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Case Code: MKTG370
Case Length: 12 Pages 
Period: 2015-2017   
Pub Date: 2017
Teaching Note: Available
Price:Rs.400
Organization : Uber Technologies Inc. (Uber)
Industry : Transportation service
Countries : United States 
Themes: Managerial Economics/ Business Economics/Economies of Strategy/ Consumer Behavior/ Marketing Management
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The Economics behind Uber's Surge Pricing

 
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EXCERPTS

BUSINESS MODEL

 

Uber had an outstanding business model with unique offerings that differentiated itself from the traditional cab service industry (Exhibit III). Since inception, it had sought to be “Everyone’s Private Driver” by driving disruptive technology and business innovation to address urban transportation challenges. It managed to capture the market share through a great app, innovative social media marketing, and aggressive courting of drivers. Victoria Leardi, Audit Intern at Auditors of Public Accounts for the State of Connecticut, New Britain, said, “Uber is easier than a cab company because you can use your credit card, no phone calls are necessary, you are able to split the fare with other riders on the app, and you can track the driver as it approaches to pick you up.” More and more people preferred paying Uber through the simple and efficient app rather than paying for a more expensive taxi (See Exhibit IV). Uber revolutionized the transport industry by introducing self-driving technology in the sectors of personal transportation, delivery, and trucking. “The biggest asset and advantage [of our self-driving efforts] is being part of the larger Uber network,” said Raffi Krikorian (Krikorian), engineering director at the company’s Advanced Technologies Center in Pittsburgh. .

 
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UBER’S PRICING STRATEGY

Uber charged varying fare rates for different cabs, and users were allowed to compare and select the suitable rate for their travel needs. The objective of the payment system was to ensure that the customers got the best fare possibilities for their ride. Uber calculated the fare for any trip by adding base fare, time and distance of the ride. Just like with taxis, Uber fares differed across the cities. It also charged promotional rates on rides to certain areas at certain times. Uber grew competitive because of its pricing system. According to data compiled by Certify Inc., the average Uber rides were about two-thirds the cost of a taxicab ride. ...
 

CRITICISM

Despite the obvious benefits of surge pricing, it generated a fair amount of criticism. Many complained that Uber was taking advantage of busy periods to force consumers to pay more. A surge pricing notification irritated riders when they tried to get a ride.
 

WHAT UBER HAS TO SAY…......

Defending surge pricing, Uber argued that without it, there would be a lack of supply and a huge demand for rides, which would result in long wait times for most people. Gurley pointed out that Uber would face a far worse situation of chronic shortage of drivers if it canceled surge pricing. It would be “better to weather the odd storm, than risk a stream of complaints from tons and tons of unsatisfied customers,” he said. Industry experts observed that the price spikes might be a public relations (PR) problem for Uber, but without them the company would arguably have another problem of scarcity of cars on the road to match customers’ demand. .
 

UPFRONT FARE SYSTEM

In a bid to reduce customer complaints, Uber started phasing out its highly unpopular surge pricing system. Jeff Schneider (Schneider), engineer lead at Uber Advanced Technologies Center, told NPR (National Public Radio) that the company viewed surge pricing as a “market failure” and was working on algorithms that would predict demand and eliminate the situation of demand and supply mismatch. Schneider proposed to fix the problem using machine learning, which would help riders get rid of surge pricing.
 

THE ROAD AHEAD

Whether Uber would be able to retain its surge pricing in future depended in part on how local governments were able to manage the transportation system as a whole. Industry experts felt that users would be more price-sensitive in areas where Uber had a good number of competitors. Speaking about the acceptability of surge pricing,
 

EXHIBITS

Exhibit I: Uber’s Car Services
Exhibit II: Ranking of Highest Valued Startup Companies Worldwide (May, 2017)
Exhibit III: Uber’s Business Model
Exhibit IV: Comparison: Classic Taxi vs. Uber
Exhibit V: Twenty Minutes without Surge on New Year’s Eve (January 1, 2015)
Exhibit VI: Spike in Demand for Uber Following Sold-Out Concert (March 21, 2015)
Exhibit VII: Uber Driver Supply to Match Spike in Demand (March 21, 2015)