Surge pricing is a tool that Uber uses to maximize the potential of their industry’s relative supply-and-demand.
In other words, rideshare companies can use dynamic pricing in situations where there are too many ride requests in the same area, and too few cars to serve them all. Raising the price by select multipliers helps regulate demand amongst customers leading to quicker pickup times and an elevated rideshare experience.
In addition, it incentivizes more drivers to venture to the busy area. In certain metro areas, dynamic pricing may result from something as simple as rush hour. However, surge pricing can also arise during inclement weather, holidays, festivals, and any number of events. For instance, New Year’s Eve is going to result in demand increases for Uber rides, causing the prices to surge higher than the normal price you’d pay on a typical evening.
When a user opens up the app during surge pricing, they’ll see the multiplier that will be applied to the final price during the surge. This surge multiplier varies based on the current Uber driver supply as compared to the number of Uber riders sending requests. It’s part of the pricing algorithm that Uber uses to determine fares, which you can read more about here.
For example, opening Uber on a smartphone may yield a message like, “Demand is off the charts!” above an indication of what the current multiplier is, something like “3.5x.” This multiplier gets applied to the base fare that a rider would pay. The surge multiplier does not alter the percentage that Uber takes of each fare, meaning there’s no risk for you to take surge fares on as a driver (only the chance to earn extra money).
As a driver, you can see what specific surge rates are around your area. The app tints parts of the map light orange to dark red. Light orange areas represent lesser multipliers while dark red areas indicate more substantial multipliers. This is a helpful tool, particularly for drivers considering whether or not to accept more rides. To see what this looks like in action, take a look at the video below, which demonstrates how surge pricing appears within the Uber partner app.
Uber states that this policy exists in order to get more drivers on the road during times of peak activity, helping meet instances of higher demand. Furthermore, the surge pricing is supposed to help moderate the demand for rides, as some riders will choose to wait (or move to a different area) if the pricing is higher than they want to pay.
There’s no question that surge pricing works to accomplish both of these goals. It works so well, in fact, that many people are signing up to drive for Uber just to chase the inflated pricing.
A former member of Uber’s board said of the policy, “By offering more money to drivers, they were able to increase the on-the-road supply of drivers by 70-80%, and more importantly eliminate two-thirds of the unfulfilled requests.”
Just about every rideshare company of note uses surge pricing (or dynamic pricing) in one form or another, from Lyft to Uber. They do make sense in terms of what they help ridesharing companies accomplish: fulfilling as many rides as possible.
A tip for off-duty drivers, suggests Uber, is to turn on surge pricing notifications in the app. An off-duty driver could look at their phone and see alerts on the home screen about current surge areas nearby. Additionally, drivers can check their in-app earnings reports to see how surges signal the highest value times to drive.
While surge pricing can be a great benefit to your bottom line as a driver, it can have its drawbacks as well. One drawback to chasing fares in surge territory is surge prices can put off customers.
In an environment that is highly dependent on exceptional driver ratings, customers upset with price may be less likely to give you a high rating. This is perhaps a short-lived issue for a bustling, new industry, or an oversight in not educating users about the policies.
Either way, companies like Lyft and Uber continue to look into dynamic pricing and how to most effectively use it.
Ridesharing companies aren’t the only ones, either. Earlier this summer, CBS News published a story about how Amazon employs the same surge pricing model for their online retail business. Instacart also uses a similar model, charging customers more for grocery deliveries during times of high demand. The same is true of food delivery apps such as Postmates.
In fact, as more businesses make algorithmic decisions based on data, dynamic pricing may become a widely adopted concept. It helps to solve one of the most fundamental issues in all businesses: supply and demand. This has always been something businesses have worked to balance, but the difference is that now they have enough real-time data to do it dynamically.
Uber Surge Pricing for Drivers: Beneficial When Used Correctly
Driving for a rideshare company means being dynamic and adaptable. While drivers should never strictly chase surge-priced zones, they should weigh the potential gains offered by the increased fares.
Even though passengers may complain, surge pricing exists to help match the supply of drivers with the demand for riders, ultimately getting people want they want: a safe ride on-demand. This can come with its own costs, which often manifest in the form of surge pricing.
Dynamic pricing as a policy, and more broadly as a concept, doesn’t appear to be going anywhere anytime soon. It simply works too well for too many types of industries. For those riders who’d rather not pay surge prices, there are always other options like regular taxis, as well as the option to just wait and see if the fares decrease (as they generally do during a surge).
Have you found surge pricing advantageous as a driver? Let us know in the comments below!