How Do You Evaluate Uber´s Pricing Policy? What Are the Up- & Downsides of Their Pricing Policy?

1) How do you evaluate Uber´s pricing policy? What are the up- & downsides of their pricing policy?

Uber’s surge/dynamic pricing model has been used on a regular basis by wide array of companies before, including hotels, airlines etc. Infact, it is the very essence of market-based economics. However, Uber’s prices changes too drastically (matter of minutes), moves either way (up and down) and is location specific. If prices are this volatile, it is not too difficult for riders (who like predictability with their day-to-day decisions) to loose trust with Uber.

Additionally, other industries employing dynamic pricing are rooted more in leisure & luxury business. They can afford to ask for more for last minute bookings – ‘The Customer chose not to book earlier when the demand was low’. However, Uber is competing in an industry where fixed prices had been the norm. Moreover, passengers are not wrong in making an ‘Instant/ Last-Minute’ Uber booking. It is part of Uber’s value proposition to them. Thus, using surge pricing is a hard sell in an industry conditioned to fixed prices for commoditized services.

Eventually, the downside of using surge pricing is a setback to Uber’s value proposition to riders. Not only does it add a layer of complexity but it makes the riders feel that they have been cunningly exploited precisely when they need Uber the most. This potentially weakens Uber’s relationship with riders and gives competition & regulators a point of contention. Additionally, surge pricing during emergencies can be seen as immoral and inhuman. Finally, drivers can try to game the system by intentionally waiting for surge pricing to kick-in.

However, there is other side of the coin. Uber is after all a platform business – it connects riders with drivers. Uber’s drivers are independent operators and thus have limited contractual obligations. While Uber tries to keep the drivers engaged by using a variety of social and psychological techniques (nudging methods like earnings goals, offering new rides before current is finished, feel good batches and ratings etc.) but that is not enough at times.

Thus, to insure that Uber is able to meet a higher level of demand, Uber needs to be able to provide a higher level of supply and this is where surge pricing helps. Surge pricing attracts drivers and regulates demand thus improves performance/ utilization while adding to passenger convenience (shorter waiting time). Surge pricing is a necessary evil and it effectively subsidises low-demand scenarios and allows Uber’s drivers to maintain their flexible schedule. Moreover, since Uber charges drivers a fixed percentage of their revenue as commission, Uber is thus potentially able to make more money per ride/ per passenger/ per driver (the trade-off between higher per unit revenue and lower number of transactions has to be assessed though).

2) How do you evaluate Uber´s aggressive business tactics? Can you think of a more diplomatic, ‘tiptoe’ business approach?

Uber has created a great value proposition for both riders & drivers. It has done so by making taxi booking & travel more efficient, convenient and reliable for both riders & drivers. In this process it has (successfully) disrupted the taxi industry and thus some degree of backlash from the taxi industry and government/ regulators is expected. However, Uber hasn’t helped it’s cause by going much beyond that by:

Employing cut-throat competitive tactics: Slowing down service of its competitors by ordering and cancelling en masse. Poaching drivers from competitors

Disregard for complaints about pricing: Riders think of surge pricing as exploitative

Fast and loose with legal systems: Complete disdain for regulatory concerns

Dogmatic media coverage: Provocative war of words with incumbents, regulators and media

While Uber has done all of the above and more, it still has a phenomenal product/ platform at its disposal. A diplomatic way to deal with all these distractions is to keep improving the platform/ technology and the user experience and engagement (both riders and drivers). As Uber experienced it during its skirmish in New York City, Uber’s customers (because of the convenience Uber offers) can be its most vocal backers and it should engage with them more often (crowd-source support for itself).

This also means Uber has to handle surge pricing more efficiently. Surge pricing (it should also ideally be renamed to say ‘Ease Pricing’ or something similar) should have a reasonable ceiling (Uber has done that already but there are breaches still) and be less volatile. Additionally, perhaps Uber can highlight and quantify (minutes saved) the benefits of its pricing mechanism to riders and educate them about the necessity of having surge pricing in place.

Uber also needs to engage a lot better with regulators, government and taxi drivers. They are all key stakeholders. Uber should invest in improving driver experience and step-up its PR efforts to highlight the benefits that are accruing to riders and taxi drivers because of Uber to regulators. Finally, the use of unhealthy competitive tactics like sabotage are a no-go zone. Uber should refrain from using such tactics.

In the end, if Uber is able improve customer journey/ value proposition (both riders and drivers see response to question 5) and avoid adverse publicity, then they will not desert Uber.

3) Uber has become enormously popular among consumers in a very short period of time. How has the company accomplished this?

Before Uber, the taxi market was highly unorganized (except for livery) & distributed. Uber has evolved the way world moves by seamlessly connecting riders to drivers. It has done so by building a more convenient, reliable & efficient value proposition for both riders & drivers.

The table below shows how Uber has made the customer experience more convenient, efficient and reliable vs what it was before. Additionally, Uber benefited from the ‘network effects’ of its business model. More riders attract more drivers thus reinforcing the value of network scale.

Metric Riders

Convenience • Lower search costs: Users developed an instant affinity for 1-tap booking feature of Uber. It allows them to make a booking while sitting in the comfort of their homes/offices vs hailing a cab on road

• Improved customer experience: Uber cabs in much better condition (cabin condition, years of usage) vs regular cabs; Digitization of entire customer journey; Uber drivers speak English (necessary part of Uber orientation)

• Variety: