra.

Subscription Model:

Ride hailing platforms like Uber can also adopt a subscription based pricing model where monthly or annual subscriptions can guarantee fixed pricing as well as ensure a consistent revenue stream. It is also an attractive pricing strategy. However, mainly the regular travelers are more likely to buy such subscriptions. For example, as in the case of food ordering apps like Zomato, people who order food more regularly are more likely to buy a monthly or annual subscription. The users who do not require these services too often are not likely to buy such subscriptions.

Dynamic pricing based on algorithms:

Uber can utilize AI and forecasting models to adjust fares in a better way compared to surge pricing and to offer a better balance between profitability and rider experience. It will require anticipating demand and supply in specific areas to keep prices under control rather than letting them grow very higher during peak hours or on holidays.

Conclusion:

Uber has adopted a dynamic pricing strategy also known as surge pricing. While this pricing strategy is aimed at managing the balance between supply and demand, it does not always work as expected because a surge multiplier of 2X or higher shows that demand and supply are heavily unbalanced which can be the situation quite often. And still, this pricing strategy has proved profitable for the company which has experienced a sharp rise in its annual net sales in recent years. The company has successfully implemented surge pricing in all the markets where it operates. However, this pricing strategy has its own pros and cons and might not be the best strategy when it concerns the consumers. It is obvious that surge pricing is not the most consumer friendly pricing strategy but yet it has worked favorably for Uber and several other brands in the ride hailing and similar sectors.