Description
MANAGEMENT DECISION CASE
Management Decision Case: Surge Pricing: Good for Uber, But is it a Surge of Customer Value?
Please provide a summary of the case, identify the problem or problems, discuss potential consequences of the problem/s, answer the questions, suggest recommendations, and include references and citations according to APA guidelines.
Would you be willing to pay a higher price for a good or service just because demand is high? Actually, you may already be doing so more often than you think. When demand is up, consumers pay higher prices for airline seats, hotel rooms, electricity (in some cities), theater tickets, and even newly minted and (seemingly scarce) iPhones. Some of these prices, such as those for airline seats, react quickly to changes in demand, changing even within minutes as bookings occur. Other prices shift over a longer period, as in price skimming or penetration pricing strategies you read about in this chapter. Of note, and as often commented on by the press and on social media, is a demand-based pricing strategy that is referred to as “surge pricing”—that is, pricing flexibly based on real-time market demand. One company that’s received a lot of attention for its implementation of surge pricing is the ride-sharing firm Uber.
Uber currently completes about 552 million rides globally per month (that is about 767,000 rides per hour).50 A key aspect of its business model is the fact that drivers are not considered employees of Uber, but rather independent contractors. This means that Uber cannot mandate specific hours a driver must work, and hence it is entirely possible that there might be a shortage of passenger capacity available when a particular rider wants to take a trip. To manage this, Uber has two forms of pricing: The first and more traditional approach bases a fare on variables such as route, traffic conditions, and number of riders. Most conventional taxis use this approach—after all, it makes sense to a customer that a 40-mile ride to the airport costs more than a ride to the supermarket three miles away. The value proposition to the customer of those two scenarios is clear. But the customer value proposition behind surge pricing is not so self-evident.
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Uber makes the switch to surge pricing at times of high demand. As Uber explains it, “. . . prices may increase to help ensure that those who need a ride can get one. When prices are surging, you’ll see a multiplier to the standard rates on the map. For example, you might see surge at 1.8× or 2.5×.”51 Breaking down the math simply, a surge multiplier of 2× on a fare that is normally $10 would mean the new fare is now $20, or twice as much.
If customers were perfect economists, they would understand and accept that when the supply of drivers is down, it is reasonable for prices to go up as the customer is vying for a scarcer resource. But alas, many riders feel that Uber’s implementation of surge pricing is a form of price gouging.52 Perhaps it is the uncertainty and unpredictability of it—Uber’s surge pricing can kick in suddenly and frequently (up to 20 times an hour), and the multiplier does not have a known cap (there have been cases of local fares that were more than $300).53 This price variability makes it difficult for customers with some flexibility to decide when to request a ride, because they are unsure if waiting a few minutes will result in a lower or higher price.54 While Uber used to market the value of surge exclusively to drivers, it has recently made an effort to help riders understand its value, even producing a video to help explain its strategy. (You can watch it at https://marketplace.uber.com/pricing/surge-pricing the next time you are waiting for Uber’s price to go down for a trip!) Despite these efforts, it may still be hard for the customer to think of surge pricing as adding value to them when it seems focused only on the upside to Uber of the supply/demand relationship.
Uber continues to refine its pricing strategy. In California, Uber is experimenting with a program that allows some drivers to opt out of surge pricing and gradually decrease their fares for a ride to as little as one-tenth of Uber’s set price, or to increase the price by 5×. This increased driver control over rates is largely driven by Uber’s attempt to show California legislators that it is merely a technology platform that connects drivers and riders rather than an employer subject to employer regulations and taxes.55
In the end, for marketing managers the concept of surge pricing is really not that new and is certainly not limited to just Uber. (For the record, Disney does the same thing at its theme parks, so surge pricing should not be considered evil.56) In fact, even automated surge pricing has been tested in the past, with Coke deploying vending machines specially outfitted with thermometers in the price display to investigate the potential for raising the price of the soda as the temperature went up.57 Electronic shelf labels that would allow retail stores to change prices automatically based on stock and demand are already available, if not widely implemented. And some upscale restaurants have taken to selling prepaid meal tickets, with higher prices during peak dining times. Believe it or not, even the city of Chicago is getting into the act, as it is installing surge-priced parking meters near Wrigley Field to capture more revenue during games.58
So, despite the negative attention Uber received for its surge pricing—which as we now understand may be more attributable to its implementation and communication with customers than the practice of surge pricing per se—it is clearly a valid pricing strategy that we will all, as customers, likely experience more commonly in the future.
Questions for Consideration
While many consumers do not like Uber’s surge pricing, it cannot easily be claimed that it is price-fixing (because it is not coordinated with competitors such as Lyft), price discrimination (because all customers in a surge area are subject to the same price increase), or deceptive pricing (Uber is nothing if not obvious about the price increase). Thus, despite the negative reactions, surge pricing is legal. Do you agree it should be legal? Build a strong case either way, depending on your feelings about surge pricing.
What adjustments and improvements to the implementation and communication with customers about Uber’s surge pricing strategy do you suggest in order to help those customers better understand the value proposition and improve acceptance? How might you explain surge pricing to consumers so the benefit they receive from it is better understood?
If surge pricing were found to be illegal, do you think prices for Uber’s service would rise in general? Why or why not?
