Cleverly, ‘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 pickups 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.
Surge Pricing and its Benefits for Drivers Explained
How Surge Pricing Works
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.
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”.
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 ideas. If the rate is 5X, a $15 ride just became $75 instead.
Why Surge Pricing is Used
Uber cites that this policy exists in order to get more drivers on the road during times of peak activity, helping meet instances of higher demand. And 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 to OLA — even Chinese ridesharing giant Didi.
A tip for off-duty drivers, suggests Uber, is to turn on surge-pricing notifications in the app. Now, 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.
Driver Drawbacks to Surge Pricing
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 potentially be less likely to give exemplary ratings. 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, CBSNews published a story about how Amazon employs the same surge pricing model for their online retail business.
As more businesses make algorithmic decisions based on data, dynamic pricing may become a widely adopted concept.
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.
Dynamic pricing as a policy, and more broadly as a concept, doesn’t appear to be going anywhere anytime soon.
Have you found surge pricing advantageous as a driver? Let us know in the comments below!