Why Uber Isn’t Killing Surge Pricing But Secretly Reducing It
Drivers have probably seen the NPR article about how “Uber is Killing Surge Pricing.” I’m a bit surprised that they wrote it that way because it was an inaccurate extrapolation from Uber’s comment about their machine learning algorithm and their goals for Surge Pricing as a whole. Here are a few other short articles written in contrast of NPR’s original article, with a direct quote from Uber saying they are not killing surge pricing.
- Tech Crunch – Uber is not Killing Surge
- Marketwatch – Sorry, but Uber has no plans to kill surge pricing
As a whole, surge pricing may never go away for the rideshare industry. The existence of surge pricing motivates many drivers to stay on the platform and removing it may cause a reduction of available cars during peak times. This is the reason why Lyft removed the 200% cap on Prime Time a few months ago to better reward drivers that work during peak times.
Uber has a love/hate relationship with surge pricing. On the one hand, they make more money by essentially doing nothing. They take a flat percentage commission across the entire fare and if the surge pricing goes up, so does their net revenue. On the other hand, surge pricing can force their customers to alternatives, such as Lyft, public transportation, or taxis in some extreme cases. A few customers have ordered UberBlack or SUV because it was cheaper than X or XL at surge rates, which also benefits Uber.
Back in 2014 when UberX was still in its relative infancy, surge pricing was very common and drove much of the narrative of Uber in the press for the year. Uber’s reputation and customer perception was negative mainly because of surge pricing. Many passengers felt cheated by surge pricing, despite clear warnings on the application. Since then, Uber has worked hard behind the scenes on multiple fronts to reduce surge pricing from a variety of ways, from changing the algorithm to hiring more drivers. Below are some of the ways in detail:
Changing the Algorithm
While this can’t be confirmed outright, we know that Uber routinely changes the surge pricing algorithm on a city by city basis, sometimes on a weekly cycle. I have heard many driver comments about how sometimes there was no surge at all on a busy Thursday or Friday night, and that there was also no cars available. This issue seemed to be fixed within a few hours of some drivers complaining about it, but it proves that Uber could essentially turn off surge pricing by changing the algorithm. In the days after the price drop back in January in Detroit, Uber had turned off surge pricing completely. You can see this in the Uber passenger app where no car was available, yet there was no surge pricing.
Surge Drop
Uber released a feature towards the end of 2014 that notifies riders when the surge pricing as reduced when they are trying to get a surge pricing ride. The customer behavior that Uber created minimized the effect of this, but may reduce how high surge pricing goes. Uber customers are more inclined today to get a ride right away, rather than wait since this is essentially what Uber created, an on-demand ride. There will always be customers who are cost conscious and are willing to wait 5-10 minutes for a cheaper ride.
Hiring More Drivers
This strategy is nothing new for drivers, but it is worth mentioning. Uber have been working hard to onboard many drivers over the last two years. They have changed their signup bonuses accordingly throughout the year to meet demand and so far this year, they have been better at matching signup bonuses to demand than previous years. However, there can be seasonal differences between availability of drivers and demand, which will cause surge pricing for a few weeks to a month, typically during the late spring, the fall and sometimes in the summer.
Driver Promotions (guarantees, ride bonuses, etc)
Driver Incentives is one way Uber gets more of their drivers out on the road. Many drivers are aware of the 50% attrition rate of drivers in any given 6-month span, so it makes financial sense to motivate their existing drivers to drive more during peak times. If Uber sees a trend in surge pricing, they will start sending out driver promotions to a random set of drivers (typically those who haven’t driven much the week before) the week before to incentivize drivers to hit the road. Here are a few different types of guarantees:
- Hourly Guarantee (Uber will subsidize your income if it falls below a certain amount)
- Ride bonus (if you hit a certain number of trips during certain times of the day, they will give you a fixed bonus)
- UberPool bonus (due to the low driver satisfaction with Uberpool, I have seen various bonuses for completing a second pickup of Uberpool passengers)
Driver Notifications (Text/Email)
Every now and them, Uber will send out a text message blast to many drivers about certain events that is going on that week or later that day. They may even notify drivers of inclement weather and that “this is a great time to drive!” They usually send out weekly emails notifying drivers of upcoming large events (sports events, concerts, conventions, etc) and the weather for the week in order to motivate drivers to drive during peak hours.
Why is Uber Secretly Reducing Surge Pricing?
Surge Pricing hurts Uber’s brand and they will do just about anything to either eliminate or reduce it from the supply side. They don’t want to heavily advertise to drivers that they are working hard to reduce surge pricing because it will further demotivate drivers to drive on Uber. They can’t remove it altogether because there will be fewer cars on the road during peak times, especially since their rival Lyft has Prime Time. When there is extreme demand, drivers will drive for the services that pays the most. When Lyft capped their surge pricing, some drivers switched to Uber when surge was much higher. The reverse would happen if Uber eliminated surge pricing and drivers would flock to Lyft.
I have seen frequency of surge pricing drop drastically in the two and a half years as a Lyft and Uber driver. I have seen surge pricing on a seasonal basis but they happen less frequently and at lower amounts. As Uber gets better with matching supply with demand, I foresee even less surge pricing in the coming years.
What do you think? How often do you see surge pricing in your market? How much of your weekly income is surge pricing?
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