Does Surge Pricing Have an Image Problem?
I performed a Google News search for “pricing” the last week of December, and seven of the first 10 results all shared the same topic: how to avoid surge pricing on ridesharing services such as Uber and Lyft. That’s quite the negative press around something that is supposed to be a beneficial facet of the service.
Surge pricing is a type of dynamic pricing that increases rates during periods of high demand. This incentivizes more drivers to get onto the road, therefore increasing supply. It discourages some potential riders, lowering demand. The end result should be sustained availability and increased convenience, ensuring that even during periods of very high demand a customer can find a ride—albeit at an increased rate.
This is supposed to be a big benefit over traditional cab services. Often during a rainstorm or after a ballgame there simply aren’t any cabs available. Supply doesn’t increase sufficiently to match demand. Instead of being sorted by willingness to pay, potential riders are sorted both by the amount of time they can dedicate to waiting for a cab and perhaps being lucky enough to stumble across an unoccupied taxi. By utilizing surge pricing, services such as Uber and Lyft can ameliorate this issue and provide better service.
One of the big benefits of ridesharing is the availability of drivers, which is increased by surge pricing. Even under periods of moderate surge pricing, ridesharing may still be cheaper than traditional taxis. So why are people so upset?
The better question is: why aren’t Uber and Lyft communicating its benefits?
Pricing doesn’t exist in a vacuum. Without clear communication, people are bound to get upset. Uber ran into problems early on where riders didn’t feel adequately informed about surge pricing and were shocked to get hit with large fares. While Uber has made notifications much clearer, the “what” of surge pricing is only one piece of the puzzle. The other part is “why.”
Economists may love the idea of dynamic pricing as a market clearing mechanism, but without good marketing the only thing that customers experience is an increased fare. Riders are anchored to the base rate and see any surge pricing as paying more than they would otherwise for the same service. Of course, the point behind surge pricing is that it isn’t the same service; the car might not be available at all without it. But that isn’t communicated well.
Clear communication about surge pricing is good customer service but without conveying its benefits, Uber is increasing the price sensitivity of its riders. This is a well-known effect of overemphasizing price in marketing communications. But price is only one reason that customers choose Uber. Why not focus on the benefits of surge pricing?
There are many things that could improve customers’ perception of surge pricing. One clear way would be to develop a metric that highlights the positive impact of surge pricing on a customer’s experience.
Uber is good at displaying detailed trip information, why not include a measurement about how much time was saved? This could take many forms, ranging from granular (e.g. “You saved 10 minutes of waiting time”) to broad (e.g. “50 more drivers are on the road”). Either would help to shift the emphasis away from additional cost and toward increased benefit. Transparent prices are important, but they can’t speak for themselves.
The key takeaway is to remember that pricing is not simply an engineering problem. Humans have very strong and visceral emotional reactions to prices and structures that seem exploitative or unfair. Surge pricing may be economically sound, but without the right messaging and marketing behind it customers experience it negatively.
This is especially a problem for a company such as Uber that counts surge pricing as one of its platform’s competitive advantages. One of its core benefits is actually experienced as a negative!
In the end, customer perception is what determines value. Uber could increase its value proposition without touching price by simply framing its existing price structure better.