I read an interesting article last week in the NY Times that discussed the fairness, or lack thereof, of dynamic prices in different industries. The case studies included pricing for show tickets, electricity during periods of high-demand, toll roads and congestion fees, prices of essential goods after a natural disaster, and, yes, Uber with its surge pricing. The interesting common angle of all of them was that consumers are willing to pay higher prices when, and this is key, they feel those prices are fair.
The article also points out that even though many consumers dislike them, there are reasons that dynamic pricing is necessary, mostly to flatten peak periods and divert that excess to periods of less demand, whether the demand is for electricity or highway use. Dynamic pricing motivates consumers to do what the supplier wants them to do on one hand, but also, like airlines, to extract more income when there is limited supply but a very high demand.
That said, there are ways to build dynamic pricing models that work. “What the successful examples of variable pricing have in common is that they treat customers’ desire for fairness not as some irrational rejection of economic logic to be scoffed at, but something fundamental, hard-wired into their view of the world. It is a reality that has to be respected and understood, whether you’re setting the price for a highway toll, a kilowatt of power on a hot day, or a generator after a hurricane.”
Which brings me back to Uber. The point of the Times article was not to say that dynamic pricing shouldn’t be used, but rather that it be explained to the user in a way that caters to their sense of fairness. This isn’t always easy to do. For surge pricing, Uber realized that users prefer seeing an estimate of the total price of a ride before confirming a ride. “It turns out it’s easier to decide whether it’s worth $30 for a car ride and act accordingly then it is to be told that a surge multiplier of 2.5 times is in place and that the normal rate would probably come to about $12.” This is an interesting product shift that seems simple, but took Uber a long time and many complaints to implement.
This week, Uber announced fees to compensate drivers for customers that require a long drive before pickup and if they need to wait for their passenger after arrival. Interestingly, they don’t yet provide details on how the new fee will be presented to passengers as they only detail the driver’s side. I’m curious to see if the new fees will be presented before booking, as part of the total cost, or if they’ll be tacked on later, something that users might not like. The new delay fee will need to be added only after a ride, so it will be interesting to see how it’s presented to riders in a way that won’t cause ire.
My takeaway, though, is mostly about how products need to understand what the user’s sense of fairness is for the price of a service, how to best communicate a price that a user might not like, and at what stage. It seems like the best practices are fewer surprises for users, a sense of control, and the reasons for an unexpected price that establishes its worth. Mr Thaler, a Nobel-winning economist, said this: “A good rule of thumb is we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists.”