I love Uber’s surge pricing. And I love that so many people hate it.
Uber’s surge pricing has come under a lot of scrutiny lately. From New Year’s Eve to New York snowstorms, people have been up in arms over having to pay more to hail an Uber during high-demand times.
But that’s how supply and demand works, folks. And surge pricing is actually good for all parties involved.
This is pretty obvious. If a passenger is willing to pay more for a ride, the driver wins.
Less obvious. Most people bitch because they want a ride for $15, but with 2x surge pricing in place they need to pay $30 for the same ride. Sad times.
But what if there are two passengers waiting for rides? Nicole is willing to spend $30 for a ride while John is only willing to spend $15. Without surge pricing the person who gets the ride may be random – whoever is closer to the driver, perhaps. But with surge pricing, the person who wants the ride more (Nicole) gets it.
Surge pricing empowers the passenger to have more control of their rides. Instead of missing out on a ride they are given the option to have priority if they pay a premium.
The other effect of drivers making more money through surge pricing is it encourages people to join Uber as drivers. More drivers on the road means less waiting for passengers, and ultimately translates into lower prices for passengers because there’s less chance of surge pricing.
Uber as a Company
It’s no secret that Uber (like any for-profit company) is out to make money. Surge pricing enables them to maximize their earning potential by not leaving any money on the table.
One of the problems companies face when pricing products is knowing that whatever price they set, there are always customers out there who are willing to pay more, and that’s missed revenue.
Say your product costs $20. There are customers out there who would pay you $30, $50, or $100 to use that product. Finding the right balance of price and purchase volume is a separate discussion, but surge pricing is an elegant (and automated) solution to this problem.
Price rises to find customers who are willing to pay extra. When the price gets high enough that no one will pay, or if more drivers become available, price begins to come back down. Like I said, basic supply and demand.
Surge Pricing Elsewhere
What surge pricing reflects is essentially an auction for a ride. The ride goes to whichever passengers are willing to pay the most. This concept is both accepted and widespread. Google AdWords, eBay, TaskRabbit, bidding for client work, and countless other processes use a similar auction format. Everyone just accepts that airlines crank up plane ticket prices around the high-demand time of holidays.
I would love to see surge pricing rolled out to other industries as well. San Francisco recently introduced demand-based parking fees that vary based on supply and demand. Plenty of other companies and industries could start using surge pricing to their benefit, even if it may come with a little negative press.