Surge pricing: why we’ll be seeing more of it

In the continuing brouhaha around ride-sharing company Uber, another very common complaint is that the costs for a single ride can get very high. Uber attributes complaints about price to its Surge Pricing policy. As Uber explains it, “rates increase to get more cars on the road and ensure reliability during the busiest times. When enough cars are on the road, prices go back down to normal levels.”

Uber’s Surge Pricing is in place to smooth out supply and demand spikes. When demand is high, say, right outside the baseball field after a game has ended, and it’s late in the evening, when few drivers are out, Uber raises prices to tempt more drivers to come out. But the higer prices also serve another purpose: to get price-sensitive riders to find alternative modes of transportation and get only the riders willing to pay top dollar to get a ride. This is price discrimination at an almost personal level and can be achieved only when up-to-date usage data is available around the clock.

My marketing professor described price discrimination as the chance to offer different prices to different customers depending on their price elasticity and their desperation. Imagine a gas station charging a lower price for a car with enough gas to get to another station as opposed to a car that is driving on an almost empty tank. The driver with the empty tank is probably willing to pay a lot more because the alternative will be a tow truck.

Marbled godwits escaping the, well, surge on the California coast

Marbled godwits escaping the, well, surge on the California coast.

Another example of using price discrimination to smooth out demand peaks are recent innovations in restaurant reservations. Pioneered by Alinea in Chicago, the pre-paid dinner tickets replace reservations and cost more during periods of high demand, like Saturday evening at 7pm, and less mid-week on unpopular days. This allows the restaurant to price differentiate between customers willing to pay more for more popular dining times and those who just want to taste the food and don’t care about the time. It also allows them to fill tables on historically slower days as really, the food is the same.

Like it or not, consumers will be seeing a lot more of these services, hoping to make more money by adding efficiency to existing products.

Here’s another new service, this one for moving. A new service called Bellhops is matching college students (evidently the audience that is most likely to agree lugging heavy things around) and people moving locally and making both sides happy. As with ridesharing, the inefficiencies in the business were significant. Only two options existed: hire a moving company (that in turn usually hired many college students) or just do it yourself. In fact, 75% of movers did, in fact, do it themselves. Soon, perhaps after establishing a presence in more locations, Bellhops will begin to see usage patterns. One that might be evident is a significant increase in demand at the end of summer, right before the school year begins. Will surge pricing make sense for Bellhops? Following the logic presented by Uber, then yes. Get more students lifting boxes during August and everyone is happier.

Where else could surge pricing make sense? Well, what are the other platforms trying to improve efficiencies? Look at Postmates, a service connecting between delivery drivers and anyone who needs delivery from places that don’t offer them. Postmates currently bases prices on delivery distance but what happens if they discover that they, too, need surge pricing to smooth out demand and like Uber, get more drivers to come out during busy periods?

Like Uber’s price surges, it will remain to be seen whether this price discrimination will do the job, effectively either adding more suppliers or shifting consumers to alternative options or less busy times. But what is certain is that we’ll be seeing a lot more services charging different prices for what were once identically priced services.

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