Uber Needs to Give Its Surge Earnings to Its Drivers

A blog about business and economics.
Dec. 16 2013 8:33 AM

How to Fix Uber's Surge Pricing Problem

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Uber drivers should profit from the scarcity of the service they offer.

Photo by Sean Gallup/Getty Images

Uber, the car hailing app, has from the get-go found itself in PR hot water due to its use of demand-response "surge" pricing, where fares go up when rides get scarce. The initial round of these complaints had to do with the idea that customers were getting ripped off nontransparently, so Uber implemented UI features that tell you what you're signing up for when you hail a surge-priced ride.

But over the weekend, snow coinciding with peak going-out hours led to some very high Uber price multiples. Not the 1.5x or 2x you see at peak hours in D.C., but prices that were seven or eight times the base fare rate. That got people outraged all anew over price gouging.

Tim Lee suggested three possible ways for Uber to make customers learn to love surge pricing—raise the base fare and offer discounts at off-peak times, give more of the surge pricing surplus to drivers, and at times of really crazy multiples give the extra money to charity.*

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I think the best play would be to simply implement the second strategy. Right now, the fare is split 20/80, with Uber taking 20 percent and the driver taking the rest (that is, if the driver owns his own car—if he's paying a car owner in order to get the vehicle, then the final count will be less favorable). What Uber ought to do is simply take 20 percent of the base fare and give all the surplus to the driver. The first and third strategies are really psychological tricks to get over people's knee-jerk hostility to surge pricing. But the second strategy both takes some of the resentment off (it's a lot harder to begrudge a driver some extra money than a venture-financed tech company) and, more importantly, addresses the actual issue of ride scarcity.

You typically see peak pricing in an industry like hotels or restaurants where the supply can't scale up or down rapidly. Restaurants are often cheaper at lunch than at dinner, because demand is lower at lunch and the restaurant can't become larger at night and then shrink at midday. A resort in the Bahamas will be more expensive in the winter than in the summer because, again, it can't grow.

Uber isn't really like that. I spoke to a driver Friday night who told me that after working full-time at one of the fancy hotels downtown for over 15 years, he heard about Uber from a friend, and in search of extra income thought he'd see about signing up as a driver. His car didn't meet Uber's standards to qualify as an Uber X, but his wife's did. So he swapped cars with his wife and for a week had been putting in an extra shift as an Uber driver. On Friday, he'd decided it was late enough and time to head home, but the doubling of fares tempted him to stay out on the road. And that, at the end of the day, is the best outcome for Uber and for Uber customers. Not to use surge pricing as a way to ration access to rides so no one has to wait. But to use surge pricing as an incentive for drivers to get on the road and make money giving people an affordable lift around town.

The goal shouldn't be to find a way to make 5x or 8x pricing psychologically tolerable. It should be to find a way to make 2x or 3x pricing attractive enough to drivers that the multiples basically never have to get higher than that. And you do that the old-fashioned way—by paying people more.

*Correction, Dec. 20, 2013: A previous version of this blog post misstated at what times Tim Lee was suggesting Uber discounts if the base fare were raised. Those discounts would be during off-peak times not peak times.

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